It’s a new year, and a new market! That’s right, folks, the Spring market is just ahead and it’s time to take stock of some of the most common pitfalls that entrap sellers and can cost them lots of time and money. Not checking building records prior to going live on the market tops my list of main offenders, because it is by far and way the most common, headache-inducing blunder home sellers make. Every buyer, whether mortgaging or purchasing with cash, will be running a title search on the property to ensure that there are no violations of record, that all aspects of the home have been legalized, and that there are no liens on the property. Thanks to the Freedom of Information Act, building department files are widely available to the public and many buyer agents will be inspecting municipal files even before their buyer makes an offer. If at that time all aspects of the home are not legal, this can create a major issue for the seller. Buyers do not want to inherit the headache of a property that lacks CO’s (Certificates of Occupancy) for any element of the home, be it a deck, finished basement, finished attic, etc. They want to ensure that their investment is sound and will not create any re-sale issues down the road with the local municipality.
Many sellers, aware of an outstanding building item, will prohibit their agent from pulling municipal files or checking any records with the building department for fear of raising alarm with the town and blowing their cover. Instead of mitigating any potential issues out of the gate, such sellers decide to gamble and take a chance that their secret illegally finished basement (or deck, or addition, etc) will never be detected. Maybe they are overwhelmed as it is with the process of selling and downsizing, and cannot stomach the hurdle of battling with the local municipality. I cannot emphasize enough how big a mistake this is. For one, the seller’s agent is obligated by their local MLS to market only those aspects of the home that are legal. So if you only have 1100 square feet of legal space, but the house is really 1800 square feet thanks to the dormer on the second level and solarium on the main level, neither of which have been CO’ed, your agent can only market 1100 square feet. This can have a devastating effect on resale because many buyers set their search criteria by square footage, and your home will fall off the radar for a good percentage of your prospective buying pool. This can result in extra time on market. Furthermore, even if you do find a buyer quickly, finding out that there is a major element of the home that has not been legalized can be very discouraging, particularly for those first timers that don’t fully comprehend or want to be entangled with a legalization nightmare with the town. Losing a buyer with whom you’ve engaged considerably between inspections and negotiations, and for whom you’ve discouraged other interest, can also result in extra time on market. And time on market, as I’ve discussed throughout my blog entries, can equate to thousands of dollars out of your pocket. I would be remiss to not reference the lengthy amount of time it can take to resolve building issues. It can take a month or more just to have a permit issued. And if legalization necessitates obtaining a variance, that will pad on considerably more time. You will have to go before the zoning committee for approval prior to being issued permits. The committee generally meets only once per month, and once every couple of months in the summer. If you are under contract on your home prior to filing for a variance, this can cause excessive delays that can put your sale in serious peril. While most contracts grant a time extension to resolve title issues once past your on/about closing window, that extension is finite and normally limited to 30-60 days. Once a variance is obtained, it will take another 4 weeks for a permit to be issued, another week or so for inspection, and yet another week for the final CO to be issued. So if you wait to address a municipal issue until it is detected by the title company, which is normally near the on/about closing date in the contract, it can be a rather tight period of time to get your ducks in a row before you’re in breach of contract and issued a time of essence letter, and that can cause an undue amount of stress and anxiety.
For those sellers under the misconception that a cash buyer is the key to a quick and easy transaction and keeping your dirty building department laundry hidden, think again. As I mentioned, the buyer agent is likely to check the building department records on the property before an offer is even made, or at least prior to contract signing. Furthermore, all buyers, regardless of their method of financing, will be running a title search, and that will uncover all. All building department records will be reviewed and analyzed by the title company and supplied to the buyer and their attorney. All buyers, cash or mortgaging, will have a title contingency built into the contract and, depending upon the findings, they may or may not choose to proceed with a sale that has title issues “as is.” On the contrary, they are likely to exercise the option to coerce the seller to either obtain the outstanding requisite building permit(s) and CO’s or else return their down payment and release them from the contract of sale. Again, it doesn’t matter if the buyer is a cash buyer or is obtaining financing from a bank. In fact, many banks these days are indifferent to the findings of the municipal search unless there is an actual violation, so it will be up the buyer as to whether or not they are willing to proceed with a missing CO. Based upon my experience, I will tell you that very few buyers are.
Another good reason to mitigate issues up front is that your dirty laundry may well be aired once your property hits the internet. If you have an illegal part of your home that also happens to be a major selling point, such as a finished basement, you’re going to want your agent to market that. They may not be able to incorporate it into the official stats for the listing, but they can mention it in the remarks and even take photos. Even if you don’t want it marketed, it is sometimes difficult to hide certain aspects of the home. If you have an illegal deck, for example, it’s going to be nearly impossible to photograph the entire exterior of your home without it being incorporated. Unfortunately, there are several municipalities that are sleuth-like and do research. They regularly peruse the home searching websites to which the MLS feeds, like Trulia, Zillow and Realtor. And they will look at the homes within the area of their jurisdiction that are on the market. Once a title request comes in, that’ll usually prompt them to hop on the internet and scrutinize your listing. They will read all the notes, look at the photos, etc. If something is detected that is not in their records, you will get slapped with a violation, which will be sent to the title company. I’ve seen it happen many times, and it usually occurs about a week before your anticipated closing date, when all your bags are packed and you’ve already made a down payment on your new home.
If I were to estimate, I would have to say that one out of every two homes I’ve sold has had municipal issues in one form or another. Why is this number so great? Well, for a few reasons. For one, building department record keeping in most local municipalities is limited to manila folders haphazardly shoved into clunky, cumbersome metal file cabinets, and greatly susceptible to human error. In terms of the content of the actual files themselves… well let’s just say you’d need a PhD in graphology in order to be able to decipher much of it. Unfortunately for many sellers in my neck of the woods, because most municipalities were pretty lax in the record keeping department up until the mid-1990’s or so (around the time title companies started to pay attention) the building file on any given property can look a mountain of garbled, yellowed chicken scratch, and there is often a lot that is missing. See, areas in the lower Hudson Valley were far less populated than they are today. These were small towns – like, Andy Griffith small – and the need to keep accurate records wasn’t as strongly felt because the town officials knew everything about every house and every homeowner. And no one checked municipal files when purchasing a home. In fact, houses didn’t even require certificates of occupancy until the late 1940’s-early 1950’s. Sadly, there was a serious lack of thought to the future – that building code might one day evolve and become stricter, the population denser, and that record keeping might actually become a necessary practice. This lack of foresight has resulted in a frustrating game of hot potato for many sellers, who are stuck holding the liability for undocumented work that may well have predated their occupancy of the home, sometimes by several decades! It could well be that the work was permitted and legalized at one time but the records were lost or misfiled. Sadly, unless you happen to have a copy of the missing ancient record, which is usually impossible if it predates your ownership, good luck proving it. Title companies didn’t run full municipal searches until the 1990’s, and those home owners who bought prior may well have inherited a nightmare. I have great sympathy for those homeowners victimized by shoddy record keeping practices of yore, but better to find out prior to putting your home on the market than once you find a buyer and are ready to close.
There are some sellers that cannot play the blame game, and failed to secure permits for work that they themselves did to their house. Why do they do it? Well, often it comes down to money. Permits and CO’s pad a little bit of cost onto the project. When I say a little, I mean they cost a few hundred dollars to obtain. Whatever it costs tends to be far less than what it will be on the back end when they are ready to sell. Many municipalities will make you pay double the permit fee for completing work under the table, not including the cost of the final CO. Furthermore, if the illegal work that was done is not up to current building code standards (building code changes every few years) then it can be very expensive and difficult to remedy. There is no “grandfathering in” of work that never had any certificate of occupancy or, at the very least, permits. I’ve seen sellers have to rip out dry wall in their basements to make it look less like living space! It’s neither pretty nor fun, I assure you.
Another reason home owners avoid getting permits is that the local municipality, depending on who’s running the building department, can be a bit of a pain in the neck to deal with (“you need to enlarge that window for egress,” “you need to knock down that wall so it doesn’t look like a bedroom,” etc.). They can be sticklers, it’s true. For this reason, some contractors will even persuade home owners to do work without permits, thus avoiding having the building inspector sticking in his beak and making their lives miserable. So badly do these contractors not wish to deal with ball-busting inspectors that they will often discount their fees considerably to incentivize the home owner to avoid pulling permits. However, by skirting permits, they fail to consider future resale consequences that will inevitably befall their clients. Nowadays, as I mentioned, it’s rather difficult to sell a home with an illegal element and at some point in time the CO will have to be obtained. And, also as mentioned, getting permits may be much easier upfront than it is years after the work is done when you are ready to sell and building code has changed. For this reason, it is prudent to obtain them prior to doing the work in the first place.
Yet another common reason home owners perform work without securing permits is that their taxes will go up. I fully understand this concern, and the building department does feed it’s data into the town assessor’s office, so all CO’s do cross the assessor’s desk. Depending upon the work performed it may well result in an increase in the assessment of the property and, hence, the corresponding taxes. However, what homeowners must understand is that the assessor conducts a periodic inspection of the premises independent of the building department, and when they see a new addition or finished basement, it’s going to be incorporated into the value at which you are taxed. They don’t give a hoot whether or not it’s legal, and they won’t blow the whistle on you either. They’ll happily collect your money until you go to sell and realize that you can’t market half your finished square footage because it’s illegal, even though you’ve been taxed on it for years.
The answer to avoiding title issues, it seems, is to make certain all aspects of your home are legal prior to going live on the market. It may be a little extra time, effort and money upfront, but that time effort and money will be spent regardless. Better to get it out of the way before you accrue precious (and expensive) days on market!