Rental Conversion Issue

[jda1984]

I just received a call from a housing inspector who walked through our duplex last week on a routine inspection (first since we've owned it).  He informed me that our duplex is not a legal duplex.  Apparently, someone took a permit to convert the property back in 2000, but never called to have the inspection done.  We bought the place in 2008 in a foreclosure.

Our city has inspections when houses are bought/sold and this didn't come up then (2008).  Our city has rental licensing and has never denied my application for 2 unit at this property.  The title company did not catch this.

The inspector says I can either restore the property back to single family or finish the conversion.  I'm not sure what either option would cost at this point, but unfortunately I can't legally do the work myself since the city requires all permit required work on duplexes to be done by a licensed contractor which I am not.  Several years ago when more people were underwater, new ordinances were made to increase the hurdles for converting property, so I'm not sure if those are still in effect and what steps need to happen.

Would the title company be responsible for some of this since they didn't catch it?  The listing agent since it was listed as a duplex (and we would NOT have found it or bought it if not listed as such)?  The city since they approved rental licenses for several years for 2 units though the conversion was never approved?

What would you do in this situation?  We paid $116.5k back in 2008 for this.  Current rents are $1165 and $900 /month.  PITI is ~$975/mo.  Obviously losing one unit makes this less attractive, but Part of me thinks I should just sell and make this someone else's problem.  Part of me wants to hold someone accountable for this screw-up.  Other thoughts?

Thanks!

[Beaker]

I'll be really interested to see what some of the more experienced folks around here have to say. But a few things that jump out to me....

Would the title company be responsible for some of this since they didn't catch it?

Wouldn't it be the title insurance, technically? Seems like a good time to haul out a copy of that insurance policy, which was probably in your closing documents, and see what exactly it covers. I don't think they usually look at permits, but if it was in the records as a SFR rather than duplex you might be able to use that for a claim...?

Part of me thinks I should just sell and make this someone else's problem. 

I would guess this qualifies as material information about the property that you would have to disclose to a potential buyer, who would then adjust the price accordingly. Since you're on the city's radar now, they'll probably mention it in the sales inspection, so I doubt you could get away with "accidentally forgetting" to mention it even if you wanted to. All the retail buyers are likely to be at least as scared of this as you are, so you'll probably get people that look for distressed (ie, cheap) situations.

Part of me wants to hold someone accountable for this screw-up.

Well, the party actually accountable is whoever did the conversion, but good luck getting them on the hook 15 years later...

[ShoulderThingThatGoesUp]

Did the inspector say what work is required to finish the conversion? Surely it can't be much labor if you're successfully renting both units.

[babysteps]

Similar thing happened to us 10 yrs ago or so in CT.  We had a small amount of work done and got the certificate - was well worth it.  Check with professional legal advice, but I'm not sure title insurance helps in this issue - it is still your property with clear title, just isn't the use you thought it was.

We learned the hard way to check with the building dept ("code") as well as the assessor for current use of a building in terms of # of units.  At least in NY and CT, our experience is that code's view is what applies...

[jda1984]

Thanks for the responses. 

Babysteps-glad to hear it wasn't much work.  I don't think it would be much work in this case, but more paperwork/fees.

Beaker-I would disclose the current status of the property to potential buyers.  I'm just not sure I want to try to unravel the legal mess myself.  It's probably worth doing, but as our family grows I have less and less time to devote to landlording (just had our third kid in January).

Thanks again for the feedback.

[adamcollin]

This seems annoying. You need to consult a real estate agent to guide you properly.

[zephyr911]

This seems annoying. You need to consult a real estate agent to guide you properly.

As a real estate agent, I believe you meant to say "real estate attorney". Agents are good at marketing your house, or helping you find one. When the shit hits the fan and fingers are pointed, you want a lawyer. For us, law is like construction, surveys, radon, and many other subjects: we learn enough to not sound like complete morons, but we defer to experts for the details.

[arebelspy]

The inspector says I can either restore the property back to single family or finish the conversion.  I'm not sure what either option would cost at this point

Step 1: Find out.

If it's gonna cost a few hundred bucks to finalize the conversion/get it inspected, it's probably a no-brainer.

But gather relevant data before making any sort of decision.

[jda1984]

Thanks for the further responses.  It turned out to be as easy as possible.  I got a call late last week from the same inspector stating that from the city's records the work was completed before 1970 so they wouldn't hold me responsible and they'll fix the paperwork on their end to make it a 2 unit property.

I'm still somewhat confused as to why it took more than 40 years to catch this, particularly since they've been issuing annual rental licenses for 2 units for more than a decade, but in the end it worked out well for me.

[arebelspy]

Thanks for the further responses.  It turned out to be as easy as possible.  I got a call late last week from the same inspector stating that from the city's records the work was completed before 1970 so they wouldn't hold me responsible and they'll fix the paperwork on their end to make it a 2 unit property.

I'm still somewhat confused as to why it took more than 40 years to catch this, particularly since they've been issuing annual rental licenses for 2 units for more than a decade, but in the end it worked out well for me.

Sweet!  Congrats!

[zephyr911]

Thanks for the further responses.  It turned out to be as easy as possible.  I got a call late last week from the same inspector stating that from the city's records the work was completed before 1970 so they wouldn't hold me responsible and they'll fix the paperwork on their end to make it a 2 unit property.

I'm still somewhat confused as to why it took more than 40 years to catch this, particularly since they've been issuing annual rental licenses for 2 units for more than a decade, but in the end it worked out well for me.

Awesome!

[CashFlowDiaries]

Haha, as i was reading I kept thinking what a crappy situation this was but then I felt warm and fuzzy about it when I got to the end.  Congrats on that.

Question though, why was there an inspector inspecting your house to begin with?  Are you doing section 8 or something?  Is this something specific to your state? I have 3 rental properties and have never had my house inspected other then when I purchased them.

[babysteps]

...Question though, why was there an inspector inspecting your house to begin with?

In our experience, government inspections are governed by local (City or Town) regulations.  Some areas require *any* rental to be inspected or rental certified (lots of folks ignore this, but if you ever need to enforce your lease, good luck).  Some areas require rental registration (no inspection).  Some areas the fire department inspects all x-unit and above units annually and 2-to-(x-1) unit buildings on a random basis.  Some areas require nothing special.

Section 8, Child Protective Services, Health Department or tenant complaints among other things can all trigger "extra" code inspections - if the building is safe and construction has been done with permits this is no problem (assuming no 'interesting' changes in regulation); if not, maintenance/upgrade costs can rise in weird and wonderful ways compared to what you were expecting.