You’ve found your dream home and are moving toward closing. It has a beautiful, finished basement, a recently-updated kitchen and a great deck out back. But as the bank does its final checks, you and your lender learn that some of those features that you love so much are technically illegal. The seller or perhaps a previous owner didn’t pull permits for the renovations, and now the bank is hesitant about underwriting your loan.

Don’t panic. It’s true that work done without permits can complicate a home sale, but it doesn’t have to derail the whole thing.

Buyers, read on to see what to look out for when you’re shopping, and how to address this situation before finalizing your mortgage. And sellers, check out what you can do to avoid this complication in the first place.

What should buyers look out for when a home has unpermitted renovations?

Avoiding roadblocks in your real estate transaction starts with getting as much information as you can as early as you can in the process. As you’re shopping around, it’s a good idea to ask if features not original to the house were done legally. In most places, a seller will be required to disclose whether unpermitted work has been done to a property, although with older homes this question is often answered with an I don’t know.

The most common projects to be done without permits are bathrooms, kitchens and decks, according to Steve Cunningham, chair of the Remodelers Council at the National Association of Home Builders (NAHB). Real estate agents in various markets added that other conversions, like basements or garages to increase living space, are also common trouble spots in this regard.

Often, unpermitted work won’t be done in conformance with local building codes, so if something seems poorly finished during a property tour, it’s probably worth asking about.

“Typically the buyer can tell if something’s been done haphazardly or unprofessionally,” said Lisa Harris, an agent with RE/MAX Center in Atlanta.

Buyers can also research properties to make sure everything is certified, and should work with their home inspector to make sure work has been done properly.

“The seller might not have known because it wasn’t disclosed to them. For the buyer, it’s all about doing your due diligence and checking public records to fully understand what you’re buying,” said Ashley Thomas III, second vice president at the National Association of Real Estate Brokers.

Keep in mind that not all home renovation projects need permits. Aesthetic upgrades like paint, flooring or tile generally don’t. Only work that involves structural updates or changes to the plumbing, electric or HVAC systems usually do.

How can unpermitted work be addressed?

The easiest way to avoid permit issues in a real estate transaction is for the homeowner to get permits for any work from the start.

“When you have a project of that caliber going on and you’re spending that kind of money, you really want to do your due diligence and find a licensed contractor,” Cunningham said. “It protects the value of your home because it’s such a large investment.”

But of course, if the work is already done, that’s a moot point. Getting permits pulled for finished work can be costlier than having them filed upfront, but it’s often the only way to move the property sale along. In some cases, sellers could be required to undo their updates.

“Even if the buyer is ok with it, you could get all the way to underwriting, and the underwriting could derail the transaction at that point, where the underwriter could say, ‘we won’t do the underwriting until this is rectified,’” Harris said.

Working with experienced agents is crucial

Because permit issues make a sale more complicated, it’s especially important to work with knowledgeable real estate agents on sales where projects have been done without the proper paperwork.

Often, the lack of permits is addressed by the seller giving a buyer credit for updates or fixes that need to be done — everything from removing drywall for an inspection to more significant overhauls to get things up to code.

A credit takes responsibility off the seller for the updates and ensures they are done to the buyer’s taste, but also eases the financial burden on the buyer.

“It really needs strong professional agents that can walk both parties through the challenges so everyone can acknowledge how we got here. Usually when that happens, everyone is level-headed and fair,” Thomas said. “It’s common in my experience that we’re able to navigate to keep the transaction on track.”

What sellers need to know

For sellers, it’s important to keep in mind that even in this favorable market, work that’s been done to your home without a permit still puts you at a disadvantage.

Above all, you should disclose any such alterations to your agent as soon as you can. Beyond that, you should be prepared to offer buyers a credit, or possibly make updates to your home before putting it on the market.

“It’s a heart-aching conversation, because there’s no easy answer financially for that problem. You have to tear it out, you have to have it done again, or it needs to be opened up so inspections can be done,” Cunningham said. “I have seen people have trouble selling a house from having bad renovations done that are not permitted.”

Right now, sellers with unpermitted work are in a relatively strong position, however, because housing supply remains low.

“Many buyers are dealing with fatigue, so they might accept something that they wouldn’t in a buyer’s market,” Thomas said.

Bottom line

When a house has had work done without permits, it can make the sale of that property more complicated. But, experts said, that doesn’t mean selling or buying such a home is impossible.

“It can be ok and it’s not a deal killer,” Harris said. “It’s just something where, if you have educated and experienced agents on both sides of the transaction, they can do what they need to do to make it right for everybody.”

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