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Let’s say you’ve found your dream investment property. The price seems right, the house looks like it won’t require too many repairs, and the seller is eager to close. But when doing your due diligence, you stumble on some outstanding code or zoning violations that the seller hasn’t corrected. So what happens, then? Do sellers have to fix code violations before closing?
No, sellers do not need to fix these violations as long as the property is being sold in as-is condition. As-is properties and their outstanding violations are passed onto the new owner, who is then responsible. If, however, the sale is a traditional sale (meaning that the property isn’t explicitly listed “as-is”), then yes, the seller would be responsible for getting the property up to code.
But, as with all things real estate, there’s a little more nuance to this. Let’s dive into how you can make sure you’re aware of any outstanding issues and considerations you should have when closing on a property that isn’t up to code.
What Do You Mean By “Code?”
Let’s first define what a code is and what a violation of that code means. Local, state, and federal governments all have their own set of agreed-upon rules for what constitutes a safe and usable property. These evolve over time as new technology or environmental regulations come into play.
Major renovations or rehabs done on critical things like electrical or plumbing will require a permit from the city or town. The homeowner will apply for the permit, which explains what type of work is being done, who is doing the job, and other details. At the start and end of the project, a city inspector will come and sign off on the work, saying that it is within the regulations defined by the city. This property is then considered up to code.
What typically happens with a code violation is that the owner will either fail to apply for the permit and do the work themselves, or the inspector will find the work doesn’t meet guidelines and is therefore in violation.
If it’s found that the owner did the work without a permit, they will also be found in violation and will have to either remove the work and start over with a permit or pay fines that cover the permit, inspection, and violation costs.
There are also zoning laws that can make a property be considered in violation. This is rare, especially if you’re buying a home in an established neighborhood. What most often happens is that an old commercial or industrial property is renovated and turned into a residential property.
Each zone has its own set of standards, and the property has to meet a high standard before it can be considered residential. If the owner renovated the property without being inspected and re-zoned, they would be considered in violation.
How to Find Code and Zoning Violations
If your seller hasn’t explicitly listed any outstanding violations, that doesn’t mean there aren’t any. I always recommend doing your own research and due diligence before signing the contract. Luckily, it’s not that difficult to find out whether the home is up to code or not.
Go Directly to the City
The easiest method is to get in touch with the city where your potential investment property is located. Ask for the building department as they would be in charge of permits and code records.
Once you get the building department on the phone, ask if there are any open or pending permits on the property. Essentially your goal with this call is to find out:
- What’s been done to the property in terms of upgrades or repairs
- If there are open violations
- If there are outstanding liens
Use the Title Company
Another way is to ask the title company to handle the transfer of the property into your name. What they’ll then create is what’s known as a “preliminary title report” or a “title commitment.” They’re the same thing; it just depends on what your title company prefers to call them.
When you receive this report, read through it. Look to see if there are any recorded code or zoning violations in the report. If there are, go back to the seller and discuss what needs to be done and decide if it’s in your interest to close or walk away.
I typically do not call the city to check for violations unless I can tell that the property has had work done to it or if it’s in pretty bad condition. I usually just rely on the title company to find that info for me. But do whatever you’re most comfortable doing; both methods will give you results.
Remember that Looks Can Be Misleading
Don’t judge a book (or house) by its cover (or siding, I guess?). Properties that look to be in excellent condition can have hidden code violations or liens that you’ll need to be aware of before taking ownership. Conversely, some homes can be in really poor condition but have not had any code violations reported, so it’s best to play it safe no matter the situation and do your research.
Do Sellers Have to Fix Code Violations?
What should your next move be if you’ve received the title commitment back and discover code or zoning violations? It depends on the stipulations of your contract with the seller.
If you’re buying a property and your contract says that the seller is responsible, then they will be in charge of getting the house up to code. This is common with traditional property sales, where the home may have been owner-occupied and is now being sold.
If the seller is unable or unwilling to get the home up to code, then it’s time to renegotiate the terms of your contract. Ask the seller for a discount on the price so that you can put that money towards repairs.
If you’re buying a foreclosure, short sale, or a property that’s listed in “as-is” condition, then what you see is what you get. The seller (usually a bank in these cases) has no obligation to get the property up to spec or discount the price. Once the title is transferred, you, as the new owner, will be liable for getting the home cleared of violations.
Something to Think About if You’re Buying the Home As-Is
If you’ve agreed to take on the responsibility of getting the home up to code, there’s something I want you to think about before making it official.
Before you agree to take on the responsibility (and cost), I want you to consider what will need to happen to stop this investment from becoming a money pit.
When correcting code or zoning violations, I recommend padding your time and money budgets accordingly. Add in not only the cost for repairs but permit fees, and you will probably need to pay for inspections done by the city to clear the violation. Also, the town may drag its feet for several reasons, so renting or selling the property may not happen as fast as you like.
Bottom Line: Know What You’re Buying
Don’t be scared, just be informed. Yes, buying properties with code violations can be a headache. But they can also end up being excellent deals if you play your cards right.
If the seller is unable or unwilling to take care of the problems, you may be able to negotiate a special rate for your new property. Often the seller may not have the time, money, or inclination to get the property up to code. If that’s the case, you can position your offer as a way for them to get this property off of their hands and make it your problem instead.
But it’s up to you to have all of the information available that helps you make those decisions. Ensure that you take the time (or make the title company take the time) to do the due diligence that gives you a 360 degree perspective on what you agree to take ownership of.