A common scenario for many Real Estate Investors is coming across properties with illegal additions. It is usually more than enough to scare investors away completely. However, if you look deeper into the situation, it may present itself as a great opportunity. You’ll hear the majority of investors say these are a complete headache and not to bother. Meanwhile, it’s not uncommon for some to ask questions on how people wholesale these types of properties. So, let’s take a closer look and see if we should follow the crowd.
Properties with illegal additions frequently fall into two categories. The first category is the addition that will comply with local building codes but does not have a permit. Generally, in these situations, contractors are brought in to do a job and face strict deadlines. Somewhere along the way, someone decided to take a chance and push to get it done. The second category is the addition that does not comply with local building codes. In some cases, these types of additions are apparent even to the inexperienced eye because they look entirely off. For example, a doorway beam or ceiling may be extremely low, or even something seems off with the layout of the floor Etc. There are also situations where everything looks good on the surface, but there’s been questionable work that you cannot see even in some preforeclosures. Those are the most dangerous situations.
Both circumstances are not ideal to leave alone because even though the first scenario may not pose an immediate physical danger to the occupants, it often impacts the accuracy of the homes square footage. It can lead to further issues dealing with the registry office and property taxes. The tax office may want retroactive payments and may include penalties with interest. This was the case in a recent probate sale. Additionally, this will also impact Insurance. They may perceive this as a deceptive move which can reflect on the homeowner’s insurance policy. Lastly, the city’s building inspector may take it to another level and request having everything torn down and removed.
When investors are looking to make a purchase, it’s good practice to go down to The local Municipal Building office relative to the property and ask to see the permit history of the prospective home. Its a good idea for a couple of reasons. First, you can eventually determine the status of the house and whether it is safe for occupancy. It should be the first and foremost reason for going through this step. There are situations where the current homeowner acquired the home and is unaware of the problem. Secondly, if at this point you find there is an illegal addition to the perspective property, the investor can go into the negotiations prepared with this information.
The next stage is to determine the severity of the situation. If it’s as simple as getting a permit, it may not provide you with much leverage with regards to negotiating price. However, if it’s an addition that can be repaired and brought into code profitably as seen in some short sales, It may be worth having them take the cost off the price of the home. The third possibility is to ask the current homeowner to do the repairs themselves before finalizing a sale. Each option can present an opportunity if you look at the situation in a positive way.
A house must be properly permitted and follow local municipal guidelines. The safety of the occupants will be the number one priority. Having a home in line with the local code will allow for proper square footage, insurance, and property tax records. There can be an excellent opportunity for an Investor depending how you look at the situation.