Walk into any home, and you will find traces of the people living there now, and all of those who have come before. It is a fact of life that people will customize their homes to suit their personal tastes and needs, and while homeowners are required by law to submit building permits to the city for inspection before embarking on any significant work, that does not mean they will always comply.
But when properties are placed on the market, and these items listed as selling points without disclosing their lack of permits, what dangers are posed for buyers? And what effect is this process having on the market itself?
"This is an issue we encounter frequently, but I see no relation between the lack of disclosure on non-permitted work done on homes and the current prices," said Alain Pinel Realtor Samia Cullen, who is based in Menlo Park. "For starters, it is not actually that often that a homeowner will make any modifications to their home without obtaining a permit."
Palo Alto Chief Building Official Larry Perlin concurs: "The demographics of this area are such that homeowners are probably in a better financial situation to be able to afford to hire the properly licensed contractors, designers and architects."
Palo Alto residents, he adds, are an extremely conscientious and self-policing lot. When a local notices that a neighbor has taken on a substantial modification project on their home, they are more likely than not to look into it.
Of course, not all changes are conspicuous. Spaces like attics and basements are frequently refitted to serve as extra bedrooms, Perlin said, and it is these that are most often found to be in violation of city codes. Sometimes this is because the changes were made prior to the introduction of the permitting system in the 1960s, or because the changes were set to the standard of now-outdated codes.
"It is a real gray area," said Anne Arjani, a Palo Alto-based Keller Williams Realtor, who notes that what it says about a home on its title rarely corresponds to the fact. "For example, I was just looking at a home in The Willows whose garage has been serving as an extra bedroom since it was built." The space conforms to the standard definition of a bedroom: a closed off area with a window and closet space. "So can you call it a bedroom, or can't you?"
According to the city, it is not. Rather, it is an example of the most common type of violation in the area: that of a habitable area being made out of a space not built for such a purpose. In such cases, the city will usually work with new owners to bring their homes up to standard. "When a violator is caught, they will often come to the city mea culpa, offering to do anything to get permission for the work. More often than not the city will try to work with them unless the violation is egregious or can't be supported without bending the rules," Perlin said.
Whether or not a seller lists these kinds of modifications when they place their home on the market is up to their and their agent's discretion. "But because the buyer will be aware of what work has been done on the home, and which are to code and have permits before they make an offer, it is in the seller's interest to be up front," said James Yang, a Palo Alto-based Rainmaker Properties Realtor.
Indeed, a buyer will be faced with so much documentation detailing the changes made to the property, and prompting them to inspect it, that they should be more than aware of a home's value before making a commitment, Arjani said. The standards of consumer protection are so high in real estate that a buyer will be prompted repeatedly to inspect the homes they are interested in.
"In contracts, it is abundantly clear that buyers have a duty to investigate, and we encourage all of our buyers to go to the Palo Alto Building Department to see if there is any paper work that could tell them what work has been done on the property, with or without permit," she said.
And even when the seller and agent downplay changes, the documentation will not. Before buyers can proceed in making an offer, they are required to read and sign a Transfer Disclosure Statement, along with numerous other documents including an Agent Visual Inspection disclosure, seller's property questionnaire and Statewide Buyer and Seller Advisory.
"Consumer protection is insane when you're buying a home," Arjani said. "On every page, it practically screams: 'Buyer, you need to inspect.'"
When accounting for Palo Alto's steep home prices, most Realtors questioned said it was less to do with undisclosed non-permitted work inflating the value, and more to do with the nature of the area.
"In Palo Alto, there are just more buyers than homes, and this has always been the case," Arjani said.
The market, too, has rebounded significantly in the first three months of the year. "According to MLS, the median price for homes in Palo Alto in the first three months of 2011 was up by 6.87 percent compared to last year," Cullen noted. "With homes that weren't selling in 2010, we are now seeing multiple offers."
A strong market is in some cases mitigating the acceptance by potential buyers of non-permitted work, however.
"This is a really common problem in Palo Alto," Arjani said. "For example, when you have four other buyers, a person is more likely to be willing to accept the non-permitted work as part of the property because they want the house."
So what is a person to do when making what will possibly be the biggest investment of their lives?
Not worry about non-permitted work, according to Perlin, because checks and balances have been built into the system.
"This is especially true in the case of a real estate, mortgage and financial crisis like that which we have been experiencing. Lenders have become extremely diligent in making sure that their appraisals for property are accurate in order to support the loan. No credit will be offered for the additional space, he said, adding that it could " hurt them later on, when refinancing their homes or for appraisals, when it becomes evident that there has been substantial work done for which there was no permit."