Potential buyer loses contract plus $1,000 in fees, other costs after discovering unpermitted work on home

The book has proved very helpful for our youngest son who is in the process of looking for a new home/condo/townhome in the suburban Denver area. Which brings me to our question on the issue of buying a home that has had remodeling work done that was not permitted.

As background, our son had signed a contract for a condo that had been flipped, having been purchased by the seller in February for $160,000 and then put on the market in April for $340,000. The interior of the condo had been extensively remodeled, particularly the kitchen and bathrooms. While the work outwardly looked very nice, the inspection did reveal a few issues. These included a few cut corners on plumbing and a dirty furnace that needed servicing. Our son’s agent indicated that these would be reasonable things to ask for the seller to fix before closing, as part of the inspection report.

Based on the above, we raised the question about whether any of the work required city permits and, if so, whether appropriate permits had been obtained. The property description on Zillow listed several items that were new: floors, doors, windows, kitchen/bathroom renovations. However, the seller’s disclosure form that our son received listed none of that work, even though there were areas on the form where work that had been done (both permitted and unpermitted) should be listed. Upon checking with the city they confirmed that most of the work listed required permits, but no permits had been pulled for any work done.

Our understanding is that buying a property with unpermitted work could have large negative repercussions for the buyer down the line, including homeowners insurance not covering any damage caused by un-permitted work. If the damage was extensive (water damage, electrical fire), this could be financially back breaking. In addition, depending on how the work affected the appraised value of the home, the mortgage company might back out of financing or choose not to approve refinances in the future.

I understand that getting proper permits for past work could take months. If the work doesn’t meet the city’s standards, they may require the new homeowner to spend a large amount of money updating it to code or removing it entirely.

Because of the issues noted above, our son asked the seller to get the proper permits before closing. However, with other buyers lined up the sellers had no incentive to work with our son and the contract was terminated. In addition, our son ended up being on the hook for fees that had been paid prior to realizing that there was unpermitted work done on the property. Between the inspection and non-refundable fees for the appraisal, he lost close to $1,000 over a home he never would have wanted to buy if he had full information on the lack of permits.

One article indicated “If you were to poll 100 people who had recently remodeled their home and asked how many pulled a permit, it wouldn’t be unusual or uncommon for more than 80% to admit that they had not applied for one.”

The agent our son is working with also indicated that it’s very common to see places on the market with unpermitted work — especially for flips. We did not see this issue covered in the book and wondered if you had any guidance that would be helpful as our son continues his search.

A: Losing a home is tough. Especially if you’re buying in a tight market. And, Colorado certainly qualifies as a tight market over the past decade.

But we think your son narrowly escaped a bad situation, for all the reasons you mentioned — and a few more.

Let’s say your son ignored the fact that permits weren’t pulled for the renovation, bought the property, and then down the line decided to sell. He’d be faced with his own moral quandary with a likely negative financial outcome. To answer the seller disclosure form honestly, he would have to admit he knew that there was unpermitted work. The buyers would have then likely required him to get those permits, and pay the past-due permitting fees, plus remediate any work that didn’t meet code.

While unpermitted work may be common (and certainly, some local municipalities could make the process of pulling permits easier, cheaper and faster), it could have life-threatening consequences. In 2003, a porch collapsed in Chicago and 12 people died. The correct permits were not pulled when it was constructed in 1998, city officials said at the time.

Your son didn’t do anything wrong. But, market forces are working against him. As you correctly note, there’s no incentive for the sellers to work with him, especially with other buyers standing in line. That leaves your son with a few options: Buy a home that has had the proper permits pulled; buy a home that needs work, which he can do after pulling the correct permits; or, buy a new home, where the builder has pulled the proper permits.

Finding a well-done flip where the builder has followed code and pulled permits might be hard. But, it’s easier than waiting to see if the flip you buy turns out to be a flop.

On the issue of his out of pocket expenses, we can’t speak specifically to your issue. But many states require the seller to disclose specific facts about the property they are selling and to list known defects and problems affecting the property. This is not to say that the seller needs to disclose every detail or everything that has happened to a property during the time the seller owned it. But the seller must be truthful in completing the form.

In Colorado, the disclosure form includes a place for the seller to disclose the work done by the seller with approvals by a homeowner’s association and municipality. There is also a separate box for the seller to list that work that was done without any permissions. Your seller knew they had done work and failed to list the work in either box.

They either intentionally failed to disclose the work or mistakenly filled out the form. In either case, you’d have to look to Colorado law to see what responsibility the seller has for failing to complete the form accurately. Some states allow you to sue the seller to recover your costs and attorney’s fees when a seller fails to comply with the terms of the seller disclosure laws of that state when it comes to the sale of a residential real estate property.

We don’t know if it will be worth your time and effort to go after the seller for the $1,000 your son lost on the deal. You’d have to discuss that with an attorney that has experience in seller disclosure issues. Together, you’d then decide whether dodging any future problems due to the lack of permissions was worth the $1,000 or you want to spend more time and money on this issue or move on.

Thanks for your question. Let us know what you decide to do.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)