Failure to pull permits- anyone been burned before?

24 Replies

There's a chance that I'll be closing on my first investment property within the next month!  However I walked the property this morning, and I discovered that the conversion of the open-air carport area into an enclosed "spare room" by the property's owner (who is a contractor) did not include pulling of permits.  I called the local zoning department and they said the only permits pulled for this address in the last 12 years were for a conversion of 100 amp electrical to 200amp due to storm damage.  No idea what that means but it sounds completely unrelated to what I'm referring to, since the remodel took place 15 years ago.

Initially I was worried that this could sink the deal. My understanding is that, if I purchase the property, I assume any liability related to the original lack of permits. I'm almost positive that I'm correct on that point. However my realtor / property manager assures me that almost no one pulls permits in this fashion in my market (Huntsville, AL), and that the length of time since the remodel transpired means we're probably OK. Additionally I spoke with a lender I'm considering for financing the property, who is local to the area and who I found on my own and who has no connection to the realtor / PM. This lender said almost the same thing verbatim.

The workmanship looks OK to me, but I'm certainly not a contractor or inspector by any means. My planned offer includes an inspection contingency, to prevent any habitability issues from turning my deal into a money pit. My question is, has anyone else run into a similar situation in your local market, or heard of folks getting burned by something this after committing to a deal?

@Richie Thomas

Congrats on your first offer. The PM and lender is probably right but you can always try to use that (work without permit) in your negotiation. If you plan to do some work on the room in the future then you might have to bring it up to the latest code and would have to pull the permit.

A SFR I purchased sometime back also had a bonus room without permits and I did not face any issues.

@Richie Thomas In my experience it depends.  In NJ we are required to get a CO (certificate of occupancy) from the town in order to close on a property. Sometimes it just a fire inspection just checking smoke and fire alarms and fire extinguisher or sometimes it is an inspection from the town(checking windows doors, heating, and ac, etc). If the house fails then you have to correct it before getting the CO or the buyer can send a letter agreeing to correct these issues in a timely manner once they take over the house.  Sometimes you may not be able to live in the house until you get these corrected)  If the seller is getting the CO then he knows he will be able to get the CO and maybe that is the way things are in the local market or fact it was done a long time ago no big deal.  If he not getting it or refusing to get it because the town flags issues that have to be corrected then you may know something is up.  

As for the illegal work itself, I know several contractors that do incredible work and had to even correct town inspectors because they were mistaken on the rule for work they performed.  So you may be lucky.  Then there are the ones who cut big corners.  So if you not as experienced you may want to bring somebody in to get an opinion.  It is tough since you can not see behind the walls.  Maybe you can try If the sellers there you may be able to complement the room and ask him to tell you about the work he did in there to get an idea.    Best of luck. DM with any questions.  Happy to help.  

@Richie Thomas - Yes, we've had this happen to us here in Huntsville.  And yes, it was a major hassle.  

A couple years ago, we bought a flipped property to use as a rental (this was before the market exploded and you could actually get a rehabbed property that cash flowed).  We ended up needing some minor work done on the house, and hired a licensed individual who pulled permits for the work.  When the inspector came out to inspect the work, there was no issue with the permitted work - however, the inspector then noticed other work done by the flipper (not us) and noted no permits were pulled for it.  So we subsequently had to then "rectify" all the previous work - the absolute cost to rectify it was not much (less than a grand);  however, we had to get 3 permits pulled, and it took 4 (yes, 4) months before the city finally signed off on everything.  I suspect they took their time with us because of the fact that we were remediating non-permitted work.  It was a real pain to try and permit already performed rehab. 

The fact that you called the city about the property may have now put that property on the radar of the city inspector.  That said, with how hot the market is, if you try to force the seller to pull permits on their work, they may just void the contract and move on.  Good luck on your decision.  

@Michael S. thanks for your input.  I would consider the room in question to be "half-finished", in the sense that it looks like a "finished garage".  The plan is to turn it into a master suite, so given it needs further rehab anyway, is it feasible to pull permits when bringing the room the rest of the way to completion?

Originally posted by @Richie Thomas :

@Russell Brazil I'm curious why you say that.  Can you expand on your answer?  Potential code violations seem like a non-trivial issue.

Like 90% of houses in america have work down without permits.  

 

The permits don't guarantee good work in the slightest.  The city comes out, gives a thumbs up, and goes back to sitting in their cubes downtown.  This is Alabama, not Commiefornia.  Don't bother with the permits--colossal waste of time and money.  If you willfully come ask the city to come make hassle for you, they will definitely oblige--be warned!

This will completely depend on area, I would recommend posting on your BP local forum. In Chicago the majority of home owners do NOT pull permits (even though they should) for mild/medium work. Many buildings even have illegal units that have been there 20+ years. Other towns have annual inspections and the norm is to pull a permit for everything even basic stuff. 

at what point would this come up? does the city need to come out and inspect this property at some point? (sale, rent, etc.) find out the local rules and regulations and go from there. 

@Victor S.  it could come up under similar circumstances to what @Michael S. described above- I purchase the property and hire a licensed contractor to come do work.  They pull permits as they're "supposed to", the city inspector comes out as requested, while on the property they notice that un-permitted work was done at some point in the past, and it becomes my problem.  Sounds like the only way to avoid that is to explicitly tell my contractors not to pull permits, which is a non-starter for me (and hopefully for my contractor as well).

Originally posted by @Richie Thomas :

@Victor S. it could come up under similar circumstances to what @Michael S. described above- I purchase the property and hire a licensed contractor to come do work.  They pull permits as they're "supposed to", the city inspector comes out as requested, while on the property they notice that un-permitted work was done at some point in the past, and it becomes my problem.  Sounds like the only way to avoid that is to explicitly tell my contractors not to pull permits, which is a non-starter for me (and hopefully for my contractor as well).

 permits usually mean something pretty significant (i.e., opening walls, roofs, etc.). are you planning on flipping this or keeping as a rental? looks like Michael's primary cost was time, since they were flipping. 

@Victor S. it's a rental, and there will be significant work done.  Opening up the kitchen and finishing the conversion of the garage into a master suite, among other things.  It's definitely a bigger job than just kitchen cabinets and granite counter-tops.

@Richie Thomas - if you are undertaking major rehab, it would be wise to make sure your GC is pulling permits in my opinion.  The cost of permits here is trivial;  but as @Peter McDonough alluded to, the real cost is time - getting inspections lined up can be a pain;  however, if your GC knows the inspectors decently, things can get done quicker.  If you were doing simple stuff, then as others alluded to, very few pull permits.  

@Victor S. - we were not flipping;  we bought a flip to rent out that never pulled permits.  We had a repair needed before we placed a tenant - and then when the inspector showed up and saw the other work done by the flipper we bought it from, they basically placed a red sign on the front door, and we couldn't place a tenant until we "rectified" the non-permitted work.  Lost 4 months rent on it.

Around here there are very few cities that require point-of-sale inspections and the housing stock is very, very old. I would guess that the vast majority of renovation work in SFR and small multi-family has never been permitted

And when we rented commercial strip spaces, the work was even worse than the stuff we see in old rental properties; it was soooo terrible-- stuff like old extension cords with the ends cut off being direct wired to exit signs. 

Originally posted by @Michael S. :

@Richie Thomas - if you are undertaking major rehab, it would be wise to make sure your GC is pulling permits in my opinion.  The cost of permits here is trivial;  but as @Peter McDonough alluded to, the real cost is time - getting inspections lined up can be a pain;  however, if your GC knows the inspectors decently, things can get done quicker.  If you were doing simple stuff, then as others alluded to, very few pull permits.  

@Victor S. - we were not flipping;  we bought a flip to rent out that never pulled permits.  We had a repair needed before we placed a tenant - and then when the inspector showed up and saw the other work done by the flipper we bought it from, they basically placed a red sign on the front door, and we couldn't place a tenant until we "rectified" the non-permitted work.  Lost 4 months rent on it.

It only matters if there is a fire or flood or someone is seriously otherwise hurt. The insurance company will present un-permitted work as a reason to not pay. And at the very least, It makes the court case last another 6 months longer when you get sued since detailed forensics have to be run to determine liabilty.

Do you feel lucky? . . . .

It's the smoke that kills ya

 

We are a GC -- renovated hundreds of homes, multifamily and commercial properties.  We also used to own a large inspection company years ago.  We also are experienced flippers.  Pull a permit on structural changes (i.e. load bearing walls, conversion of a space to HLA, major HVAC/electrical/plumbing).  We have seen this backfire on others where the city/county has found out something significant that required permitting was not permitted and the offending item/room/building/addition had to be opened up or torn down.  We have had people call crying when they found out later that their "contractor" who did their work didn't permit something critical.  I can pull a permit in a day for any interior renovation....longer for an addition that requires plans, zoning, etc.  Many items don't need a permit (check with your jurisdiction).  Some items just require that you use a licensed electrician or plumber or HVAC tech.  I like to sleep at night, so every house we are going to flip has had a permit pulled on items where required.  The cost is minimal compared to having yourself covered liability wise.

I've been burned in Huntsville with a permitting issue. I can't even talk about it, it still makes my blood boil. To say they were difficult would be a gross understatement. 

Unless I had some killer deal fall in my lap, I'm not buying in city limits. In fact, I sold 3 in HSV city limits this year. 



@Richie Thomas   This question is very market specific.  Here in Huntsville as @Peter McDonough mentioned pulling a permit does not mean quality work.  One instant of this is we had to get a service mast change out reinspected 5 times after the city initially passed the inspection however the utility company did not approve the work.  I have several other stories of this as well.  

For this reason I recommend someone that is looking to get into rehabbing at least have an understanding of what needs to be done in addition to getting inspections.  The city inspectors essentially are looking for safety issues and checking a box.

...pulling the permit does not mean quality work.

Sure, but *not* pulling the permit can mean headaches down the road.  I was able to figure out pretty easily that the property in question had had non-permitted work done.  If a new investor like me can put two and two together, others can as well.  And that could blow back on me as the new owner, in unforeseen ways.

At the risk of sounding paranoid, all it takes is one person to say "Gee, it'd be a shame if an anonymous tipster told the county about your non-permitted work, why don't you let us take this headache property off your hands?  At a discount, of course..."  Not saying that's guaranteed to happen, and I'm sure local Huntsville investors are totally above-board and ethical and would never think of adopting this strategy.  But I know money is pouring into the Huntsville market from all parts of the country and even internationally, and some of *those* folks are likely to be more or less ethical than others.

At the end of the day, I can't guarantee that this scenario won't happen.  It's my job as an investor is to anticipate and mitigate risk, right?  An experienced, locally-connected, well-capitalized investor, who doesn't mind taking the gloves off with their competition, will know that I as a new, inexperienced, aspiring investor have little recourse if they make the above suggestion.  I'd rather avoid that risk ahead of time, by dotting my i's and crossing my t's.  If my plan includes a contingency for this scenario, then I'll either be right or I'll be pleasantly surprised.

Additionally and equally important is how the permitting will affect my cash-out refinance strategy. If the work done involves increasing the square footage of the property (a forced appreciation strategy which I expect to use frequently), lenders who only perform drive-by appraisals will use the older, lower square footage figure, and therefore will return a lower appraisal.  Not sure to what extent local lenders rely on drive-by vs full appraisals, but to the extent that they rely on the former, my pick of cash-out lenders will be limited.

Re-reading my last comment, I realized I focused on one risk to the exclusion of others. There are many ways a city inspector could find out about non-permitted work (they see a dumpster out front while driving by a house, they get a tip from a neighbor, etc.) I think some were mentioned above.

My point is not about the motivations of the people who tell the city about the non-permitted work, and more about how to mitigate the risk itself.

@Rebecca P. that sounds like a drag, sorry to hear that. How are you faring in Madison and elsewhere? Do you find that neighboring towns are much easier to work with?

@Richie Thomas it is great to mitigate risks however don’t let that get in the way of taking action. You will make mistakes as a new investor.

To mitigate the risk with the appraiser have someone meet the appraiser at the house and have a detailed list of all repairs and updates you have made to the property. Also have all your comps ready before you meet them.

Happy Investing!

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