Anthony Young | SF-Bay Area Appraiser
“Anthony, I have a duplex with an unpermitted studio downstairs. How do I value it?”
The short answer? You don’t.
Unpermitted additions, like the studio in this case, can cause more issues than they solve when it comes to appraisals and pricing. Let me break down why, and how you, as a real estate agent or loan officer, can handle these situations effectively.
Why Unpermitted Additions Don’t Guarantee Value
While it may be tempting to increase the list price based on the extra square footage or room from an unpermitted addition, this can create serious problems down the road. Here’s why:
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Appraisers May Not Assign Value: If an addition doesn’t comply with local building codes, an appraiser might give it zero value. You could set a higher list price, only to have it fall apart when the appraisal doesn’t back it up.
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Lenders Might Reject It: Even if the appraiser finds a way to assign value, the lender may refuse to recognize the unpermitted space. Lenders follow strict guidelines and often won’t accept unpermitted additions in the valuation.
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Secondary Market Restrictions: While the secondary market (lenders buying mortgages) may accept unpermitted additions if there are similar properties in the area, it’s not a sure thing. You’ll need strong comps showing that unpermitted spaces are common in the local market.
Fannie Mae Guidelines on Unpermitted Additions
According to Fannie Mae’s selling guidelines, unpermitted additions can be considered in an appraisal—but only under certain conditions:
- The addition must be typical for the market, meaning there must be comparable sales with similar unpermitted spaces.
- The appraiser must assess whether the lack of permits affects the marketability of the property.
- The property must be safe, sound, and structurally secure.
- If the market reaction to unpermitted additions is favorable and supported by comps, Fannie Mae allows them to be included in the valuation.
However, if the appraiser or lender finds that the unpermitted addition negatively impacts value or marketability, it will likely be excluded from the appraisal.
My Advice: Let the Market Decide
Instead of adjusting the list price based on the unpermitted space, let the market determine its value through the offers you receive.
Why? Because this way, you avoid the risk of pricing the property higher only to have it fall through when the appraisal or lender won’t support it. Buyers may be willing to pay more for the additional space, but that doesn’t guarantee it will hold value in the eyes of an appraiser or lender.
Stay within the accepted range for the type of property and neighborhood, and let the offers guide you.
The Potential Downside
While you might save money by not obtaining permits, you may not see a return on your investment in the unpermitted studio. Worse yet, if the space doesn’t get the support of appraisers or lenders, you could face lower offers or a drawn-out selling process.
How to Avoid This in the Future
Always educate your clients on the risks of unpermitted work. What might seem like a quick and cost-effective solution could cause significant complications when it’s time to sell.
What’s Next?
This is just one of many pricing and appraisal insights I’ll be sharing. Next time, we’ll dive into how to handle properties with unique features and how to adjust comps for those variations.
Stay informed with tips like these!
Follow me on Instagram at @Anthony_young_appraiser, visit my website at ValuedAudit.com, or call me at 925-999-0144.
Our team serves the greater San Francisco Bay Area and surrounding counties.
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