Purchasing a Property knowing that it is not up to code...?

Question

I have an opportunity to purchase a local rental property. It is a duplex with both units currently inhabited. The property has been owned by a close, personal connection for quite some time. It is one of the last properties in an area that hasn't been purchased by either the city to expand their park or by the business next door for adding parking space.

The offered sale price is $40,000. At the annual adjustment in 2017, the property was valued at $34,900 (via GIS). This is from a value of $3,000 for the land and $31,900 for the house. I do not have the cash to buy it outright and would be financing some of it. My intention with the property would likely be to hold onto it, while the rental income pays the mortgage, and then sell it to the business as they expand their parking.

The property next to the one I am looking at was purchased by the business next door. According to the GIS, the neighboring property's details are:

• Lot Size: 0.1074 Acres -- this is 0.02 acres larger than one I'm looking at.
• Has detached garage.
• LAND Value: $10,900 -- this is $7,900 more than the value of land I'm looking at
• Transfer of Ownership (to business) date: 2004-11-30
• Sale Price: $87,000

One MAJOR issue that I know of is that some things in the home (i.e. plumbing and electrical) are not up to code. My initial thought would be that it won't matter that much, as it will likely not be a long-term hold on the property.

My two main questions/concerns would be as follows:

• Should I be very concerned with the issue of the house not meeting code? Could there be a problem with getting financing (i.e. is it mandatory for the property to be inspected before getting a loan)? Or could it cause problems with selling the property if the property is just being purchased for the plot of land?
• How accurate is the property valuation that is listed on GIS? Even if it is accurate, will I need to go strictly off the listed valuation of the land considering the re-sale I am anticipating? How should I assess the value of the property?

Any input I could be given on assessing property values and how worried I should be about code would be GREATLY appreciated!

Cheers,

Josh

Josh Hooley · Answer

Thanks for the input guys. I'll consider getting a professional to check it out.

I'll let you know how it pans out if we get the deal done.

Jimmy Dudley · Answer

I know people hate to hear this but pay for an hour of time with an attorney and talk it over. Plumbing is not a big deal but electrical can kill people. I wouldn't hesitate to purchase a home with known defects if the deal was right but depending on what the defects were I wouldn't live there or allow tenants to live there. Maybe have a trusted electrician give you some estimates on how fast it can be brought up to code and how much it would cost before you move any further.

Eric James · Answer

Unless squate footage, or maybe if a bedroom or bathroom were added, I doubt a lender will even know improvements were made (up to code or no). No lender I have used would know such a thing.

Josh Hooley · Answer

@Tom S.

Thank you for the input. I'll be sure to get an appraisal prior to purchase.

@Matthew Paul

This question could go for either of you, but what if there were improvements done to the house that weren't up to code? So current owner did some stuff that wasn't necessarily code. Going to probably be up to each lender of they care about code or not?

Thanks!

Tom S. · Answer

@Matthew Paul

"If it was code when the house was built than its still legal . ( Most of the time)"

In our area, true for owner occupied but not for rentals. Rentals have a strict set of codes here, combo smoke-carbon dioxide detectors, certain size windows, fire rated doors to name a few.

I always recommend checking with your state and even your city, as certain cities have additional codes.

Tom S. · Answer

@Josh Hooley Depends on the lender if they'll finance it with code violations. You might want to reach out to smaller banks that hold their loans in house, for more flexibility. You can also ask the seller to fix the violations before selling.

Of course you should have a good understanding of exactly what needs to be completed to bring it to code. I once had the local fire marshal inspect hard wired smoke detectors I put in. Costed about $1,000. Then he said, "by the way, the windows are too small for people to get out in case of fire". So a quick unexpected few thousand more....

You should always get the place appraised, not rely on town assessments.

Good luck!

- Tom

Matthew Paul · Answer

If it was code when the house was built than its still legal . ( Most of the time)

if everytime a house was bought or sold it had to be brought up to code , nothing would sell .

In my area code is now 2x6 exterior walls for more insulation . Well I would have to tear down every one of my houses and rebuild to bring them into code

Purchasing a Property knowing that it is not up to code...?

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