February 2008 Archives

February 23, 2008

Why Do So Many Homeowners Fail to Get Permits for Remodeling?

Inspector Paul RudeGetting It Done. Paul A. Rude, retired California General Contractor and Certified Member of the American Society of Home Inspectors, answers your questions on remodeling, dealing with contractors, and home maintenance.

The law in California and nearly all other states requires a permit for just about any remodeling project, so most homeowners get permits, right? Wrong. Private home inspectors see non-permitted work every day. Here in the San Francisco Bay Area, the consensus among experienced ASHI inspectors is that at least 60 to 70 percent of all home remodeling is done without permits. When I ran this number by a local city inspector with more than 20 years of experience, she laughed and said it sounded too low.

Why is so much work done without official sanction? First, the application process can be daunting. Many communities have obscure and sometimes unbelievable restrictions, often intended to maintain the "authentic" character of their neighborhoods. If your bath requires changing a single window, you may have to pay for a design review, additional drawings, or even a public hearing. In general, the larger the city, the more complex the requirements, although some small, exclusive cities also have very stringent rules.

And a bureaucratic blessing doesn't come cheap anymore. In the old days, permit fees were nominal, but California cities have seen their tax base dwindle since Proposition 13 passed in 1978, and they have jacked up all sorts of fees to compensate. A permit for a modest remodel can easily be $2,000 or more -- not to mention that city offices are almost never open, except when you have to take time off work to visit them.

Then there's the tax thing. In California, under Prop. 13, property taxes are based on the price you paid for the house, plus limited annual increases and local assessments. If you bought your home 15 years ago for $150,000, your taxes might have been about $2,000 a year at first. With annual increases and new assessments, they might now be $3,000 or so -- still low by present standards. But an addition or major remodel will be assessed at today's values, according to a formula in the state tax code. The cost of a large addition could easily exceed the original cost of the house, possibly doubling the taxes. If you stay in the house long enough, the tax bill may eventually exceed the construction costs.

So, do you get a permit or not? Follow your conscience. But if you're going the outlaw route, talk to the neighbors first. Few cities have the resources to monitor neighborhoods for power-saw noise -- the main source of Stop Work orders is complaints from neighbors. If you have a long-running feud with the guy next door, he might get even by calling in your unlicensed bath remodel. If a neighbor's big remodel project does have a permit, the city inspector will be coming around and might notice your off-the-books project. Even if you play by the rules, it's always best to let folks know what changes you're planning. It's just human nature to be agreeable when someone consults you in advance, and to be annoyed when noise and contractors' trucks show up unexpectedly.

Paul is the owner of Summer Street Inspections in Berkeley CA. His opinions are based on conditions in California and the San Francisco Bay Area. Conditions elsewhere may be substantially different. Contact Paul at paul@summerinspect.com. To find an ASHI inspector in the Bay Area, go to www.ggashi.org. Elsewhere, go to www.ashi.org.

February 15, 2008

How the Economic Stimulus Plan Affects Homebuyers

News has spread: recent legislation signed by President Bush will put cash back into taxpayer hands--$600 for most individuals, $1,200 for couples, and an additional $300 for each child.

If you're looking to buy your first house, the extra cash can't hurt. But if you're looking to buy a house that costs more than $417,000, that may not be the best part of the new plan. It also raises nonconforming loan limits from $417,000 to up to $729,750 in high-cost areas. This applies to loans originated through the rest of the year.

What exactly does that mean? Hopefully, if you're borrowing in the range identified, a lower interest rate. Because nonconforming loans can't be resold to Fannie Mae or Freddie Mac, the two largest purchasers on the secondary market, they've generally carried higher interest rates. As Sue McAllister points out in the Silicon Valley Real Estate Blog, borrowers will have to wait and see whether lenders will start dropping rates on these larger loans to conforming loan levels right away, in anticipation that they'll be repurchased on the secondary market.

At this point, too much is unknown--and it may not be time to start cheering. Critics point out that the higher loan limits will be based on local median home prices, and probably won't affect most markets. And while Fannie Mae and Freddie Mac are authorized to buy these loans, they aren't required to.

Also, investors may not be as comfortable with securities backed by these newly eligible loans, because they remain riskier. As Bankrate's Holden Lewis notes, that could mean that mortgage-backed securities segregate regular conforming loans from these new "superconforming" loans. If so, rates on the superconforming loans are still sure to be higher.

If you're looking to buy between now and the end of the year, and you're expecting to borrow more than $417,000 because median home prices where you live are sky high, stay tuned.

Alayna Schroeder