How do Building permits or Lack Thereof Affect Appraised Values?
Appraiser Mary Thompson from Lake Lanier, Georgia wrote about how building permits, or the lack of them, affect the appraisal of a property the post below. I hope you have a chance to read it, I learned a couple of thins I did not know. Thanks Mary :D
Upon request of a fellow Active Rain Member, Patty Da Silva, I am passing along what I know to be the truth about Building permits and how they impact or affect the appraisal on a property.
http://activerain.com/pattydasilva
First and foremost, local, county and state laws differ to varying degrees. I am in North Georgia. Building permits are required to be pulled whenever you are renovating a home which will include framing, plumbing or electrical work. Also required to pull permits for new or replacement decks if they are more than 30" above the ground. FENCES, no permit is required. If you plan to replace just cabinets and counters in kitchens or baths, NO permit is required. Check with your local planning and zoning departments on when permits are required.
If someone finishes their basement or encloses their garage into living space a permit is required.
NOW, how does this affect the appraisal. I can tell you for a fact that I do not routinely, nor do my peers and colleagues check building permits to see if someone did have a permit pulled for renovations noted above. This is not the responsibility or the obligation of the appraiser to do this. They report what they see and observe and the lender will decide.
FHA says they are not in the business of policing local government codes, etc. They want appraisers to look at the property and make sure that there are no obvious structural, electrical, pluming issues as well as look for any safety, saleability issues, etc.
There are additions that are completed in the utmost professional manner with no permit being pulled and then there are additions that are for lack of a better way to say this..... CRAP!
We report what we see to the best of our expertise and ability and if it looks like a professional job we will state this in the report. We state that there was an addition, if we know the year we will state this, if we know a permit was pulled we will state this, if we ask and there was no permit we will state this.
The question is how many appraisers will ask if a permit was pulled. That is the million dollar question. Other appraiser's out there tell me what you do and be honest!
In our appraisal reports there is a limiting condition statement that says we are not liable for legal matters that would impact the property now or in the future. So that tells me we are not liable for additions where permits were not pulled and they become a liability later. We are not the code police and we should not be expected to be unless the lender asks us to check into it for them.
I have had heard of lenders and Fannie Mae telling appraisers that if a permit was not pulled on an ADDITION, not so much a finiished basement, that we are not supposed to include any of that heated square footage in the report. We can give it credit but it will not get the kind of credit it would as heated square footage.
If there is an obvious addition, I will ask if a permit was pulled, if they don't know or they say no, I note it in the appraisal but I DO GIVE IT CREDIT as heated square footage (if it is heated area and not a screen porch, etc.) Unless the addition has not been constructed in a workmanlike or professional manor. Now I am not a builder or contractor, but if the addition looks just as good as the main living area or better, I am going to give it credit.....WHY? Because the market will give it credit and that is what we are providing Market VALUE.
Realtors out there......correct me if I am wrong here, but I do not see evidence of buyers paying anything less that is measurable for an addition that looks great where a building permit was not pulled vs. one where a permit was pulled. Unless there are legal issues getting into a home where it could bite you in the back later, I can see where someone may decide not to buy a home on that basis. But overall this does not seem to deter most buyers, at least not in OUR market.
FHA does not require us to pull permits and they do not state that square footage cannot be counted if a permit was not pulled.
So the best advice I can give to Realtors, Sellers and Buyers is if you like a home with additions/renovations, etc. have it inspected thoroughly to find out if it is structurally sound and meets code for the time in which it was constructed and if you like, find out what you would need to do to make it conform to CURRENT building codes. This is certainly NOT a requirement that you bring them up to code it is just something you may want to consider.
Realtors you may want to get copies of any and all permits done on a home you are considering listing so you can have if for potential buyers and the Appraiser to foresall any issues. If no permits were pulled. SAY NOTHING! Let the buyers perform DUE DILIGENCE and let the appraisers determine on their own if they are going to research permits or not. If they ask you about permits, by all means tell them the truth, and if you can have your buyer provide records of the work performed, receipts, etc. showing who the contractor or builder was so the buyer can check these people out if it will make them feel better about the renovations/additions.
Finished basements, I would not worry too much about that, because as I said most appraisers are not going to be checking or asking if someone pulled a permit on this work, decks the same thing, Kitchen and Bath renovations, I really would not worry about those either. Most people do NOT pull permits on this kind of work and most appraisers are concerned with the quality of the work, how it improves the value of the home and how it compares with the other homes which it would compete with, etc.
I hope this helps and I would love to hear from Realtors and other Appraisers in different areas to see how your locations differ and how you would handle this if you were appraising a home where no permit was pulled for additions, finished basements, enclosed garages, etc.
Have a great weekend everyone! I hope this one is FEATURED as many people I am sure have the same questions.
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