Failed interior insurance inspection due to illegal unit and vacancy

New York, New York
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Failed interior insurance inspection due to illegal unit and vacancy

Marie Eisley
Investor · Bronx · Member since 2022 · 5 posts · 7 votes

Hello BP, I purchased a legal 2-fam house in the Bronx (built in 1899) with an illegal attic unit that's a finished apartment with plans to househack and live in that unit and rent out the others. Right after closing 2 months ago, I went straight into renovations and didn't schedule an inspection til afterwards. Unfortunately, the house was vacant after reno since I haven't gotten tenants in yet nor have I moved in (was planning on it) and I failed interior insurance inspection due to a vacant house and illegal unit. The insurance apparently won't consider reinstating as per my insurance broker. 

How can I ensure I pass my next inspection? What is the proper way to decommission the illegal unit and is this absolutely necessary? Would I have to temporarily move to one of the legal units? Would future insurances I inquire always see a history of a failed inspection? For reference, the illegal attic unit has a gas stove, 1st floor has a gas stove, and I JUST converted the 2nd floor unit to fully electric and capped the gas line. The illegal unit is accessed at the top of a shared staircase as the 3rd floor. It has its own door and looks like its own independent apartment.

I'd appreciate any advice and help I can get. Current insurance is going to lapse next week.

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Davendra Bhagwandin
Real Estate Broker · New York City · Member since 2019 · 12 posts · 8 votes
3y

Hi Mary 
 As a broker in The Bronx and a licensed expeditor who's work on resolving municipal violations for investors this is the advice I would give.

On passing your next inspection and proper way to decommissioning the illegal unit:
It depends on the exact nature of the violating condition, what exactly was seen & recorded. 
Was this determination made solely from the inspection?                                                                                                                                         Also if the violating conditions/violations are on record regarding the illegal unit and which entities have issued them.
When dealing with a gas line in NYC a licensed plumber is needed to ensure the work is done to code.

Is it necessary to decommission?
Yes if the insurance turned you down for an illegal unit and that has been documented.
Being found in violation of occupancy/use and an illegal unit can result in multiple violations from DOB, ECB and HPD all stemming from the same underlying violating condition. 

Would future insurances I inquire always see a history of a failed inspection?
To my knowledge no. It is not like car insurance where it follows you if you were to change insurance companies. Though fixing the violation of course would put you in the right.

All in all it is a fixable but tedious issue

If you'd like some help in coming up with a gameplan/ navigating the process feel free to reach out to me.

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  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    3y

    When it lapses, I have seen the lender put very expensive (special) insurance on the real estate asset, and then bill the owner for that. 

    If the owner failed to pay, the lender would REPO the asset.

    Just my 2 cents.

    2Reply
  • Davendra Bhagwandin
    Real Estate Broker · New York City · Member since 2019 · 12 posts · 8 votes
    3y

    Hi Mary 
     As a broker in The Bronx and a licensed expeditor who's work on resolving municipal violations for investors this is the advice I would give.

    On passing your next inspection and proper way to decommissioning the illegal unit:
    It depends on the exact nature of the violating condition, what exactly was seen & recorded. 
    Was this determination made solely from the inspection?                                                                                                                                         Also if the violating conditions/violations are on record regarding the illegal unit and which entities have issued them.
    When dealing with a gas line in NYC a licensed plumber is needed to ensure the work is done to code.

    Is it necessary to decommission?
    Yes if the insurance turned you down for an illegal unit and that has been documented.
    Being found in violation of occupancy/use and an illegal unit can result in multiple violations from DOB, ECB and HPD all stemming from the same underlying violating condition. 

    Would future insurances I inquire always see a history of a failed inspection?
    To my knowledge no. It is not like car insurance where it follows you if you were to change insurance companies. Though fixing the violation of course would put you in the right.

    All in all it is a fixable but tedious issue

    If you'd like some help in coming up with a gameplan/ navigating the process feel free to reach out to me.

    2Reply
  • John Mocker
    Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
    3y

    Marie,

    Most Insurance policy applications have a question asking if you were ever cancelled and/or non-renewed.  You will need to disclose the reasons for the non-renewal.  If the issues are corrected (Building Occupied and no more illegal unit) the non-renewal will probably not be an issue.  If the 3rd floor unit is still illegal you will probably have issues.

    For the immediate coverage, you will need to get a vacant dwelling policy.  That policy can have more restrictions and higher pricing but may be more lenient on the underwriting.  

    Going forward, you will have to deal with the illegal unit.  You may be able to get it legalized.  If so, one of the issues will be two means of egress from that unit.  If you have to create a 2nd exit, it may be easier and less expensive to do the work prior to the other units being occupied.  If it can not be legally occupied you will have to decide whether to lock it up or add that area to the 2nd floor unit.   If you rent it or occupy it yourself, there may be issues at claim time.  

    1Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    The insurance policy was owner occupied and you never moved in is reason enough to cancel you. 

    Who is the insurance company? Did they send their own employee or contract with an inspection service? Many insurance companies use outside companies and these overlap so there is a good chance the next insurance company you go to will have access to the report. Also get an agent to pull the Clue report and see what shows (it's an insurance report card that is historic and permanent). Praying you personally know the agent and they reveal the whole mess verbally, they won't do it in writing.

    If there are no permits to build the 3rd unit into housing also the city/county/DOB/and others now know or will know soon. They will red tag the whole building and you cannot legally rent to anyone. And there are fines.

    Your lender is going to put forced place insurance and it will be lower coverage for super high cost and you will have no choice and the lender will send someone to go look and all these eyes alert the "authorities."  Get another insurance policy non owner with the loss payee perfect- very important not to have a lapse, vital that the loss payee clause and vesting are perfect and match the loan. Call Champion, Patrick Cavallo, Morea and see who is willing to find new company ~ tell them the problem- they will inspect and find it soon enough so better to have them advise rather than this blow up worse. The lender knows already, the insurance company notifies them right away.

    Get on this fast. Have an experienced general contractor who has a code buddy walk through and look at the report. My guess is your only cure now is to rip it out and remove stove, closet, extra hallway, make the ingress/egress legal to TODAY's code. Without seeing how the door stairway is it is hard to cost estimate. Demolition is cheap BUT you have to bring it to code. Can you save the unit and bring to code? No idea without seeing layout and construction quality.

    Any non permitted pieces are not covered by hazard insurance. Policy stated this. If the 3rd floor illegal addition causes a fire you might be uninsured. 

    1Reply
  • Marie Eisley
    OP
    Investor · Bronx · Member since 2022 · 5 posts · 7 votes
    3y

    Would it be enough to drywall up the kitchen and bathrooms in the attic unit so that there are only three bedrooms up there in the attic? Each unit, including the attic unit, has its own entrance from a shared staircase. I'm not sure what's the best way to demonstrate that the illegal unit will not be lived-in. I will move into the 2nd floor and use the attic rooms as storage and purchase an owner-occupied policy. Will this prove to be an issue?

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    If you closed 60 days ago, check your mortgage docs and see how fast you promised to occupy. You don’t want your legal address to be a different address past the number of days allowed to move in. They’ll assume you lied on your application and plan to rent it out. 

    You also often need the more expensive/less coverage vacant prowprty insruance any time the property is vacant more than 60 days. Though some insurance companies go 6 months. Regular insurance won’t cover any losses if the property was long term vacant. Get moved in. 

    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    If the city/planning, DOB, ECB, HPD, Fire department, your lender knows the unit is without permit and even looks habitable they will fine you (conventional lender is now notified of lack of insurance and they can call the loan due in full as you didn't move in to an owner occupied loan, who is the lender? This is vital to the answer).

    We cannot see what the workmanship looks like we cannot see if there are two exits to meet code, sounds like no and sounds like done funky which is not okay for a rental - plumbing/wiring/exits have to have permits and inspections- based on what you say they are not to code- you  must immediately return the property to a duplex, get yourself owner occupied bed in one of the TWO units tonight, and get new insurance. The insurance denial creates alerts for certain. No one entrance from a shared space is not to code.  No you cannot just drywall it to magically invisible now inspector is going to make you rip out the drywall to see. 

    https://up.codes/viewer/new_yo...

    0Reply
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