Will an Unpermitted ADU Hurt Your Home Sale?

Will an Unpermitted ADU Hurt Your Home Sale?

If you have an unpermitted Accessory Dwelling Unit on your property and you are thinking about selling, you are probably wondering how it will affect your sale. The honest answer is: yes, an unpermitted ADU will almost certainly hurt your home sale, but the extent of the damage depends on several factors, and there are steps you can take to mitigate the impact.

In this guide, we will cover the real-world consequences of selling with an unpermitted ADU, how buyers and lenders react, your disclosure obligations under California law, and a detailed comparison of your options for resolving the situation.

How an Unpermitted ADU Hurts Your Sale

Unpermitted ADUs create a cascade of problems that can significantly reduce your sale price, extend your time on market, and narrow your buyer pool. Here are the specific ways an unpermitted ADU can hurt your home sale.

1. Appraisal Issues

When a buyer's lender orders an appraisal, the appraiser will note the presence of the ADU. If the ADU does not have permits, the appraiser will typically assign it zero value in the appraisal report. This means the property will be valued based on the main house alone, as if the ADU does not exist.

In some cases, the appraiser may go further and flag the unpermitted structure as a potential issue, which can cause the lender to require the structure to be permitted or removed as a condition of the loan. For more on how appraisals work with ADUs, see our guide on how appraisers value a property with an ADU.

2. Buyer Financing Problems

Most buyers use mortgages to purchase homes, and lenders have strict requirements about unpermitted structures. Here is how different loan types handle unpermitted ADUs:

This is a significant problem because it eliminates a large portion of potential buyers. FHA and VA loans, which are popular among first-time buyers and veterans, may be completely unavailable for properties with unpermitted ADUs.

3. Reduced Buyer Pool

Unpermitted ADUs scare off many buyers, especially those who:

• Need conventional financing and cannot risk a denied loan
• Are risk-averse and do not want to inherit a code compliance issue
• Plan to rent the ADU and need it to be legally rentable
• Are concerned about insurance coverage for the structure
• Worry about potential fines or enforcement actions from the city

4. Price Reduction

Properties with unpermitted ADUs typically sell for 10-25% less than comparable properties with permitted ADUs or no ADU at all. This discount reflects the cost and risk the buyer assumes by purchasing a property with an unpermitted structure. In some cases, the discount can be even steeper if the unpermitted work is extensive or if the city is known for aggressive code enforcement.

Your Disclosure Obligations

California law requires sellers to disclose known material facts about their property. An unpermitted ADU is a material fact that must be disclosed. Failure to disclose can result in lawsuits, rescission of the sale, and significant financial liability.

Required Disclosures

Under California Civil Code Sections 1102-1102.17, sellers must complete a Transfer Disclosure Statement (TDS) that includes information about the property's condition. The TDS includes questions about:

• Whether there are any improvements made without required permits
• Whether the property has any additions, structural modifications, or other alterations
• Whether there are any code violations or notices from governmental agencies

You must answer these questions truthfully. If you know the ADU was built without permits, you must disclose this fact. Attempting to hide it is both unethical and illegal.

Potential Liability for Non-Disclosure

If you fail to disclose an unpermitted ADU and the buyer discovers it after closing, you could face:

• Lawsuits for fraudulent concealment or misrepresentation
• Rescission of the sale (buyer returns the property and you return the purchase price)
• Damages for the cost of permitting, modifying, or removing the unpermitted structure
• Emotional distress damages
• Attorney's fees and court costs

Your Options for Resolving an Unpermitted ADU

Before listing your property, you have several options for dealing with the unpermitted ADU. Each has different costs, timelines, and impacts on your sale price.

Option 1: Retroactive Permitting

California has made it increasingly easier to retroactively permit existing ADUs. Many cities now have streamlined processes for bringing unpermitted ADUs into compliance. The process typically involves:

1. Submitting plans for the existing structure to the building department
2. Having the structure inspected for code compliance
3. Making any required corrections to bring the structure up to code
4. Paying applicable permit fees (and potentially back fees or penalties)
5. Receiving a certificate of occupancy

This is often the best option if you have the time and budget. A newly permitted ADU can add $150,000 to $350,000+ to your property value in Los Angeles, far exceeding the cost of permitting in most cases. The California Contractors State License Board (CSLB) can help you find licensed contractors for any required code upgrades.

Option 2: Sell As-Is with Full Disclosure

You can sell the property with the unpermitted ADU, disclosing its status to all potential buyers. This approach is faster but will result in a lower sale price because buyers will factor in the cost and risk of dealing with the unpermitted structure.

To maximize your sale price with this approach:

• Get quotes for retroactive permitting and share them with buyers (showing the path to compliance)
• Provide documentation of the ADU's construction quality (materials, contractor info if available)
• Target cash buyers or investors who are comfortable with unpermitted structures
• Price the property competitively, factoring in the cost of permitting

Option 3: Remove the Unpermitted Structure

If retroactive permitting is too expensive or the structure is too far from code compliance, you may consider removing the unpermitted ADU entirely. This eliminates the disclosure issue and allows you to sell the property as a standard single-family home.

Demolition costs for a small ADU typically range from $5,000 to $15,000, depending on size and whether utilities need to be disconnected. After demolition, you may want to landscape the area to improve curb appeal.

Option 4: Sell to an Investor or ADU Specialist

Some investors and ADU-focused companies specialize in purchasing properties with unpermitted ADUs. They have the expertise and capital to handle the permitting process and are willing to take on the risk. While you may receive a lower price than a retail sale, the process is typically faster and simpler.

Insurance Implications

An unpermitted ADU creates serious insurance complications. Your homeowner's insurance policy likely does not cover unpermitted structures, and if a loss occurs (fire, flood, liability claim) involving the unpermitted ADU, your insurer may deny the claim entirely.

Additionally, if someone is injured in or around the unpermitted ADU, your liability exposure is significant. The lack of permits means the structure may not meet safety codes for fire resistance, egress, structural integrity, and electrical/plumbing safety. Any of these issues could result in injuries and subsequent lawsuits.

For more on ADU insurance requirements, see our guide on ADU insurance coverage.

Frequently Asked Questions

Can I sell my house with an unpermitted ADU?

Yes, you can sell a property with an unpermitted ADU, but you must disclose the unpermitted status to all potential buyers. The unpermitted ADU will likely reduce your sale price and limit your buyer pool, particularly among those who need financing.

How much value does an unpermitted ADU lose compared to a permitted one?

An unpermitted ADU typically receives zero appraised value from lenders. In practical terms, properties with unpermitted ADUs sell for 10-25% less than comparable properties with permitted ADUs. The exact discount depends on the local market, the quality of construction, and the estimated cost of permitting.

Can I retroactively permit my ADU?

In most California cities, yes. Many cities have streamlined processes for bringing unpermitted ADUs into compliance, especially under recent state ADU legislation. The cost and timeline depend on how much work is needed to bring the structure up to current code. Contact your local building department or consult with an experienced ADU contractor to assess feasibility.

What happens if I do not disclose the unpermitted ADU?

Failing to disclose is illegal under California law and exposes you to lawsuits, potential rescission of the sale, and significant financial damages. Buyers who discover an undisclosed unpermitted structure after closing have strong legal remedies against the seller.

Will the city come after me for having an unpermitted ADU?

Code enforcement varies by city. Some cities are proactive about identifying unpermitted structures, while others only investigate upon complaint. However, the sale process itself often triggers scrutiny, as appraisers, inspectors, and buyer's agents may notice discrepancies between permit records and the actual property. It is better to address the issue proactively.

Can a buyer get a loan on a property with an unpermitted ADU?

It depends on the loan type and the lender. Conventional loans may be available if the unpermitted structure is assigned zero value and does not affect the main house's habitability. FHA and VA loans are more restrictive and may require the structure to be permitted or removed. Cash purchases bypass lender requirements entirely.

The Retroactive Permitting Process for Unpermitted ADUs in California

If you have an unpermitted ADU on your property, legalizing it through retroactive permitting is often the best path forward, especially if you plan to sell your home. California has made this process more accessible in recent years, but it still requires careful planning and professional guidance.

Step 1: Contact Your Local Building Department

Start by contacting your city's building and safety department to discuss your situation. Many California cities now have streamlined pathways for legalizing existing ADUs, particularly under state laws like SB 13 and AB 68 that encourage ADU development. The building department will tell you what documentation and inspections are required for your specific situation.

Step 2: Hire a Licensed Architect or Designer

You will need professional plans that document the ADU as it currently exists. An architect will measure the structure, create floor plans, and identify any areas where the unit does not meet current building codes. These plans will be submitted to the city as part of your permit application.

Step 3: Address Code Violations

The most common code issues with unpermitted ADUs include inadequate electrical wiring, insufficient plumbing, lack of proper egress windows, missing smoke detectors, and structural deficiencies. Your architect or a licensed contractor can help you develop a plan to bring the unit up to code. Not all original building codes apply retroactively. California allows some flexibility for existing structures, but life safety requirements are always enforced.

Step 4: Submit Your Permit Application

Once your plans are complete and you have a clear understanding of the required corrections, submit your application to the building department along with the required fees. Processing times vary by jurisdiction but typically range from 4 to 12 weeks for plan review.

Step 5: Complete Inspections

After your plans are approved and corrections are made, schedule inspections with the building department. Inspectors will verify that all work meets code requirements. Once all inspections pass, you will receive a certificate of occupancy or equivalent approval that makes your ADU legally permitted.

Cost of Legalizing an Unpermitted ADU

The total cost of retroactive permitting depends on the condition of the existing structure and the extent of corrections required. Here is a breakdown of typical costs California homeowners can expect.

• Architectural plans and documentation: $3,000 to $8,000 depending on complexity and your location
• Permit fees: $1,500 to $5,000 depending on your city and the scope of work
• Electrical upgrades: $2,000 to $8,000 if the existing wiring is substandard or improperly installed
• Plumbing corrections: $1,500 to $6,000 for issues like improper drainage, missing backflow prevention, or inadequate water supply lines
• Structural repairs: $3,000 to $15,000 if the foundation, framing, or roof structure needs reinforcement
• Egress windows and fire safety: $1,000 to $4,000 per window, plus smoke and carbon monoxide detectors
• Total estimated cost: $12,000 to $45,000 for most retroactive permitting projects

While these costs may seem significant, they are far less than the value loss associated with selling a home with an unpermitted structure. A permitted ADU can add $100,000 to $300,000 in property value, making the investment in legalization well worthwhile. For more on ADU costs, visit our guide on ADU costs in California.

Frequently Asked Questions About Unpermitted ADUs and Home Sales

Can I sell my house with an unpermitted ADU?

Yes, you can sell a house with an unpermitted ADU, but you must disclose the unpermitted status to potential buyers. California law requires sellers to disclose all known material facts about the property, and an unpermitted structure is a significant material fact. Many buyers will still be interested, but they will likely negotiate a lower price to account for the cost and risk of legalizing the unit or removing it.

Will a buyer's lender refuse to finance a property with an unpermitted ADU?

Some lenders will refuse to finance properties with unpermitted structures, while others will proceed with conditions. FHA and VA loans are particularly strict about unpermitted improvements. Conventional lenders may approve the loan but require the unpermitted structure to be excluded from the appraisal, which can reduce the maximum loan amount. In some cases, the lender may require the seller to legalize or demolish the unpermitted ADU before closing.

How long does retroactive permitting take in Los Angeles?

The timeline for retroactive permitting in Los Angeles typically ranges from 3 to 9 months from initial application to final approval. Plan review usually takes 4 to 8 weeks, and the correction work and inspections add additional time. Complex projects with significant code violations may take longer. Working with an experienced permit expediter can help reduce processing times.

What happens if I do not disclose an unpermitted ADU when selling?

Failing to disclose a known unpermitted structure can expose you to serious legal liability after the sale. Buyers can sue for fraud, misrepresentation, or breach of contract, and you could be required to pay for the cost of legalization, demolition, or the difference in property value. California real estate disclosure requirements are strict, and courts consistently hold sellers accountable for failing to disclose unpermitted improvements.

Can the city force me to tear down an unpermitted ADU?

Yes, if the city discovers an unpermitted ADU through a complaint, inspection, or permit research, they can issue a notice to comply that requires you to either legalize the structure or demolish it. In practice, most California cities prefer to help homeowners legalize existing ADUs rather than force demolition, especially given the state's housing shortage. However, if the structure poses safety hazards or cannot be brought up to code, demolition may be required.