Many flippers and developers will encounter properties with unpermitted work.
The physical property may not match the official record of a house for any number of reasons.
A converted garage, remodeled kitchen or ADU built without approvals are not uncommon throughout California.
Inevitably, when these properties are sold, they come with a discount.
This is not the kind of discount associated with a tired or distressed property, carpets worn or in need of reroofing.
This is a discount designed to incentivise a sale because there are real risks that come with the purchase.
But depending on the purchase price and size of the discount, there may also be real opportunity.
The key is to accurately price and assess that risk before closing.
What is unpermitted work?
Unpermitted work is any work undertaken without a required permit or where the permit was never finalized.
It may include renovations begun or completed beyond the approved permit scope, contrary to zoning requirements or in a way that does not meet California’s rigid building codes.
While there are no accurate figures as to how prevalent unpermitted work is in California, it is relatively common in the following circumstances:
- older California homes
- family-owned properties modified over decades
- inherited properties
- distressed properties
- garage conversions
- enclosed patios or other additions to the home
- extra bedrooms and bathrooms
- electrical and plumbing upgrades
- ADUs or informal second units
How unpermitted work creates opportunities
Unpermitted work doesn’t simply offer price leverage which usually translates into a handsome discount.
It also reduces the pool of competing buyers because most retail purchasers and many flippers don’t want the hassle and complexities that come with it.
Unpermitted work allows sophisticated investors to solve problems that typical buyers either can’t or can’t be bothered with.
This in turn gives them the chance to create value if they can economically and legally reconfigure existing space.
But any project that features unpermitted work is only viable if the discount obtained exceeds the cost and risk of solving the problem.
Assessing the risk
There are five key questions any flipper or developer should be asking before buying a property with unpermitted work.
They are:
- What exactly was done? Compare a physical inspection with the property’s permit records.
- Was a permit required? Verify with the relevant local building authority.
- Can the work be legalized? Never assume it can. An architect, engineer, licensed contractor or local building department may be required to assess:
- structural compliance
- electrical/plumbing
- setbacks
- fire safety
- parking
- zoning
- ceiling height
- egress
- energy requirements
4. What might legalization involve? Calculate the potential costs of:
- preparing plans
- permit fees
- inspections
- opening walls to concealed work
- correcting noncompliant work
- rebuilding sections
- removing work that cannot be legalized
- additional project time
Avoid using generic estimates because costs can vary widely.
5. Does the deal still work if the space is worth less – or nothing?
This is a critical part of the equation.
If the deal only works because of a number of bedrooms, bathrooms or square footage with questionable legal status, assume the worst and reassess before committing capital.
How unpermitted work can impact your exit strategy
Unpermitted work that remains unresolved can have a significant impact on any exit strategy.
Flip – if the intention is to flip the property, documentation and disclosure becomes critical at resale.
Potential buyers will have the same questions as the investor regarding unpermitted work and will demand a similar discount.
Refinance/hold – a lender or appraiser may assess the property differently from the investor’s own calculation of usable space and value.
Rent – unpermitted work may prevent the property from being legally rented as intended.
Crunching the numbers
To ascertain whether the opportunity exceeds the risk and effectively green lights the project, investors need to carefully calculate all costs to ensure they fall below their conservative expected exit value.
Those costs must include:
- purchase price
- renovation
- legalization and remediation
- financing
- holding costs
- a generous buffer
Permit risk should be incorporated into both the budget and timeline.
How private money helps
Traditional lenders hate risk.
They shy away from financing properties that carry potential problems.
They don’t like distressed properties and they certainly don’t like properties with unpermitted work.
But private real estate lending is much more flexible and gives investors an option where previously none existed.
Private lenders will consider financing investors undertaking substantial renovations, including distressed properties and ones with unpermitted work under the right circumstances.
They take an holistic approach, considering the asset, project and investment strategy in a bid to find a financing solution.
Private lenders also have the ability to lend money quickly giving investors the power to strike when opportunities arise rather than missing a deal.
Get funding and support today
Unpermitted work shouldn’t automatically make an investor shy away from a deal.
It should be seen as both a risk and an opportunity.
Only a thorough investigation can determine whether the purchase price leaves a big enough margin to warrant proceeding.
When you are searching for guidance, a chat with the experts at Equidy can help ensure you are making the right call on a property with unpermitted work.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
Their sole focus is to help you maximize the return on your investment without putting yourself at unnecessary financial risk.
And here’s the best part – Equidy is a hard money lender that can finance flippers and developers in as little as 48 hours.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in tough times, they are determined to reward entrepreneurship and resolve to help their clients crystallize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
