Landlords: The Importance of Investigating Outstanding Violations

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In many municipalities, a Certificate of Occupancy (often referred to as the “CO”) must be obtained by the seller and delivered to the buyer prior to or at closing. This insures that the buyer is aware of any outstanding violations or pending assessments against the property. However, some towns do not require a CO. If you are purchasing a property in such a town, beware!! If your agent fails to be proactive and inquire about outstanding violations or assessments, you could be stuck with some very large bills.

I currently represent a buyer who purchased a $30,000.00 vacant lot. Sometime after settlement, he received four bills from the city for demolition work performed on a deteriorating building, which was located on the property, while the property was under the seller’s ownership. Although the demolition work was completed several months before settlement, the city’s bills were forwarded after settlement, and subsequently attached as liens to the property. The city is now looking to my client to satisfy those liens. Unfortunately, when my client first looked at the property, all he saw was a vacant lot. He was not even aware, and the seller failed to disclose, that there was a structure on the property at one time that was demolished by the city.

How could this problem have been avoided? If my client’s agent had performed a minimal amount of investigation, by contacting the city violations/assessments office, it would have become evident that this property had pending bills for work to correct the seller’s outstanding violations. My client could have then made an informed decision whether or not to purchase the property. Unfortunately, the city only cares about who is the record owner once the bills are due and the liens attach. Now, the seller’s violations have become my client’s headache. Instead of a seemingly quality investment, he has purchased a property worth $30,000.00 that has $20,000.00 in liens.

You may be asking about whether my client has a valid claim under his title insurance policy. Most title policies exclude coverage for liens and encumbrances that are created or attach after settlement. Even though the demo work was performed prior to settlement, the liens did not attach until after settlement. Therefore, the title company has disclaimed any coverage in this matter. Further, the title company typically is not responsible for any liens or other blemishes on title that are not of public record. Unfortunately, pending violations against a property do not show up in a title search, as they do not affect title until they become liens. Therefore, the title company would not have discovered the city’s outstanding bills in conducting a title search prior to settlement—another reason why the title company refuses to extend coverage to my client for this horrible mess.

Now, my client’s only remedy is to pursue expensive and time-consuming litigation against the seller, my client’s agent, and the title agent.

All of this could have been avoided with a minimal level of effort and competence. So, the next time you intend to purchase a property in a town that doesn’t require a CO, don’t rely on your agent—make sure you contact the appropriate city department to inquire whether there are any violations, fines or outstanding bills that could potentially become your responsibility once you take title.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.