Should a buyer be concerned about unpermitted improvements?

QUESTION: My buyer likes a home that has a significant amount of unpermitted improvements in the basement. He wants to make an offer, but first he needs to know if, on resale, the unpermitted space can be included in the total heated square footage. Can you help me answer this question?

ANSWER: According to guidance from the Real Estate Commission, unpermitted improvements in a property can be included in the total heated square footage for advertising purposes as long as: (1) the space meets the requirements for heated living area; and (2) the listing clearly discloses and identifies the unpermitted space to prospective buyers. We addressed in more detail what a listing agent should do when presented with a listing that includes unpermitted square footage in a previous Q&A that is available here.

In addition to answering the question you’ve asked, however, you should also advise your buyer about a couple of other potential risks inherent in buying this kind of property. If the current owner does not get the necessary permits before closing, a governmental authority could later make your buyer incur the cost of compliance. The cost to bring a property into regulatory compliance, especially when removal of sheetrock is involved, can be substantial. It is also possible that a taxing authority could reassess and impose increased ad valorem taxes on your buyer for years previous to his ownership, if it concludes that the unpermitted improvements increased the property’s value.

We encourage brokers to advise their buyer clients about the foregoing risks in writing to avoid any potential complaints after closing.