Charles:
Most real estate investors run from Unpermitted work. But if you are one of those investors who doesn’t mind some extra work, it could be a huge opportunity that sets you apart from other buyers in your market. Welcome to Strategy Saturday. I’m Charles Carillo and today we’re discussing what every real estate investor must understand before buying a property with Unpermitted work. But before you move forward, there’s a lot you need to consider. So let’s get started. So as a real estate investor, you will inevitably encounter properties that have un permanent work. This will be an immediate no for most property buyers, but some real estate investors will see this as an opportunity. And if you are that type of investor, then this episode is for you. Now as a side note, years back I sold the portfolio of properties and they had open permits, which took weeks to close out.
Charles:
It was a, it was a hassle, it was something that I documented. And to learn more about closing out those open building permits, you can check out episode SS 77. That’s SS 77. But when you’re encountering un permanent work, there are a few steps buyers can take when approaching a property with this type of situation. Now, before we get started, let’s clarify what un permanent work actually is. So un permanent work refers to any construction, renovation or altercation done to a property without obtaining the necessary permit from the local building department. Now this includes major and minor renovations from a new roof or electrical panel upgrade to an addition to the property. Now, some minor un permanent work like a water heater replacement will probably not be recognized by an inspector or investor unless the work is shoting. Compare that to a property advertised as a three bedroom, but legally it’s really a two bedroom home.
Charles:
I mean, that’s majorly gonna change. The investor’s approach, the cost, the hassle. I mean everything gets changed when a major problem like that or difference like that occurs. So number one, let’s understand the un permanent work once the UNT work has been identified. And that’s usually done by an inspector or investor, hire at least one contractor to review the un permanent work and make a suggestion on how best to rectify the issue because your inspector’s going to notice it, right? They’re gonna identify it. But after that it might give you an idea of one of my costs. But you really want a contractor that’s gonna do the work, go out there and give you a quote on first of all what they would do in the situation and then how much that would cost. And it’s kinda like, you know, going to a different doctors and seeing what they suggest if you have an issue.
Charles:
Same thing with contractors. I might also bring out another contractor to do the same thing and I’m gonna also have them inspect the rest of the property and see if there’s any other issues. I mean, if it’s in one place on the property, it could also be in another place on the property. What is the quality of the un permanent work? I mean, was it done correctly or is it a safety hazard? Usually, you know, poorly done work will increase your legal liability and furthermore, even if it’s done correctly, your insurance company might not cover the damages caused by it. Any case, I would suggest getting two contractors to review it and see what they suggest. Now review all of the property building permits to see if anything else has been missed or wasn’t permanent. Very important as well. ’cause You might uncover something that wasn’t picked up before.
Charles:
And this is something you can dig into yourself, but also, and you can find this online and you can pull all these different building permits, but when you’re actually walking the property, you’re gonna see stuff that doesn’t line up. It’s not so important when you’re initially walking the property, but when you see major changes or differences that can really change. Like for example, the roof issue that we talked about before, if you’re in an area like here down in Florida, you know roofs, they, the insurance goes up dramatically as the roof gets older and it’s something that the buyer or the seller has some sort of weakened roof work done that was on permanent. And then you come along and they go, oh, it’s a new roof here and there. But when you’re looking no permit, which ever pulled for it, your insurance company, they’re not gonna send someone out.
Charles:
They’re not gonna consider that really done that roof. They’re gonna look through the building permits, number one, and they’re gonna say there’s no permit pull for it. It wasn’t legally done and it’s like it’s never been done. So these are important things that you have to take into consideration when you are reviewing properties like this and kind of what your next step is and determine how the property’s value will change. How will having un permanent work affect your financing? The property’s value will likely be lower than initially anticipated, and your lender will likely lower the amount they will lend. I mean, if you cannot rectify the issue, you might not be able to resell or refinance the property for the value you initially anticipated. Okay? And you gotta also understand if you are getting a deal on a property, because there’s issues when you sell that property, you’re gonna be passing that discount along to the next buyer as well.
Charles:
‘Cause They’re gonna want it. It’s like having a house under power lines or something like this. Whatever that discount is that you got initially got, you are gonna have to pass that along to the next people. So number two is assessing the un permanent work. After thoroughly reviewing the property, if you are still interested in moving forward, you speak to the local building department and in inquiry about the process for legalizing the work. And I would not initially mention the exact address of the property to them. I would want to see how they react and what they say. And this is also another thing too, keeping in contact with a contractor, and I’d wanna make sure that contractor that chosen to rectify this problems with, they’ve worked with the building department in that city. Building departments can vary greatly by town and some of them are much tougher than others.
Charles:
And knowing how to dealt with them, they’ve fixed un permanent work situations. This is stuff that you want to know before you sign with the contractor. Number three is negotiate with the seller. So once you have feedback from the building department, reach out to the seller and let them know what the permitting will entail. And I would, you know, pad the estimates from the contractors as well to cover any cost overs. And additionally, you know, for your time, right, because now you’re working almost as like a GC on this project or as a project manager as well, making sure it gets done. So you have to make sure you’re being compensated. You don’t wanna go on the whole for it, and you also wanna be compensated for you. And if you recognize the issue with the un permanent work, chances are other buyers are or have been as well.
Charles:
And this might motivate the seller to offer a discount to move on because like I said before, a lot of buyers are just gonna avoid it, right? They don’t know how to deal with it. They don’t know what it entails. They’re not gonna go through the legwork of it. They want something easy. But if you wanna put the legwork in, they’ve gone through this, they’re trying to sell the property, and you come, you tell ’em, I will work with you for this and it just has to be a discount on the price, they might go ahead with you. And suppose the seller decides to discount the property. In that case, the seller will most likely have you sign like an as-is sale disclosure, which fully discloses the un permanent work and states the buyer is fully assuming all associated risks and costs. Also, make sure to consult my real estate attorney throughout the process to best advise you on your legal rights and obligations and to protect you throughout the process.
Charles:
Really in your team, you’re gonna have the inspector that’s gonna find out what the problem is, or you as the investor’s gonna find out what that is, you’re gonna have one or two contractors that you’re working with as well in addition to your real estate attorney. It’s a whole team effort to fix these problems. But if you’re getting it at a significant discount, then it’s something that it makes sense now, once you purchase the property, you can start the process with your contractor and billing department to legalize the work. So I hope you enjoyed. Please remember, rate, review, subscribe, so we come to potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.
