Buying homes with code violations sounds terrible? Actually it’s not that bad. Although a property may have different code violations, it can still be a good deal as an investment, depending on what kind of code violations and how you can fix it.
Especially in today’s high-octane housing market, it seems like before you can even make an offer, a property’s already under contract. And, with mortgage rates at historic lows – and likely staying there – changes are it’s going to remain tough for investors to find deals for the foreseeable future.
Buying houses with code violations provides savvy investors an outstanding opportunity to find undervalued properties – before they’re even on the market!
In this article, we’ll dive into the following topics to give real estate investors the background information necessary to start thinking buying properties with code violation:
- What is a housing code violation?
- code violations list
- What will happen if the property has a code violation?
- How to fix code violations
- Option 1: code remedies
- Option 2: administrative court proceedings
- Real estate investor opportunities with code violations
- Pros and cons of buying a home with a code violation
- Closing thoughts
What is a Housing Code Violation?
Throughout the United States, states and local municipalities formalize certain housing and building rules into laws known as housing codes. While sometimes done for aesthetic reasons in localities, the primary purpose of housing codes is to ensure a minimum level of health and safety standards for a community.
Essentially, state and local governments want to make sure that people live in reasonably safe environments, and housing codes are meant to meet that intent inside the walls of someone’s home.
As with other laws, the fact that housing codes exist means that they can be broken. When property owners break a housing code in their municipality, it is known as a housing code violation.
Code Violations List in Real Estate
While every municipality will have slightly different housing codes on its books, certain common codes can pretty much be found everywhere. With these common codes, there are also plenty of common code violations. Here’s code violation list that we see broken all the time:
Working without a permit: In order to ensure property owners follow building codes, municipalities require permits for most home repair and construction projects. As such, not getting one of these permits is one of the most common code violations. And, while owners may avoid a citation when they first do the work, there’s a good chance that it’ll be discovered during the inspection process of any sale, potentially derailing the deal.
Not testing older materials for lead and asbestos: Years ago, materials we now know to be harmful (e.g lead and asbestos) were common building materials. Localities want these all removed, so most repairs also require testing – and removal – of harmful materials.
Adding a basement bedroom without a window egress: This is a major safety concern, as landlords often try to squeeze an extra room into a basement without actually considering the fire egress considerations. And, this is also a visible enough violation that a disgruntled tenant could notice and report it.
Incorrectly completed electrical work: This one can also kill people. When non-licensed home owners (i.e. non-electricians) do electrical work, it’s often shoddily done and can lead to significant fire hazards. While this can be hidden behind drywall temporarily, a sale-related home inspection will often uncover these sorts of violations.
Failure to abide by fence height requirements: Less serious than some of the other violations on this list, fence height violations definitely are aesthetic violations, but they’re also extremely visible so cited frequently.
No “returns” on handrails: In most municipalities, handrails going up and down stairs are supposed to connect to the walls at the ends with “returns.” This sort of violation is commonly cited during the sale of a property when an inspector does a walk-through.
Venting bathrooms into an attic: Bathroom vent fans are supposed to vent directly outside, but a lot of homeowners take the shortcut of venting them into an attic, instead.
Missing smoke detectors: Many municipalities have enacted codes requiring smoke detectors in all bedrooms and common areas – and some even require annual testing of these detectors but a licensed inspector.
Treating the yard as a junkyard: Localities – and neighbors – don’t like seeing trash piled up around houses, as it hurts property values. And, when people treat their yards like a dump, anyone passing by can – and often will – report these violations.
Turning the yard into a jungle: Similar to the above, not keeping your yard landscaped is a surefire way to get cited with a housing code violation, as it is a very visible infraction.
How the Code Violation Works
So now that we’ve outlined some common violations, it’s important to discuss who is actually responsible for enforcing these housing codes.
Every municipality has employees to enforce the various categories of codes on their books (e.g. zoning, environmental, business licenses, etc). As such, the Housing Code Enforcement Officer is the city, state, or other municipality official charged with enforcing the locality’s specific housing codes.
Broadly speaking, the way these officers do their jobs falls into one of two models: proactive or reactive:
The proactive enforcement model: In this scenario, housing code enforcement officers regularly inspect rental housing – regardless of whether they receive a tenant complaint or not – to ensure that the property is up to code. As expected, this model tends to lead to earlier and more frequent citations.
The reactive enforcement model: This model depends on either tenant or passerby complaints. Officers only conduct inspections when they receive a complaint, which means that there are typically fewer citations.
What Will Happen if There is a Code Violation?
Regardless which of the above enforcement models is used, a housing code violation will result in a notice from the Code Enforcement Officer and, potentially, a fine.
Typically, when the officer discovers a violation, he or she will offer a violation notice to the property owner. This notice is a formal message from the respective municipality alerting owners that they are in violation of the local housing code.
Though the format and some of the content in the notice will vary by locality, it will give, at a minimum, A) a description of the violation, B) the timeline the property owner has to remedy the violation, and C) the consequences associated with a failure to remedy the violation, which can range from fines all the way up to criminal proceedings.
And, of particular concern to property owners, violation fines are often assessed on a per-day, per-violation basis. This means that if you get cited for faulty electrical wiring and excessive trash in the yard and each of those violations has a $50 fine, ignoring the violation for two weeks would lead to a $1,400 bill!
How to Fix Code Violations?
Option 1: Code Remedies
Fortunately for property owners, violations don’t have to lead to massive fines. As stated above, when you receive a violation notice from the Housing Code Enforcement Officer, it’ll include what steps need to be taken to resolve the violation.
These steps to bring a violation up to code are known as code remedies.
For some violations, the remedies are straightforward and easy to accomplish. For example, if you receive a notice for having a trailer parked on your front lawn, moving that isn’t going to take you too much time or money.
On the other hand, some violations – especially for landlords operating on thin margins – are absolutely cost prohibitive. For instance, if a tenant complains about shoddy electrical in a rental property, an inspector may find an entire house’s wiring not up to code, potentially putting the owner on the hook for tens of thousands of dollars of electrical overhauls.
While an expensive code violation like this may be terrible news to the current property owner, it represents a potentially golden opportunity for real estate investors!
Option 2: Administrative Court Proceedings
When a property owner is either unable or unwilling to remedy a code violation, the next step in the enforcement process is generally an administrative court proceeding. Typically after a second violation notice is ignored, this court issues a summons to the property owner to appear before an administrative judge.
During the court process, property owners can be assessed further fines, a lien can be placed on the property, and, in rare situations, the judge can order the property foreclosure process to begin. Clearly, this is not a situation in which property owners – especially thin-margin landlords – want to find themselves.
Real Estate Investor Opportunities with Code Violations
As stated, while a citation may be a massive headache for a property owner, it can be an outstanding opportunity for an investor, and these opportunities are seized at the above administrative courts.
Where and how frequently administrative courts meet to hear housing code violation cases differs in every jurisdiction, so it’s beyond the scope of this article to go into that level of detail. But, with a little research and asking around at local government offices, real estate investors can confirm:
Where administrative court sessions are held.
When these courts hear housing code violation cases.
What requirements – if any – exist for investors to sit in on these court sessions.
Ideally, the first time landlords need to go before an administrative court to answer to unremedied housing code violations is also the last time. Most people simply don’t want to deal with the hassle and stress of these procedures.
And, many landlords realize very quickly that the necessary steps imposed by the judge to remedy a violation just don’t make financial sense for them. For example, being ordered to do $15,000 of lead pipe replacements in a rental property that barely breaks even likely doesn’t make sense or is out of the question budget-wise for an owner.
Recognizing this reality, savvy real estate investors can attend these hearings and provide property owners an opportunity to unload their violation-related headaches by selling their properties.
While not every property owner at an administrative hearing will want to sell, a little persistence will provide real estate investors access to deals before they hit the market. By putting together some informational flyers and rehearsing a 15-second “elevator pitch,” investors can make dozens of offers at these hearings.
And, because you’re making an offer on a property that’s not up to code, you’ll be able to make significantly below-market offers, as the property owner would not be able to sell in a standard transaction with an inspection contingency.
Pros and Cons of Buying a Home with a Code Violation
While this strategy certainly has plenty of upside, it’s not for all investors. To determine whether it makes sense for your situation and overall objectives, it’s worth outlining the pros and cons to buying houses with code violations.
Pros
Value: As stated, the very nature of these properties as not up to code means that you’re going to be able make offers significantly below market value. For investors with limited capital but with a solid team of contractors, this could be a great opportunity.
Fewer bidding wars: In today’s market, every property on the market seems to create a bidding war, whether it’s a good deal or not. By making offers on properties that aren’t actually on the market, investors can avoid the pains – and escalating price hikes – associated with a bidding war.
Fits multiple investment strategies: Regardless of whether you’re an investor using the BRRR or fix-and-flip strategy, success depends upon purchasing an undervalued property and adding value. These code violation properties are inherently undervalued, because the municipal government has declared them unfit.
Endless opportunities: As long as housing codes exist, there’ll be property owners in violation who end up before an administrative judge. For real estate investors who embrace this strategy, that means that every time courts meet represents another batch of opportunities for great deals.
Replication: Directly related to the endless opportunities of this strategy, an ambitious investor can take procedures for making these sorts of offers and replicate them across a variety of municipalities. With some established procedures and basic training, investors can hire people to set up at multiple administrative courts, significantly expanding the pool of potential code violation sellers.
Cons
Need to bring the house up to code: On the opposite side of the above coin, the inherent drawback of buying a code violation property is that you need to bring it up to code. This may be within the budgets and expertise of certain investors while not a good idea for others.
You’re “on the list”: Unfortunately for investors who purchase these homes, even if they make the necessary repairs to bring everything up to code, the property is now on the Code Enforcement Officer’s list. This means that there will likely be more frequent inspections down the line and, by extension, more violations.
May need to bring everything to code: Typically, when property owners apply for a permit to do work, they are only required to adhere to the current housing code for the new work. However, when a property ends up the subject of an administrative hearing, judges may order that everything in the house be brought up to code. For a property built 50 years ago, that could mean basically overhauling the entire house, a potentially massive expense relative to a fix-and-flip budget.
Closing Thoughts
Buying properties with code violations certainly isn’t for everyone, but there are some great opportunities to find deals in otherwise competitive markets if you choose this strategy.
As a closing thought, investors who go down this path should work hard to build solid relationships with key individuals in their locality’s housing code enforcement division. With a good relationship and open communications, it’s far easier to find out what a municipality’s expectations are with a code violation property:
Will I need to just address this violation?
Will I need to remedy this, but then also get inspected for other violations?
Will I now be on a list of code violators and subject to more random inspections?
These are just some of the questions that, if answered prior to purchasing a code violation property, could save an investor some serious headaches – and expense.
And, regardless of whether you try this strategy out, be sure to have a good understanding of the key elements of buying any investment property, code violation or not. For real estate investors with a rock solid foundation, opportunities have a way of presenting themselves, no matter what the local market is doing.
No matter what path you take as a real estate investor, financing is king. Without access to reliable financing, the best deals remain nothing more than wishful thinking. As such, one of the most important relationships you can build as an investor is with a reliable, trustworthy lender.
Learn how it all works by attending our next webinar.
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