After a recent club meeting I was grabbing a late dinner and met up with a friend who is in charge of purchasing for a national hedge fund. He is meticulous and successful at what he does and he follows strict purchase criteria of price range, condition and specific neighborhoods.

As he and my partners were watching a game on the TV we also started discussing specific deals we had seen and how we handled the lien and code violations issues. While every property’s problem is somewhat different, they all have a common thread – the city hasn’t approved the final resolution of the problem.

We went on jokingly to discuss a couple of hard-nosed code officers and how a few city officials seem to have a vendetta against investors. This struck a chord with everyone at the table and we got further into what people and problems we each had encountered.

Maybe we had gotten lucky because we heard about what two specific cities had done to the hedge fund and their efforts to rehab properties. The stories that unfolded almost defy repeating so I won’t take the time here. In fact, I wish I could tell you which cities they were but don’t want to be sued by vindictive public employees.  The bottom line was that a couple of cities and their elected officials and employees were power-hungry bullies in the truest sense.

So how do you handle these people? Suffice it to say that as a rehabber or a wholesaler, you better check on liens and code violations that need to be fixed before you buy a property. Most “non-life-threatening” code issues can be rectified fairly easily, such as un-mowed grass, junk in the yard or even old pit-bull liens.

However, liens or code violations where permits haven’t been pulled can be much more problematic and require action to cure the problem before the city will remove the lien or violation. Here is a “clue” to a potential headache before it happens to you – Don’t sign any agreement with the city before you know that you as the buyer can cure the problem in a timely fashion.

If you have to have architectural drawings or a mechanical engineer’s approval of the plans, these can take time to draft and they well may be rejected by the city – and over and over again. Unfortunately, you may find that one inspector approves work you did while another inspector whose job is a different “discipline” may reject the former approval.

This can easily go to the level of harassment very quickly and basically you are powerless to stop it. The best way to start early is to AGREE and make the changes requested by the city official and do it right the first time. The more you protest the better your chances of your project being delayed for what seems like forever.

If you have a hard money loan in place, your holding costs can escalate very quickly as you wait for permits and repeated changes to your plans or work to get finalized. You may have chosen to rehab without permits when you started and if you get caught by code enforcement, you better have a great reason why you went insane for a few days.

Play the blame game on your factitious handymen and get back in-line with the code officer.

Never tell a code enforcement officer he can’t come in your property – that’s not legal and he has the option to call a police officer and have you arrested in many cities. This would be a really bad start to what could have been a great money-making project. Suddenly you have a money pit with no end in sight and a vindictive enforcement officer determined to make you pay!

A very good reason to do the work needed with permits is for the safety of the buyer – especially where electrical work is being done. If not done up to code and a fire starts you likely will be sued when the Fire Marshall declares the reason for the death-related fire is the rehab that you did. Much of the equipment you install is dated from the manufacturer so don’t think your poor work that leads to the event can’t be proven.

Another reason to do things right is that when an inspector for the buyer’s conventional lender does an inspection and finds your un-permitted work, your chances of getting the buyer a loan have evaporated. The inspection report could become a part of the history of the property especially if the city requires a Certificate of Re-occupancy.

Do your rehab right to begin with and despite it costing more because not only is it the right thing to do, you have far less liability as you move forward!

To your limitless success,
Dave Dinkel

Real Estate Mentor Program Founder