Point Of Sale Ordinances Affecting Flips/Renovations

28 Replies

Anyone else coming across these? Some cities are now forcing sellers to have a city inspection before listing their homes on the market. Anything not up to code needs to be fixed prior to listing the home - in some cities, even if the homeowner decides not to sell, they still need to make all required repairs! I'm wondering if anyone has had to deal with this firsthand from the buyer/investor end and if there are any loopholes so you can buy a home as-is. I'm happy to fix issues myself if it means a better price, but now sellers want premium if they've had to do extensive work, even if the house is outdated cosmetically. 

Thank you, 

M

Yes, this is becoming more common in the LA area.  So far, we have been able to speak with the city and explain that we will be renovating the house and that we will fix all of the cited issues when we buy the house.  So far it has worked.

I haven't encountered general inspection requirements at time of transfer in any of my farms.   I have encountered required sewer line inspection and repair (to the street) by the City of Berkeley.  I think it's total overreach to make the transfer of property a mandatory inspection point.  If the muni wants to make sure the lines won't fail, they should inspect them and not wait for a transfer, IMO.  Of course, they didn't ask my opinion.

Originally posted by @Account Closed :

Anyone else coming across these? Some cities are now forcing sellers to have a city inspection before listing their homes on the market. Anything not up to code needs to be fixed prior to listing the home - in some cities, even if the homeowner decides not to sell, they still need to make all required repairs! I'm wondering if anyone has had to deal with this firsthand from the buyer/investor end and if there are any loopholes so you can buy a home as-is. I'm happy to fix issues myself if it means a better price, but now sellers want premium if they've had to do extensive work, even if the house is outdated cosmetically. 

Thank you, 

M

Can you tell us which cities are forcing sellers to submit to a city inspection before listing? I'd like to see what laws/regs are actually on the books for such requirements.

I have gotten some great legal advice on how to get around this long term.  Put the property into a legal entity that can be sold.

City's control over ownership of stock in corporations, or beneficiaries of trusts is extremely limited.

My lawyer has also said eventually someone will explain Linkmark Associates Inc. v. Willingboro to a city in court.  The argument will probably be extended to the unconstitutionally silencing amounted to a taking of ownership rights.

Does anyone know of a legal challenge on constitutional grounds yet?

Thanks, all. I am from the Minneapolis area and was reading about how one city is thriving and desirable (in part due to school district reputation, in part due to having an affluent reputation, and in part due to the city allowing tear downs without much ado) and mentioned that some neighboring areas might stagnate because of their Point Of Sale ordinances causing less investors and developers to purchase tear-downs that have to be brought up to code first. They even had a video of the process and it seems pretty intense. And, yes, overreaching. The suburb I was reading about is called St. Louis Park http://www.stlouispark.org/property-maintenance/pr... That said, I know that these are a thing in Ohio and here in some parts of CA, too.

@Account Closed : That's interesting. It's difficult to fight such things but I was going to ask a friend at Institute For Justice about it. One of their areas of focus is eminent domain. This is not eminent domain but in the realm of gov't infringing on property rights. My spouse is an attorney and tried to fight a city on mandatory rental inspections, one of the claims was that it didn't give renters the same right to privacy as homeowners, but it didn't fly. I hope these Point Of Sale ordinances don't become a widespread thing...

@Account Closed   I hear this is common in Milwaukee WI.. and I just did a remodel in a suburb of Chicago and we had to get a city inspection and a CO on a plain jane cosmetic rehab.

I did not get into the meat of why or what .. the guys just did it as a matter of course.

My brother in law does sewer lines and other muni work for Richmond and that area and he said SF is now doing the mandatory Sewer scopes and replacement on resales..

@Davit Gharibyan : I suppose it varies depending on the city/ordiance, but the city I was reading about (St. Louis Park) said it is required any time the property is transferred and not just listed on the MLS, and that title will not transfer without a certificate showing that you went through this process and your home passed final inspection.

Originally posted by @Account Closed :

@Davit Gharibyan: I suppose it varies depending on the city/ordiance, but the city I was reading about (St. Louis Park) said it is required any time the property is transferred and not just listed on the MLS, and that title will not transfer without a certificate showing that you went through this process and your home passed final inspection.

 I can see the ordinance affecting flipping/ rehabbing properties greatly. 

I am evil so if they said I could not list it I would put a "for sale" sign the yard.

If they said anything about the sign we would be in federal court so fast their heads would spin.

They would pay my legal fees to get the injunction against them.

The sign and I believe the listing is speech.

They really should not forget this is the court that decided Citizens United.

The most important case about signs was in the 1970s.  It was an 8-0 decision.

Do any of these ordinances limit the transfer of real property to another entity? If not it would be simple to put it as the only asset of an LLC or something similar and then find a buyer for the LLC.

As always... if you have more than a small problem with a government entity pay a lawyer to deal with it.

If that does not work... there is always the seller taking a loan against the property and not paying it back and doing deed in lieu of foreclosure.

In Milwaukee, in my experience, the sale of the property is what cues the city to send out an inspector.  The new buyer then gets hit with a list of repairs about a month after purchase.  Good to know when looking at potential purchases.

@Account Closed actually, yes there is a work arround to code compliance to buy a distressed property as is: the city will make you sign a form that you will take care of the code violations. In my area they usually give us a year, which is plenty of time, typically we are done in six weeks.

I have changed my opinion about code compliance and inspector in general. When I started out I heard a lot of horror stories about inspections and in particular inspector who make it really hard for investors. I come to find out that I really like working with the inspectors in my area - I want everything code compliant, it's in my best interest. I usually schedule a walk through together before we start to discuss issues and what to best do about it. These guys are a wealth of knowledge and they are happy to share!

The other issue is that most houses that we buy have some sort of DIY plumbing and electrical. The makeshift solutions we find during demo are often entertaining, but sometimes just dangerous in terms of major property damage or bodily injury. These things get usually identified during code compliance and that lets me sleep at night, because I dont want to be on the hook for someone getting electricuted in the shower, because someone thought it was a good idea to put an open junction box under the shower next to the copper pipes....  

City of Milwaukee does exterior code compliance after sale, and correcting issues falls on the buyer.  I've found their requirements to be reasonable, for the most part.

Some of the Milwaukee suburbs had programs where prior to sale the owner had to pay a fee and have a municipal inspector come out and inspect the interior and exterior of the property.  Any items noted on the inspection had to be corrected, including using licensed plumbers and electricians for any plumbing and electrical issues, prior to issuing a certificate of code compliance.  This was all required to be done prior to sale.  However, in the state budget passed this summer, a prohibition on these pre-sale code compliance inspections was included so they are no longer an issue for sellers.

In the Minneapolis area, the ordinance is called the Truth-in-Housing ordinance. It's required for any sale of a SFH, duplex or townhome. The city inspector does a inspection and provides the inspection report. When the report shows items listed as below standard, repairs must be made before the house is sold or the buyer must sign an acknowledgement of responsibility to do the repairs and have it reinspected. Most suburbs around Minneapolis have adopted a similar ordinance to preserve the quality of the housing stock.

I haven't found it to be a big deal.  The reports I have seen, outside of abandoned and condemned properties, are items that are generally picked up through a buyer's inspection anyway.  

Originally posted by @Account Closed :

 Many of the small villages in the suburbs of Chicago have similar mandatory inspection requirements before you can close.  The common practice to buy the property "As IS" is the buyer/investor must agree to make all the required repairs & escrow funds w/ the city/village prior to closing.  Once repairs & inspections is complete the escrow is released.  It's not a loophole, just how it's handled in Chicagoland area.

Originally posted by @Peter K. :

 This was all required to be done prior to sale.  However, in the state budget passed this summer, a prohibition on these pre-sale code compliance inspections was included so they are no longer an issue for sellers.

Correct. From what I hear there is a debate going on to reinstate the practice in order to maintain overall safety and standards of the housing stock. 

I live in St. Louis Park and recently put my house up for sale.  This ordinance has been in place since the 80's, so if someone was going to sue and win, I think that would have already happened.  Personally, I think it's a good thing and is in the buyer's best interest since many issues are caught and fixed prior to the buyer's inspection.  I can see how investors would have some issues, but obviously there are ways to accept the issues and fix them later.  In order to rent a house, you have to go through the same inspection process, so it happens sooner or later anyway.

Thanks, everyone. 

To clarify, I'm talking about "point of sale" ordinances - these ordinaces require the SELLER, not buyer, to have an inspection before trying to sell their property, and the SELLER is required to make all repairs that the city deems necessary (in the city I posted about, this can be something like flaking exterior paint) and the seller must have a second inspection to make sure all work deemed necessary to allow a tranfer of title. So, basically, the government will forbid an sale of a property unless the seller fixes everything first. Not all cities have these ordiances, and those that do have them to varying degrees - from those that want to only check sewer lines to those that won't allow a sale unless the entire house is flawless (I'm concerned about the latter). 

Truth In Housing is different and has been around a long while. And, of course, you want homes to be code complaint. Mine end up above and beyond code compliance. My brother is an inspector, so I do not have issues with inspectors, either. Though, to be fair, not all are as competent or as kind as he is. And any such work on my end to fix requires permits and inspections. I am ok with all of that, of course. It's all I know.

What worries me is that I will find that ugly, pink and green house with an outdated kitchen, small rooms, linoleum floors, and carpeting in the bathrooms, but the sellers want $$$$$ for this eyesore because they had to pay for lead abatement for then old, peeling pink paint outside (repainted a new, lead free pink and green) and all new hideous everything, and they hired workers "approved by the city" (ie 3x normal coverage cost of repair). And they think it's lovely! 😄

And, of course, other worries include sellers that are underwater on their home, being asked to dump more $ into it, or people that are selling because they can't afford the home anymore (so how can they afford to bring it up to code?). Many sellers are selling for financial reasons and this seems nonsensical to require a seller ONLY to fix the house. It also seems like it could have the reverse effect of keeping homes up, as homeowners that cannot afford to do so will not be able to sell and will be afraid to try, knowing that the house has issues. So people like us cannot come in and buy the place at a fair price and make the house beautiful. 

I've already encountered similar city ordinances in which it made no sense for me to rehab. For example, a home, fixed up, was worth 200,000 but the city required repairs that would cost 250,000 (and you can only use their city approved contractors, etc which charged a fortune. A lot of pocket lining going on) and the house was listed for 80k. 

My last purchase almost fell through because the sellers removed showers from the bathrooms. Not sure why, but they did. Mind you this house has 5 baths. But because not *every* bath that was supposed to be a 3/4 or full bath was a full or 3/4 bath, they made the seller install showers and baths, deeming the home "uninhabitable" without them. All of them. Almost lost the house over this because the sellers didn't want to deal with remodeling the house. Understandable.

When I read about St Louis Park, MN point of sale ordiance, I found it to be overreaching to say the least. And I can see that this is a thinly disguised way of the city to get $$$ under the guise of public safety (public safety for privately owned property). It greatly infringes on property rights as well. But where do such ordinaces leave us? Let's be honest, we make most of our $ when we buy, and we get the deals because we are the bold ones going into houses that are hot messes. I always have a property inspected before purchasing to get an idea of what I'm getting myself into. I don't need the government looking out for me in this regard. I feel if these ordinaces catch on and get nitpicky, house flipping and rehabbing will become even harder than it already is. 

@Erin Krohn : What if the buyer wanted to tear down the home that was riddled with problems? Why the need to bring it up to code prior to the property changing hands? And who wants to pay for these repairs, knowing the place will be leveled anyway? It's a waste of time and money for buyer and seller (but not for the city, who gets $). That seems to be an issue now with St Louis Park, in part due to their point-of-sale ordinance. Their neighbor, Edina, has tear downs galore and is maintaining their desirability and property values.  Edina has no such ordinance. 

That said, if a city was truly concerned with safety, they'd not specify who needs to fix items that are non-code complaint. So long as the buyers knows of and is willing to fix issues, why would a city care who fixes the issues so long as they get repaired in a timely manner? Seems odd.