Don't mess with building inspectors

33 Replies

In another thread I mentioned one of my hard money loans was going to default. It did, and my business partner and I have now taken back the house deed-in-lieu.

The place has some cosmetic issues. Its total white inside, the yard is a mess and the decks need some attention. But the big issue is the lack of permits. The borrower did get permits for a roof and siding, but nothing else. He did pretty complete remodels in the kitchen and baths and put in new windows. Needless to say the inspector noticed the new windows. Then he started looking around and noticed the remodel. We met with the inspectors (main, electrical, plumbing and mechanical) last week and got some input on what they wanted done. The plumbing inspector was insistent on opening up the walls and floors so he could have a look. He said he looked at the property, and no permits had every been pulled since it was built in 1940. So, everything is now our problem.

In particular, he pointed out this in the floor of the laundry room:

Its a little tough to see in that picture, but a cut was clearly made in the concrete for that drain pipe. Now, who knows how long ago this was done. It was not done by our borrower. That pipe leads under some nice new tile into the bathroom:

Well, it was nice new tile. This is what it looks like today:

Sigh!

Still wanting for the full bid from the GC on what its going to take to fix this mess.

... and the lesson that you learned and will pass along is ...?

There are several.

For one, get permits. I know people tend to take short cuts and skip permits and inspections. If you get away with it, that may save you some money, and especially save some time. But if you get caught, it can cause you a lot of extra work.

If you going to lend, keep an eye on the deal. We work through a broker, and he holds the repair escrow and does the inspections. Too much of the escrow was released too soon. Had we been watching more closely, we could have seen the work was unsatisfactory several months ago and done something at that time to try to fix the situation.

Be sure about valuations. Before we started in this deal we had an appraisal. That appraisal gave a $213K value, after the fixup was completed. It was by a licensed appraiser, and the comps looked solid. This property is one a somewhat busy street. All but one of the comps were on the same busy street, and the remaining one was on an even busier street. The borrower had this under contract at $163K and his appraisal came in at $166K. That's a HUGE difference. Now, some of the cosmetic issues dragged down the value, and I suspect these issues with the city also caused him to look hard at the house. And one of his comps looks like it was a probate deal rather than a fixed up house. But that just kills the whole deal. I am hopeful that once we resolve the permit issues and really finish the fixup that we can come in a fair bit higher than the latest appraisal. But there's no evidence now that we'll get up to the $213 original appraisal. I do think there has continued to be some decline in the prices in our area, but I don't believe its been anything nearly this dramatic.

The busy street is a more complex issue than it might seem. Yes, it hurts the value. We knew that going in, and considered that in the selection of comps. The limitation of chosing comps on that street is the issue. Rather than having several dozen recent sales, there are just a few. So, those specific sales being low vs. the ones from nine months ago means you're really stuck with a significantly lower value. A house off this busy street would have a much larger selection of comps. So even if the appraiser tends to the low end, he's not going to be stuck.

This was a thin deal from the start. Purchase plus rehab was 75%. We only loan 70%, but the borrower had some of his own money into the deal. He did make the payments for eight months. His loss will be greater than ours. But there came a point when he just couldn't stay in the deal. I know folks push back on the 70% guideline, but there really is a reason for that.

That was a little over the top! If something has been there for years and operable, you can take it to the board and appeal to court, don't know which is cheaper in this case. If something was put in service before they made a requirement to have it inspected, it's on them if it was already there. They need to prove it was there after the requirements were put in place. Good luck Jon!

this sucks. sorry john. hopefully you will be able to salvage the deal and at least come out on top with something

Making us dig up the basement seems excessive to me, but I don't seem to have a choice. He did find one thing with the way the toilet and shower came together that he wanted changed. Not sure I understand exactly what needed to change but the plumber did. No idea when that bath and washer drain was put in, so I don't know if there was a possibility of grandfathering it or not.

A number of the cities in our area have started really cracking down. Seems they watch for "for sale" signs to pop up, go peek through the windows and if its looks remodeled, they research the permits. So, this guy was doomed from the start.

Certainly don't expect it to be a total loss, but at the point I am expecting a loss vs. what we we have into the deal. With the eight months interest it will be close to a wash.

Here are some links to a multi-unit building (condos) that are relatively new construction AND have been condemned:

http://www.timesherald.com/articles/2010/05/19/news/doc4bf3756d7edd7196333678.txt

http://www.timesherald.com/articles/2010/05/06/news/doc4be24f861bf09020283040.txt

http://www.timesherald.com/articles/2010/06/02/news/doc4c05e9e39a566528918135.txt

The first of those links should have links to PDF reports; the last of them has photos of the defects.

Get things properly inspected is the mantra to follow.

Updated over 8 years ago

There has been an arrest in connection with those links: http://www.timesherald.com/articles/2010/10/13/news/doc4cb5cc9c3c80b057327446.txt

Jon,
Sorry to hear of your trouble with the inspectors. Your advice is good on taking out permits. As a licensed builder and licensed plumber, I take care to make sure permits are pulled when needed. It looks like your code administrators wanted to make an example out of you. In our area, as long as you were not the owner or contractor that did the un-permitted work, they would be reasonable and work with you. In 5 minutes, the inspector could tell if the underground plumbing was serviceable and at least close to code (vented and correct size piping, etc.). Running a washer into the standpipe would show any issues with how it was tied into the existing main drain. I think that the requirement to break up the floor was punitive and not justified by a member of the code enforcement team that is supposed to help ensure that homes meet minimum functional, safety and health standards.

I'm going to give our inspectors all a big Hug next time I'm in their office!
Bill

In Washington it is not uncommon to have problems when it is discovered that unpermitted work was done. Appraisers and home inspectors sometimes note this work as well.

The last thing a landlord wants is for a knowledgeable tenant to create problems because of this.

jon,
sorry to hear about your situation. and as i am a new investor wanted to jump in immeditely after looking at all the good testimonials on this forum.
but i decided to wait longer and learn about the system as much as i can. and man this is really huge.
this permit discussion of yours taught to me more and to be careful. think i will still keep learning before leaping.

i guess patience is a virtue

and thanks jon for enlightening us about the system and hopefully you will keep guiding us.

Jon,
That stinks. Can you tell me what city this is in?

Best of luck.

Thanks,
John

I'm going to hold off on the specific city until I get this wrapped up. The GC and subs I've brought in, though, were well aware of this potential issue. They say this city, and several others, actually look for fix and flip situations. They watch for "for sale" signs to go up, peek in the house, check the permits, and if it looks rehabbed but there are no permits, they go have a look.

I will say this is not Denver.

They have several more days in on this job. We've had a round of opening stuff up and getting feedback on electrical and mechanical, and several rounds on plumbing. Don't yet have an estimate on electrical, but expect that to be around $2000. We knew there was an issue there with the meter and the mast because a deck had been added (previously) on the back and you can reach up and grab the service lines from the deck. We think around $2500 for plumbing. The connection between the furnace/water heater and the flue liner was incorrect and the correct parts are unavailable, so we have to do a new flue liner. About $750 for mechanical.

And you can see all the broken floors and tile. There are a bunch of holes in walls and ceilings now that will have to be fixed and then textured. Don't have an estimate on that, yet. I'm guessing $2000-$3000. Hopefully this will all be wrapped up this week or early next week and we can finish up the cosmetic work and get this onto the market. Certainly at this point I'm quite confident any issues have been resolved and the house if fully up to current (for this city) codes.

Jon,
I understand. What a pain in the rear! I appreciate the information.

You make a good case for installing blinds in fix and flips to keep the city folks from looking in the windows...

Cheers,
John

Originally posted by John Klahn:
Jon,
...

You make a good case for installing blinds in fix and flips to keep the city folks from looking in the windows...



Keeps the thieves from peeking in too!

This makes me nervous. An innocent buyer purchases a place and then it's discovered that nothing was done with permits. Assuming that the seller can't be found or already spent the money (not uncommon), the buyer is probably on the hook.

Mike

We're close to having this place fixed and on the market. Between the permits and work to correct the problems we spent about $6000. We've spent another $12,500 to repair all the damage done in fixing the permit issues and to finish up the rehab that should have been done.

This is one more thing to watch for when purchasing properties. I also good reason to know your market area. Thanks for sharing this situation, I have run into unpermitted work done by previous owners, but never been told to bring it to code. Obviously if you are doing new work in an existing area inspectors at least in my area will require that area be brought up to code.

I saw a house on Craigslist some time ago where the seller claimed to have spent 100K on finishing out the basement and that may have been true. But, tax records showed finished sq, ft at 2600, not the 3200 that was advertised = no permits.

Those inspectors are trained to be nosy, especially in this economy when they're under pressure to bring in more revenue. Job security, doncha know.

That looks like trench warfare from WW1. What a pain to have to deal with the results of someone else's bad decisions. Now I know why hard money loans have such high interest!

We did FINALLY get final sign off and a certificate of occupancy from the city. Even after all the rough inspections finally passed, they had yet more corrections that had to be made before they would give use the final approval. But its all approved now and listed for sale. I'll post a few before and after pictures later.

This one must be getting to me. I had a dream last night that I went over the check on it and squatters had moved in.

Originally posted by Michael Kwiatkowski:
This makes me nervous. An innocent buyer purchases a place and then it's discovered that nothing was done with permits. Assuming that the seller can't be found or already spent the money (not uncommon), the buyer is probably on the hook.

Mike

Jon,
Congrats on getting everything completed and getting on the market. Best wishes for a quick sale!

Mike,
I understand your concern. I will let you know that on my projects all of my work is done to current code - that is something that my integrity demands. However, I do not necessarily get permits. There a some rehabbers who cut corners without permits and that is a complete shame. My business is to make a profit but I will never do that by providing a substandard product.

I believe that you can request permits on any rehabbed property that you are purchasing if you know that work was done that needed permits. Someone correct me if I'm wrong. If you are under contract to buy a rehabbed house to live in you can request the permits when you believe that they are warranted - just terminate the contract.

Cheers,
John

Some before and after pictures.

Front, before:

Front, after:

Back yard, before:

Back yard, after:

As far as getting permit information, every building department I've dealt with has been willing to give out information on any property. I have indeed called about properties I was considering.

I don't believe that even if you say "all of my work is done to current code" you would necessarily pass an inspection. Individual inspectors interpret the code differently. Little details can make a difference. Even though the contractors brought in on this job did all the work in accordance with the code, as they understood it, the inspectors were extremely finicky and found numerous corrections on work that we believed would pass inspection. Even if your work was done perfectly in compliance with code, but is done without permits, future work done with permits may well result in the kind of destruction we had to deal with just to allow the inspections to have a look. In this particular house, we had to correct not only problems created by the work done by the rehabber over the last nine months, but also ALL the work done by everyone who had touched the house since it was built in 1940. That's 70 years worth of code changes and errors. The city where this property is located, Englewood, apparently takes a look at ALL for-sale houses and checks what they see against the permit history. If they see something they believe is unpermitted, apparently whether done as part of recent work or 50 years ago, they will write up a correction notice. I believe Arvada has also started requiring all real estate sales to have a permit review and will also require inspections and corrections of any unpermitted work. AFAIK, Denver is not yet doing this. But after this experience I will say that doing ANY work the requires permits without getting those permits and using properly licensed contractors and subs is taking a risk of having your rehab torn apart very late in the game.

The house looks great Jon!

I have to agree. Pull your permits! I had to pay $3,000 just for an inspection because of some electrical work we did that was unpermitted. The inspectors can be real ********...

The weed clean up & new landscaping in the front really makes a huge difference.

Related question: is it considered unethical or bad form to go asking questions to the bldg permits dept on a short sale or regular seller? An unpermitted addition could have been done several owners prior, and if you get permits people involved who are very hard-*** on a house you haven't bought yet, you could end up getting the current owners "busted" for work that they didn't even do.

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