diff --git a/stix2/base.py b/stix2/base.py
index 898f489..7ca4740 100644
--- a/stix2/base.py
+++ b/stix2/base.py
@@ -10,7 +10,7 @@ from .exceptions import (AtLeastOnePropertyError, DependentPropertiesError,
                          ExtraPropertiesError, ImmutableError,
                          InvalidObjRefError, InvalidValueError,
                          MissingPropertiesError,
-                         MutuallyExclusivePropertiesError)
+                         MutuallyExclusivePropertiesError, ParseError)
 from .markings.utils import validate
 from .utils import NOW, find_property_index, format_datetime, get_timestamp
 from .utils import new_version as _new_version
@@ -49,7 +49,7 @@ class _STIXBase(collections.Mapping):
 
         return all_properties
 
-    def _check_property(self, prop_name, prop, kwargs):
+    def _check_property(self, prop_name, prop, kwargs, allow_custom=False):
         if prop_name not in kwargs:
             if hasattr(prop, 'default'):
                 value = prop.default()
@@ -61,6 +61,8 @@ class _STIXBase(collections.Mapping):
             try:
                 kwargs[prop_name] = prop.clean(kwargs[prop_name])
             except ValueError as exc:
+                if allow_custom and isinstance(exc, ParseError):
+                    return
                 raise InvalidValueError(self.__class__, prop_name, reason=str(exc))
 
     # interproperty constraint methods
@@ -125,7 +127,11 @@ class _STIXBase(collections.Mapping):
             raise MissingPropertiesError(cls, missing_kwargs)
 
         for prop_name, prop_metadata in cls._properties.items():
-            self._check_property(prop_name, prop_metadata, setting_kwargs)
+            try:
+                self._check_property(prop_name, prop_metadata, setting_kwargs, allow_custom)
+            except ParseError as err:
+                if not allow_custom:
+                    raise err
 
         self._inner = setting_kwargs
 
@@ -244,8 +250,8 @@ class _Observable(_STIXBase):
             if ref_type not in allowed_types:
                 raise InvalidObjRefError(self.__class__, prop_name, "object reference '%s' is of an invalid type '%s'" % (ref, ref_type))
 
-    def _check_property(self, prop_name, prop, kwargs):
-        super(_Observable, self)._check_property(prop_name, prop, kwargs)
+    def _check_property(self, prop_name, prop, kwargs, allow_custom=False):
+        super(_Observable, self)._check_property(prop_name, prop, kwargs, allow_custom)
         if prop_name not in kwargs:
             return
 
diff --git a/stix2/test/test_custom.py b/stix2/test/test_custom.py
index a50819b..d46acd4 100644
--- a/stix2/test/test_custom.py
+++ b/stix2/test/test_custom.py
@@ -617,6 +617,23 @@ def test_parse_observable_with_unregistered_custom_extension():
     assert not isinstance(parsed_ob['extensions']['x-foobar-ext'], stix2.core._STIXBase)
 
 
+def test_parse_observable_with_unregistered_custom_extension_dict():
+    input_dict = {
+        "type": "domain-name",
+        "value": "example.com",
+        "extensions": {
+            "x-foobar-ext": {
+                "property1": "foo",
+                "property2": 12
+            }
+        }
+    }
+
+    with pytest.raises(ValueError) as excinfo:
+        stix2.v20.observables.DomainName(**input_dict)
+    assert "Can't parse unknown extension type" in str(excinfo.value)
+
+
 def test_register_custom_object():
     # Not the way to register custom object.
     class CustomObject2(object):
diff --git a/stix2/v20/observables.py b/stix2/v20/observables.py
index 4449527..7dc7c02 100644
--- a/stix2/v20/observables.py
+++ b/stix2/v20/observables.py
@@ -67,7 +67,7 @@ class ExtensionsProperty(DictionaryProperty):
                     else:
                         raise ValueError("Cannot determine extension type.")
                 else:
-                    raise ValueError("The key used in the extensions dictionary is not an extension type name")
+                    raise ParseError("Can't parse unknown extension type: {}".format(key))
         else:
             raise ValueError("The enclosing type '%s' has no extensions defined" % self.enclosing_type)
         return dictified
@@ -936,7 +936,7 @@ def parse_observable(data, _valid_refs=None, allow_custom=False):
                 ext_class = EXT_MAP[obj['type']][name]
             except KeyError:
                 if not allow_custom:
-                    raise ParseError("Can't parse Unknown extension type '%s' for observable type '%s'!" % (name, obj['type']))
+                    raise ParseError("Can't parse unknown extension type '%s' for observable type '%s'!" % (name, obj['type']))
             else:  # extension was found
                 obj['extensions'][name] = ext_class(allow_custom=allow_custom, **obj['extensions'][name])