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Sunday, September 25, 2016

The risks and rewards of unpermitted real estate

The $299,000 Scott Avenue bungalow built in 1923 on the border of Echo Park and Silver Lake seems like a good deal, with two bedrooms, off-street parking and free-standing garage. There is, however, one issue:  unpermitted construction. “There are extra rooms or offices in garage which was converted without permit,” reads the sales listing on Redfin.   Should buyers keep shopping or is unpermitted construction not such a big deal?  It’s an issue that comes up frequently when shopping for the older homes that predominate on the Eastside.

“We all know that on the Eastside people have been adding, changing and converting space for years,” said real estate agent Dan Ortega. “Back in the day it was just done and no one batted an eye.   With the gentrification of the area came buyers who couldn’t understand the pro/cons that came with unpermtited space.”

Click on the link below to find out what Ortega and real estate agent Tracy King have to say about unpermitted spaces.

Dan Ortega:

The issues/risk that a buyer can encounter is that if they ever go to resell the property, that unpermitted  space won’t be counted in the [square footage]. Secondly someone could come from the city and ask them to tear down/correct the changes that were made. This typically can happen when the buyer goes to make improvements or significant changes, like adding a bath. But I think the most significant impact unpermitted [space] can have for the buyer is when [lenders appraise the home ] and doesn’t give any real value to the [unpermitted] space. I’ve seen it happen, the price comes in lower than the price agreed upon in escrow. This can kill a deal if both parties can’t come to some agreement.

Tracy King

Here’s the situation in the City of Los Angeles: there is no official city onsite inspection of a property being sold like there is in Pasadena.  So unpermitted spaces like garage conversions are not as important. Historically, the only issue with unpermitted space was that an appraiser wouldn’t give credit for it in assessing the value of the property. In the past couple of years, some lenders have flatly refused to lend on property with unpermitted rooms because they felt that the liability of the work having not been done “up to code” was too great.
I had one deal where we had to convert a bathroom to a closet and a kitchen into a workroom so there would be no obvious potential to renting out the lower floor as an additional unit. Since there are so many illegal rooms in Los Angeles, completely enforcing a rule about them would be impossible. But the City needs money, so who knows what they may decide to do about this in the future? I always advise my clients to have any work done with permit to avoid possible future issues like this.

In the case of the Scott Avenue bungalow, the unpermitted garage work didn’t scare all the buyers away. A sale is pending, according to Redfin.

Photo from theMLS.com



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9 comments

  1. Even though the city of Pasadena requires an inspection and correction of any code violations before the close of escrow, that doesn’t mean those repairs get done and the necessary Certificate of Occupancy issued. In my case, my buyer’s agent was unscrupulous and complicit with the Seller to not disclose the inspection report to me, and escrow closed without the necessary repairs being done. My advice to anyone purchasing property in Pasadena: ask for a copy of the Certificate of Occupancy before the close of escrow. Don’t just assume one was issued because it’s required by law.

  2. I agree with Tracy about the City of LA needing money. I recently heard of a homeowner in Mt Washington who had a random visit from LA Dept of Building and Safety likely prompted by a disgruntled neighbor. Said homeowner had to take her home off the market until all illegal work was brought up to code. Of course the city makes money on fines for work done without permit; for the new permit to correct/confirm work was done to code; and of course the new assessment on said homeowner’s property taxes if the improvement was additional square footage-which was the case in this instance. It’s a bit of a Catch-22 for LA City in that given budget cuts, they are understaffed to handle code enforcement for every offending property. On the flipside, if you own a rental property, you damn well better make sure you’ve got proper heating, no vermin, working smoke detectors, i.e. a generally safe and habitable dwelling for your tenant(s). If not, LA City Housing Department Taskforce will make sure you do. And they come around every 3 years like clockwork. As it is, you’re supposed to obtain a permit to paint your house number on the curb in front. Hmmmmm, I wonder if that local actor dude (who shall remain nameless) ever obtained a permit when he painted all those house numbers on curbs a while back???

  3. I wish the city had been more diligent in the past, so as to build a nice, proper, well maintained city, instead of the trash pit that it is. I wish they had been motivated by integrity instead of finances.

    There is a compelling reason for requiring permits and inspections, and neither of the agents quoted recognizes or seems concerned with the quality of life issue.

    As a renter, I want to rent a habitable and decent living space. I expect in exchange for my timely and full rental payment in advance, that I am guaranteed certain living conditions and standards afforded by the city code. Most often is the case where an un-permitted space is simply cobbled together out of substandard materials that pose a safety risk, and create sub-standard living conditions.

    These conditions also breed sub-standard landlords. For the landlord, that translates into more profit, but is that really the kind of city anyone wants to co-create?

    As an owner, I want to make sure my tenants are happy, because happy tenants pay the rent on time and don’t destroy your property. What is the ‘real value’ of a property that endangers people’s lives or creates and fosters a sub-standard existence?

  4. Just FYI, the city at one time was picking neighborhoods to do building code sweeps in. I last heard of it when they brought it into Echo Park in the late 1970s. There was such an uproar from the owners in Echo Park that then-Councilman John Ferraro had the code enforcement notices all held in abeyance and not enforced, and the program was pulled out. Clearly, many of the properties were served notices to come up to code.

    That sweep even spawned a new neighborhood group that lasted for many years thereafter.

    I haven’t heard of that program ever since.

  5. Indeed it’s a shakedown.
    My old landlord, who lives around the corner from this apt, recently got nailed too. He’d been making upgrades to his complex for the last 30 years and they only just now started taking issue. At this point he’s up to his eyes in fines and repair to bering everything up to code.
    That said I did try to warn him that they’d bite him in the ass one day.

  6. I am a property owner and landlord as well as a Realtor, and I have experienced first hand many situations involving permitted and unpermitted work. Having work done on permit does not necessarily mean it is done well. I have seen inspectors condemn work that was done with permit, so a permit doesn’t necessarily guarantee quality, and sometimes it doesn’t even guarantee code-compliance. I have seen beautiful work not done with permit. It is a very complex question with no simple answer. Getting a permit finalled by the City can be an extremely frustrating, expensive and time consuming process and there is no standard by which each and every inspector does things exactly the same. I know there is a code on the books, but the application of it is open to interpretation. As I said, I always advise my clients to have work done with permit. But I would also like to see the city administer the permitting process in a fair, efficient, and open way. I would like to see the City train their employees to give good customer service to the public. I have experienced and heard about many cases where the permit process was more like a game of “Gotcha!”–and that does not encourage compliance with City regulations.

  7. as a consultant specializing in unpermitted construction within Los Angeles County I can tell you that although it may not be a big deal to some it can turn into a very big deal including the property owner being heavily fined and even charged with misdemeanors I think that if at all possible it is more profitable for all concerned to obtain the necessary entitlements and permits to legalize the construction projects than to ignore the situation it simply does not just go away. I have also seen cases where the new owner has taken legal action against the seller and the realtors to recover damages caused to him by the unpermitted construction it’s usually not that big a deal to fix the situation and avoid the potential nightmare

  8. This is happening right now all over Echo Park. Recently a house went up for sale that was being sold “lovingly upgraded by conscientious owners” (which is total BS, but that’s another story) except the “upgrades” were not permitted. The house went from 500+ square feet to over 1,000+ square feet within a week of being listed, with a “mother-in-law apartment” which is an unpermited area dug out underneath the house – on a hillside. Other unpermited “upgrades” include an additional room with unpermited and unchecked electrical. The owner has gotten away with this BS for years. Clearly, building and safety either isn’t doing their job or they still have inspectors on the take.

    Buyer beware.

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