Real Estate Rehabbers May Be Facing Huge Losses Because of This Change

What may well be the biggest single change in real estate investing in 50 years is fast approaching. It could well be the end of real estate rehabbing as we know it and it has already started in a couple of cities. At first I thought it was an urban legend because a Real Estate Mentoring Student called and was telling me what happened to him – or at least what he thought had happened to his rehabbed property. A few days later another Mentor Student called and told me the same story except in a different county.

It started when I had called the first Student back to check on the status of his rehab since I had provided the hard money for his purchase of a seemingly great property. He had gotten it via a short sale at least $150,000 below fair market value (FMV). His estimate of repairs was about $35,000 so he was looking at a killer deal. I had personally inspected the property and it was what I call a “lipstick on a pig” or very light rehab – mostly patch and paint.

When I spoke to him he told me that code enforcement had tagged his “canvas” carport as illegal and as having been installed without a permit. He bought the property this way which is no excuse so he decided to simply tear it out. But it didn’t stop there – the officer had tagged the property for mechanical, electrical, plumbing violations, illegal kitchen remodel and an illegal enclosure of the original carport. Of course this all happened after the closing but what was strange was that no code officer had ever been inside the property. More importantly, almost none of the violations were valid because he hadn’t started his rehab!

The Mentoring Student was panicked and very angry at the city and the code officer. I got him to calm down and go to the city to see what was happening. If you don’t make friends with the city they can be your worst enemy and kill you financially. The first time he went to the city the code officer was not there but the staff seemed to know the “modus operandi” of this officer.

Without saying it, the city employees implied that the officer used the MLS® to find rehabbed properties that did not show permits for work that was advertised as completed and shown in the listing agent’s comments. Every time a new listing comes on the MLS® a city employee is notified by an autoresponder email notification that a local Realtor® has set up for the city employee. All the employees have to do is check their emails to see who is violating code provisions that day!

The second Student did not have the same thing happen to him but he explained that he talked to a rehabber who got caught advertising his completely rehabbed property on the MLS® and he had not pulled the necessary permits. He went on to say that this city actually dedicated employees to searching the MLS® listings for Realtor® comments that implied work was done to upgrade the property. These upgrades were then checked against the property address to see if appropriate permits were pulled and also if permits were pulled, were they closed out.

For the real estate rehabbers who are conscientious and pulls all the permits needed to complete a project it can be an expensive and frustrating experience. Jim and Viju have been working on a rehab that has lasted over a year because of permitting issues with the city. Some cities are notorious for seemingly working against investors. Of course if you are a real estate rehabber using hard money, the delays in getting permits issued and closed out can bankrupt your deal and maybe you also.

In summary, the ugly Spector of over-enforcement using seemingly necessary advertising terms to sell your rehabbed property should be reviewed carefully. If you pulled and closed out the necessary permits to do the work, broadcast it! If however, you took the quick and dirty rehab route, think twice about selling your property on the MLS® using grandiose remarks about what you replaced or updated where the work should have been permitted.

To your limitless success,
Dave Dinkel

Real Estate Mentor Program Founder