"Chad" (not his real name) THOUGHT he was one of the lucky ones. His house had sold, and the buyers were lender approved.
Then the appraiser delivered the devastating news that caused the whole transaction to blow up: The appraisal on Chad's house could not include the entire 700 square foot downstairs area that had been converted into a cool media room, bathroom, and office. Why?
The conversion of the basement had been UNPERMITTED (done without permits).Why UNPERMITTED? TO AVOID AN INCREASE IN PROPERTY TAXES.
This is a story that pits an underdog (overtaxed, over-mortgaged Californians living in "high cost" areas) against bureaucrats (cash thirsty counties who have strapped themselves by legislating promises they cannot deliver).
As is the case with most instances where taxation is askew (and broadly resented), those being taxed come up with ways to avoid or eliminate taxes. Such is the case with the enormous amount of of unpermitted "home improvement" that went on during the boom years here in California.
Zillow doesn't know the house has 700 extra square feet. There are no public records anywhere that indicate this 1,000 square foot house is really a 1700 square foot house. The contractor (now long gone) promised to do everything "to code". What clue would the listing agent have when the house was placed on the market?
Massive amounts of equity paid for unpermitted upgrades to California properties during our "boom years". During this era, getting an equityline was as easy as ordering a hamburger. We're talking about new kitchens and bathrooms, garage conversions, basements being finished into living areas, sunrooms, new wiring and plumbing, and the list goes on.
Many were never permitted.
For those of you unfamiliar with property taxes in California, they are essentially frozen for the entire time you own the property, based on what you originally paid for the property. One of the only ways a county can increase the tax is when a home improvement takes place, therefore increasing the value of the property.
"Protecting your tax base" is a phrase has come to mean many things...one is simply not moving ( a topic for another post). Another is the decision to keep improvements to the property a secret by not making an application for a permit.
It is truly mind boggling to consider how many of these unpermitted improvements exist here in California. The "Secret Renovations Society" is alive and well, and paying far lower taxes than those that played by the rules.
As if in a conspiracy, neighbors look the other way when contractors arrive everyday at the house next door for 6 months. Among friends, secret renovations are applauded, representing a sneaky way to avoid a tax increase. Houses are often first outfitted with proper looking window coverings in the renovation areas to keep prying eyes away.
Just how hungry are counties for money? On one of my own properties, I simply made an application for a permit, but changed my mind and never completed the work. Next tax bill? A massive increase in taxes for something that wasn't even done to the property (and if done, would have never increased the value of the property the amount determined by the county).
Would you call this a MONEY GRAB?
Can you see how behavior like this by the taxing authorities, along with a simmering resentment over how much tax money is perceived to be wasteful could cause Californians to think twice before they apply for a permit?
Can you see how this has the potential to unravel many real estate transactions in the future?
Comments from appraisers would be welcome.
Written by Janet Guilbault, California Mortgage Expert Based Out of the San Francisco Bay Area
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