A friend recently asked me, "What do you do when you appraise a house with unpermitted space? Does it affect the value or your appraisal?"
The answer to this question largely depends on the lender for whom we are preparing the appraisal. While some lenders stipulate that unpermitted living area can be given value as long as it is professionally completed and cannot be distinguished from the permitted living area (this is called "conforming"), more and more lenders are hesitant to lend on non-permitted space. Why? One concern is that if something were to happen to the house and it needed to be rebuilt, it is possible, depending on the zoning or municipal restrictions that only the permitted space would be able to be legally rebuilt. This would leave the bank holding a loan that could potentially be thousands (or hundreds of thousands) of dollars more than the house is actually worth.
We recently did an appraisal that had approximately 500 square feet of non-permitted living area. In a 2200 SF house, this makes a big difference! The workmanship was impeccable, as you can see below...can you tell which bathroom is permitted and which is not?
The top bathroom is actually the non permitted one! We tried our hardest to be able to value the home at its full 2200 SF, but the lender just wouldn't allow it, and we had to appraise it as if it were a 1700 SF home, which was a huge disappointment to the homeowners. They had purchased the home a few years earlier with the space already added, and poured many resources into making the house their dream home. They had no idea the non permitted space would affect the value so negatively!
Now, in the example above, the market would most likely react to the non permitted addition, but unless the buyer could bring cash to the table to make up the difference in value between the permitted area and the addition that was built without permits (remember, 'non permitted' is another way of saying 'illegal') the bank as already mentioned is reluctant at best to lend on an illegal addition.
Though we have also done appraisals with non permitted living area in which the lender allowed us to value it as part of the home, there is always a chance that they won't. Even if the lender allows us to incorporate it in the total GLA (gross living area), we are legally required to disclose that it is non permitted. We also must add verbiage to limit our own liability. Needless to say, this complicates the whole appraisal and borrowing process.
If you are house hunting and come across a house with space that is not permitted, it is often marketed as "bonus living area." Be careful! Unpermitted space, while it may seem a great bargain at the outset, can have great negative impact on your future home value.
