Jul 9, 2010

Why it's difficult to get a permit for an Illegal Unit

This article is to help clarify for Realtors, who may be trying to help their Seller obtain a building permit. In general, unless there will be a huge increase in the living area that will significantly boost the sales price, my recommendation is to simply disclose the non-permitted area and give the Buyers a credit.

An after-the-fact building permit initially sounds like a good idea: The Sellers promise that it was built to code. It's been there for decades without any problem. And getting a permit would mean the appraiser could add square footage to the Appraisal, which means higher comps and (hopefully) a higher sales price.

However, applying for a building permit before a sale transaction is difficult because of the many unknowns ($$$) and unexpected delays ($$$) in the permit process. Also, the Seller is the most vulnerable (ie. they're on a tight timeframe and don't want unexpected surprises) and wost of all, may be burdened with added out-of-pocket costs to correct Code deficiencies, before the house is sold. The worst case scenario is receiving a Notice of Violation for a home that's already in Escrow. A City Inspector who comes to check on one part of the house could cite the owner for a different area.

During a sale transaction, Lenders (ie VA loans, sometimes FHA) may require that improvements built without a permit be removed or that a permit be issued for the improvement. Also, the process of obtaining a permit usually requires showing the layout of the entire house, which may reveal further areas not built with a permit. Issuance of a permit will trigger a City Inspector(s) to visit to the site. Retrofits are commonly required as either the work was never built to code or the codes have changed since (ie. New roof insulation requirements, Smoke detector upgrades now required). 

Also, during a sale transaction, the State of Hawaii requires that a General Contractor sign-on as being  responsible for the construction. This is a requirement to protect the public -- by having licensed professionals do the construction work, instead of a homeowner who may not be qualified or take dangerous shortcuts. If the work to be permitted includes plumbing or electrical, then a licensed Plumber and Electrician is also required to sign-on as being responsible for the work. (NOTE: recently, the state law was revised so that a General Contractor is NOT required for work <$10,000; the Owner-Builder can sign instead)

The difficulty is that the Seller is asking a General Contractor/Plumber/Electrician to endorse and be potentially liable for existing in-place construction that is often concealed behind a wall and that was installed by someone he never met.

Because of these complications, especially during a property sale transaction, Owners of illegally built rental units have a strong incentive to never apply for a Building Permit. (An Amnesty Program would come in very handy.)