Property Flippers Behaving Badly: Unpermitted Improvements

In this era of property flipping, investors are well served upon resale to bring any legally uninhabitable or questionable expanded living space up to code in the course of renovation. When houses are selling for $1,000+ per square foot on average, every marketable (i.e. documented) inch matters. Indeed, making property improvements without necessary permits is not only a certain way to diminish ROI, it runs the risk of accruing fines and being delayed or having the project entirely shut down.

 

CASE IN POINT

The following example is intended for educational purposes only and is based on our experience as a real estate broker. Information obtained from third parties is deemed reliable but is not guaranteed. No legal or financial advice is given. Home sellers and buyers should always seek counsel from qualified professionals including attorneys, accountants, architects, contractors and municipal authorities.

San Francisco’s western neighborhoods are rife with single-family dwellings that have bonus rooms constructed at the ground level. Given the prevailing design of homes — a single-level layout connected to a full unfinished garage/basement by interior stairs — it’s almost as if they were built with future-proofing in mind. More often than not, the middle-class families who historically resided here opted for a budget-friendly DIY approach to expanding their forever homes as needs changed.

Purchased almost three years ago, an Outer Sunset single-family had “great potential” with a 2-bed/1-bath layout upstairs and an ever-so-common 1-bed/1-bath buildout downstairs. The 2019 listing describes that downstairs space as unwarranted, however public record of square footage and number of bathrooms seems to account for it. Due to administrative procedure or otherwise, it is not uncommon for older permitted improvements to not be documented in a property’s permit history.

According to the Department of Building Inspection (DBI), the buyer wasted no time applying for a building permit to remodel the majority of the home and document questionable spaces. Curiously, that permit was subsequently withdrawn by the owner. A permit was later filed for a scaled down renovation: Relocate (e) full bathroom & replace (e) window with new at ground floor. Remodel (e) kitchen & bathroom at 2nd floor.

That building permit was approved, and comparing listing photos* from 2019 and today, the work was completed.  *Source: SFAR MLS

 

The room-by-room non-exhaustive summary of improvements, below.

Front Exterior: garage door replaced, porch entry framed, addition of exterior door, addition of lighting.

 

Entry: wall between entry and laundry area deleted, construction of alcove and relocation of laundry area, closet door and hardware replaced, flooring replaced, addition of recessed lighting.

 

Living Area: wall between room and kitchen deleted, decorative archway deleted, flooring replaced, light fixture replaced, addition of recessed lighting, addition of air conditioning unit.

 

Kitchen: relocation of gas range and exhaust system, relocation of refrigerator, relocation of dishwasher, cabinetry and countertop replaced, entryway to hall expanded, fixtures replaced, flooring replaced, addition of recessed lighting.

 

Primary Bathroom: tub replaced, vanity and sink replaced, fixtures replaced, shower surround replaced, toilet replaced.

 

Family Room (Downstairs): removal of stairs and enclosure of entrance, under-stair storage deleted, heating unit deleted, light switch relocated, flooring replaced, addition of recessed lighting.

 

Bedroom (Downstairs): exterior door deleted, closet enclosure deleted, drop ceiling deleted, interior door relocated and replaced along with hardware, window at right replaced with sliding door, flooring replaced, addition of recessed lighting.

 

Bathroom (Downstairs): entire room relocated and constructed in unconditioned area at rear of garage off new hallway connecting Family Room and Bedroom.

 

A can of worms.

Purely cosmetic alterations like flooring and doors generally do not require permits, but it’s plain to see that this project exceeds the scope of the building permit. Structural changes that should have been approved — including the construction and demolition of walls — are just one issue. All plumbing work in the kitchen and downstairs bathroom was done entirely without permit, as was all the electrical modifications throughout the home. These issues would have been flagged by any diligent city inspector before walls were closed, at which point they could have been addressed. It gets worse.

The property has been prepared for sale, is actively listed, and none of the improvements were inspected by DBI. What good is a permit if there is no assurance that work is completed properly? It’s no good. It may be possible for the owner to obtain sign-off on the 2nd floor kitchen and bath remodels as well as the ground floor window replacement (assuming the inspector has no knowledge of what those areas looked like previously) but the ground floor bathroom relocation is a dead giveaway that corners were cut. Plumbing and electrical permits were required for that job yet not obtained. Inspection now would invite investigation of just how much work was done improperly.

 

Truth hurts.

For the owner of this home (and every seller out there), disclosing to buyers material facts affecting the property’s value is law. Needless to say, the statutory Residential Building Record Report (permit history) is going to raise questions about the scope and integrity of this renovation. And any buyer’s agent who reviews disclosures with their client as we do — and as all should but many do not — has a fiduciary duty to advise their client accordingly. Spoiler alert: it won’t be all rainbows and butterflies.

To add insult to injury, not having the home’s downstairs space inspected and documented as entirely legally habitable is a missed opportunity for the seller to add marketable square footage. The current listing displays a measurement unchanged from 2019 — still the official figure regardless of valuable area the relocated bath and new hallway may have added.

The sales price of this property will fall short of what it could have been had its “great potential” been realized to the fullest. At best, a buyer will look the other way and appreciate it for what it is. Some will undoubtedly consider living in perhaps sub-par construction too dangerous and will run from it. Time will tell how this one shakes out. We’ll be watching.

 

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