Finding code violations in walkthrough

17 Replies

Hi all!  I walked through a house yesterday, and talked with some very interested sellers.  They would like to move quickly from their larger house to a smaller house, and are willing to negotiate.  I think we're going to be able to strike an agreement to buy in as-is condition.

This is my first potential deal, and I wanted to educate myself a little bit on what to do with code violations.

The house has had many self-done add-ons by multiple owners since its original construction. During the walk-through, I found several undisclosed code violations.   Most of the house does not have a crawl space.  The sewer drain pipe from the washer runs outside the home, and connects around to another point under the house, due to the lack of crawl space.  There is an undisclosed bedroom as well when compared to the tax records - records show three, they currently have four, and there are a couple other rooms which could be used as bedrooms as well.  The roof was apparently three months old, but looked very poorly constructed.  The current owners started to add a garage, but it does not look structurally sound.  I'm sure an official home inspection will turn up more issues, but those were the largest structural things I could find.  (Many other cosmetic issues exist, but I consider those normal.)

What should I tell them when I come back with repair estimates and offers?  A code violation requires disclosure and seller credits to mend when selling with a realtor correct?

Also, compared to their mortgage balance, I'm not sure an offer can be accepted here.  Even a lease option would require the end buyer to do some significant updates and repairs to be able to rent out the home.  Are there any other creative solutions?

Thanks!

it does not sound like a deal that make sense, unless the seller are willing to short sale and still bank has the say on bottom line number. We need numbers on this transaction to give feedback.

Agree, doesn't sound like a deal so far. I don't know TN disclosure requirements, they don't change on whether you use a realtor or not, but a seller would not be required to offer repair credits of any kind, "as is" purchase contract.

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I might pass on this one then.  If they had more equity to work with, I think I would have more flexibility in the deal.  I was hoping there would be another solution out there, but maybe not?

Originally posted by @Anthony Donaldson :

it does not sound like a deal that make sense, unless the seller are willing to short sale and still bank has the say on bottom line number. We need numbers on this transaction to give feedback.

The sellers bought in 2005 at $115,000. If they paid with 3.5% down on an FHA mortgage, and got the loan at the then-market rate of 6%, and made no extra payments, they would still have a remaining balance of $92k. They said their mortgage balance was still pretty high, but did not share an exact number.

I estimated ARV to be at $180k. Using the 70% Rule, my ceiling is at $126k, and with a wholesale fee and transactional funding, my ceiling is at $116k.

That leaves us only $24k to cover repair costs, and I estimate repair costs to be above this.  Items needed include:  new HVAC (current was installed in 2003), new water heater (the house has two, one is new, and the other was made in 1998), significant bathroom repairs/remodels in both bathrooms to re-do unskilled labor, window replacement to re-do unskilled labor, destruction of the garage and rebuilding the roof to be without the garage, destruction of a cinder block wall that was supposed to be used with the garage, finishing the driveway that was half-completed, fixing plumbing violations, new flooring and paint in the entire 2000 sq ft house, updating tax records with number of rooms and bedrooms, and some cosmetic updates.

I initially offered $90-95k range, and said I would present a final offer upon review of the repairs.  That number seemed to be uncomfortably close to their current mortgage balance, based on their reactions.  They wouldn't be able to sell and then move to a new place at that price, basically.

Looks like the best play would advise them to hang on to the home until they have more equity.  They could short-sell, but that would only make sense if the payments are too much.  They unfortunately have a sick family member, and that is likely a growing cost for them.  But not sure of their exact financial situation, because they didn't feel comfortable sharing any more details than what I have.

unless this property is in a hot area, I would pass. Make a offer where both party can see reasonable and your numbers work for you and leave it at that. In the future if they need help getting out of the house tell them they can inform the bank that you will be speaking on their behalf to negotiate a short.

Such cases lead to great discounts and "buying right".  

First negotiate, 

  1. selling price WILL be adjusted to account for getting code compliance on everything.
  2. Then you get the contractors bids for the work

Proceed only on the buyer's concurrence.

Originally posted by @Jeff B. :

Such cases lead to great discounts and "buying right".  

First negotiate, 

  1. selling price WILL be adjusted to account for getting code compliance on everything.
  2. Then you get the contractors bids for the work

Proceed only on the buyer's concurrence.

Should I agree to a higher price repair, as in, "Offer is $115,000 minus repair costs as estimated by a qualified contractor"?  I know the repair costs will likely be north of $20,000, but it might help take the sting out of the low offer, and provide some justification.  Is that what you were suggesting?

Originally posted by @Anthony Donaldson :

unless this property is in a hot area, I would pass. Make a offer where both party can see reasonable and your numbers work for you and leave it at that. In the future if they need help getting out of the house tell them they can inform the bank that you will be speaking on their behalf to negotiate a short.

 It is in a hot area, which might get a buyer interested more in the potential profit than the ratio.

I will make my best cash offer, and if that's not accepted, we'll look at short sale options.

I'm really looking for my first wholesale. I don't feel comfortable trying to negotiate and wholesale a short sale. Maybe one day when I get more advanced, or if I had a local mentor that could show me how to configure the paperwork. I will probably JV this with someone for a finder's fee.

You stated they are negotiable, would they look at doing a sub 2? This may put a little more meat on the bones and make it more interesting to someone looking to do a deal without a lot of cash. If it is close to Nashville then it is a hot area for the most part but there are some areas that have not caught up to the rest of the area. For the disclosures, they must disclose anything they know about in the home. There is a standard TN state form that they can provide you or the potential buyer with however they may not know about any code violations if they purchased the home in the current condition, you stated many owners have done their own work to the home. I would even think of pitching this to buyers looking to buy and hold. If they can put a few dollars into the home and make it livable and take the appreciation that could be another avenue of sale for you to pitch when trying to wholesale this home or any other home, this is when a sub 2 is really goode for the buyer you are pitching the deal to.  

All right, I'm going to offer an opinion on an issue that no one seems to be addressing, which is the number of "home improvement" projects you've identified that look to be done incorrectly and/or in violation of code.  I shy away from these types of home unless there is a massive amount of meat on the bones.  It's one thing to take on a neglected home, where you can at least roughly know what you're getting into.  It's quite another to get into a home where inexperienced people have been mucking with it quite extensively on larger ticket items.  I promise that you are going to have more the "unforeseen" issues than is typical and your repair estimates are probably too low.

Getting a short sale in Nashville these days is nearly impossible because the market is so hot. The neighborhood is an important factor.  Some parts of town you can pay mare than that level it , and build new to make more.  Also how big a house and lot are you looking talking about.

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You or the seller could contact the municipality to conduct a U&O inspection.  Your offer could be contingent on the outcome of that inspection.  That would give clarity to the situation at least as it concerns code violations, unapproved/permitted improvements and what will need to be done.

I purchased a property in Pennsylvania with code violations and received a temporary U&O that allowed repairs, but not residential occupation.  You are probably looking at some version of that kind of approval if you purchase a property with violations that block a full U&O approval.

It doesn't look like a great deal from what is posted here.

Jim.

This is a great opportunity to learn a few basic rule to find success in RE.

#1 Make an offer that works for you.

If they accept it, then you are in business. If not you are not loosing money by not making deals that don't work.

Doing all this work and not having your offer is a great lesson to learn.

If it doesn't feel right, what number makes it feel right?

#2 Good information

Code violations can be tricky. If you do go under contract, make sure you supply all the information you have gathered to interested people on your buyers list. This will build a foundation of trust that will help you with your buyers list in the future.

Originally posted by @John Chapman :

All right, I'm going to offer an opinion on an issue that no one seems to be addressing, which is the number of "home improvement" projects you've identified that look to be done incorrectly and/or in violation of code.  I shy away from these types of home unless there is a massive amount of meat on the bones.  It's one thing to take on a neglected home, where you can at least roughly know what you're getting into.  It's quite another to get into a home where inexperienced people have been mucking with it quite extensively on larger ticket items.  I promise that you are going to have more the "unforeseen" issues than is typical and your repair estimates are probably too low.

 Very helpful information.  I sent a repair estimate to them highlighting the most expensive items.   My estimate is about $30,000, and I agree with you that even that is probably too low.

The largest seems to be a recent self-done roof replacement with buckling shingles only months after the fact. It is visually apparent that the entire roof was poorly done.  I can only guess that it was done by the sellers or by an unskilled family member / friend.  There is no doubt in my mind that rainwater intrusion is already causing damage and fungus growth in the attic as a result.

The code violations are going to require moving the laundry area. Currently the washer drain sewer pipe is protruding from the home. It connects around the outside of the house, and back inside, to a toilet sewer pipe (I'd hate to see that washer after the toilet is plunged). There is no crawl space to properly install anything that would satisfy code.  The washer and dryer do not properly fit flush in this area anyways.  A licensed plumber will have to install proper water and drainage elsewhere, where there is a crawlspace and enough room for the machines to fit. A licensed electrician will have to run the GFCI / 220V connections to the new area as well.

There are also some other sections of the house that are no doubt attracting water intrusion.  Where craftsmanship was lacking, a visibly large amount of caulking was used.  Self-installed windows are likely to be leaking (even if it's not visible), as are the boarded-up windows and doors.  The self-installed tiling in the bathroom is visibly crooked, and the joint between the wall and floor is not flush.  The self-installed garage is likely not structurally sound.  It has been built with several different types of materials, and seems to be held together by caulking.  I am recommending destruction until a home inspector or structural engineer says otherwise.

All that to say - if the seller does not accept the as-is cash offer, I am not sure what other options I can reasonably give them that would be acceptable to a buyer.  Subject-To is something I will offer in addition to short sale as a last resort. 

Although short sales are uncommon here due to the very hot housing market, the unskilled repairs and additions have significantly de-valued the home. I doubt any conventional buyer would or should buy this off the MLS. A home inspector will likely point out several significant code violations and inadequate construction that should stop a conventional sale anyways.

Originally posted by @James Mc Ree :

You or the seller could contact the municipality to conduct a U&O inspection.  Your offer could be contingent on the outcome of that inspection.  That would give clarity to the situation at least as it concerns code violations, unapproved/permitted improvements and what will need to be done.

I purchased a property in Pennsylvania with code violations and received a temporary U&O that allowed repairs, but not residential occupation.  You are probably looking at some version of that kind of approval if you purchase a property with violations that block a full U&O approval.

It doesn't look like a great deal from what is posted here.

Jim.

 Excellent context.  Thanks Jim