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News  When Covert Remodeling Comes Out of the
Woodwork |
August 16, 2003 |
 |
Starting a major home-remodeling
project without the proper building permits might save you
some filing fees, but it might also cost you your mortgage.
This year's low mortgage rates and the record
refinancing boom provided increased opportunities for
complications, particularly for people who took out cash when
they refinanced or those who secured home-equity loans
specifically to pay for renovations.
When a loan is
refinanced, the bank needs an appraisal to determine the worth
of the property that will secure the loan. While
computer-guided "streamlined" appraisals have become more
common, a live appraiser still evaluates many properties. And
if the appraiser notices illegal renovations, that can grind
the whole process to a halt. The reason: There can be lots of
money at stake, sometimes hundreds of thousands of dollars of
equity being transformed into cash. Prudent lenders want to
make sure the physical condition of the property merits the
money.
Some lenders also have become more vigilant
about large home-improvement loans, looking at properties
throughout the remodeling process. They will definitely send
out an appraiser for a major evaluation before the final check
is cut, said Wade Craig, the Washington regional manager of
home repair and general contracting for Owens Corning. If
you've cut corners or performed work not included in the
permit, there will be issues.
"This can hold up the
mortgage process," Craig said. "It can hold up the homeowner
and just cause a nightmare."
Silva Mirzoian, real
estate broker and founder of Mirzo International Inc. in
Beverly Hills, Calif., vividly remembers one recent remodeling
nightmare that forever changed the life of her client.
A lender foreclosed on the loan of a TV producer after
he tried to refinance his luxury home. The producer, who
worked at home, had decided to remodel his 4,000-square-foot
abode. But he didn't want to hassle with the local permit
process, Mirzoian said. So he just hired some contractors and
began remodeling. He added a 500-square-foot room here, a
1,000-square-foot space there. Soon he doubled the size of the
house, all without local-government consent.
When he
tried to combine several different loans used for the various
remodeling projects, his primary lender learned of his
remodeling misdeeds and chose to foreclose, reckoning the
value of the home was harmed. "It's very sad -- but I see that
a lot: clients who remodel the home without the proper permits
and approval from the city," Mirzoian said. The problems arise
when they try to sell the home or refinance the home. The
square footage is more than what the tax rolls show it to be.
Because they expanded in bits and pieces, they figured that
nobody was going to notice."
The do-it-yourself trend
has exacerbated the problem. Many homeowners don't know when a
project requires a permit and when it does not.
"People are used to maintaining their properties on a
weekly basis. Many times, it wouldn't occur to them that if
they were replacing the front steps, they might need a
permit," said Amy Johnston, founder of the Dreamhouse
Institute, a consumer advocacy organization that helps
homeowners through the remodeling process. "It depends upon
where they live."
Mortgage lenders say homeowners
should first consult with local planning officials when
considering a remodeling project that costs more than $500.
Call the city or county planning department and find out what
the proper procedures and processes are for obtaining a
permit. "Cities are usually very helpful with that," said Sue
Marshall, president of InnovRE, a real estate consulting
company and mortgage lender based in Minneapolis. "People
should use that to their advantage."
Johnston added:
"People sometimes think it is better to ask for forgiveness
than permission. But it usually is not good. Planning boards
have no financial standing in the project -- unlike
contractors or architects. They can give you support and ideas
and ways to save money."
Even if you are working with
a contractor, make sure that all the permits and other
paperwork are obtained and the proper procedures are followed.
Contractors sometimes neglect to obtain the permits
themselves. That can cause big headaches later on when trying
to sell.
Linda M. Scalia, a real estate agent with
Century 21 Agawam Albertson Fine Homes and Estates in New
York's Hamptons, recalled how a client of hers bought a
property and renovated it, then two years later found a buyer
willing to pay double the earlier purchase price. "He had the
building permit, but he didn't have a certificate of
occupancy," Scalia said, noting that the buyers' bank demanded
to see a certificate of occupancy from the seller. "This came
up when the buyers were going for financing."
This led
to a mad-dash scramble by Scalia, who furiously searched for
the contractor and his subcontractors to obtain the right
paperwork to ensure that the certificate of occupancy could be
obtained from the local authorities. "It took three months to
close the deal," she said.
Another time, some of
Scalia's clients renovated a small cottage near the
waterfront. They added a bathroom and a bedroom. "But they
could not sell it with those additions," she said. "Before
closing, the lender for the buyers made them take out the
toilet and cap it and take out all of the bedroom upgrades."
This may seem heavy handed, but Scalia said the bank believed
there would be trouble with property assessments in future
years due to the illicit remodeling work.
Johnston
remembers a case where a couple she was working with added a
deck to their waterfront home -- then had to hold a "deck
destruction party," complete with sledgehammers, to demolish
it after the local building inspector learned of the illicit
upgrade.
"Their friends came out and destroyed it for
them," said Johnston, author of the forthcoming book, "What
Your Contractor May Not Tell You." "It was awful. It was a
terrible day. They had resigned themselves so we tried to make
the best of it."
Mortgage lenders are not pleased when
this happens.
"Doing the right thing, following the
right procedure, is very important, especially if you are
looking down the road to sell the home," said Bob Imperato,
senior vice president and group manager of ABN Amro Mortgage
Group Inc. "People are very aware today through all the
disclosure processes of all the things that were done there."
Another threat to the integrity of your home or your
financing is shoddy work by a cheap contractor. If the work is
not up to code, there could be difficulties, even if a permit
was obtained for the project.
If you're taking out a
second mortgage or refinancing the first, the bank's appraiser
might put a stop to the loan if he notes the bad work. Or,
when it comes time to sell, a buyer might not be able to get
financing.
Before Imperato will sign off on a
home-improvement loan, he said he insists that the
specifications for the upgrade are explicitly spelled out in a
written contract between the homeowner and the contractor.
This includes the building materials, the scope of work and
the start and end date of the project, he said. "When we go
out to do our inspection, we know exactly what we're looking
for," he said.
InnovRE's Marshall, a mortgage lender
and consultant, said that lenders are becoming more vigilant
today about ferreting out improper upgrades.
"A lot of
lenders have been burned," she said. "They don't want to be
the last to know."
© 2003 The Washington Post Company
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