In a recent webinar, Uncovering Unrecorded Debt and Municipal Liens in Every Real Estate Transaction, we discussed the importance of municipal lien searches.
A municipal lien search helps fill in the gaps by finding hidden would-be liens in the pre-closing period. It reveals details about county and city fees, fines, and other related issues that haven’t hit the public record as a lien yet.
However, permits are a thorny subject when it comes to this step in due diligence. Many real estate professionals avoid dealing with them at all costs as it can open up a can of worms and extra work.
While no one wants to spend time on the phone or at the local building department’s office, taking the time to provide this additional information to clients can help protect the new homeowner’s investment and a real estate professional’s reputation.
What is a full municipal lien search?
At PropLogix, a full municipal lien search will include:
- Three years of the most recent tax information
- Public Special Assessments
- Utility information
- Code violations
- Open/Expired Permits
When you order a municipal lien search, you can mix and match what information fits the buyer and lender’s needs and the type of deal. Our service fees for ordering permit searches with our municipal lien searches won’t change, but there may be additional municipal charges.
Does title insurance cover open or expired permits?
No, title insurance doesn’t insure against open or expired permits, and title agents aren’t legally obliged to search for these issues before closing. A title search won’t show any open or expired permits, but a full municipal lien search will.
Buyers who plan to make improvements or believe recent work was done on the property they are purchasing would benefit from asking their real estate agent or title company whether or not they will search the permit history.
What can happen when a property has open or expired permits
Buying a property with open or expired permits or without doing a thorough search can lead to frustration and unexpected expenses. Here are few potential consequences:
- Delays and extra costs when pulling new permits
- Mechanic’s Liens
- Legal liability
Delays and additional charges when pulling new permits
Typically, a permitting authority requires a final inspection to close out a permit officially. Homeowners entrust that their contractors will complete this crucial final step, but it doesn’t always happen. A municipality rarely issues any notice to the homeowner when the contractor fails to do this, leaving homeowners or diligent title agents to discover the problem upon the home’s sale or when the homeowner decides to remodel.
In some cases, if the work is completed and presents no safety hazard, paying fees and penalties and requesting a final inspection may easily resolve the problem.
But some cases may not be that simple.
Matters can be complicated when:
- The original contractor didn’t complete the work
- The original contractor is no longer in business or can’t be located
- Building codes have been updated since the permit was issued
- A new contractor must be found willing to complete the work
If the problem must be resolved before the sale of the property, it can cause some significant delays for the closing.
A mechanic’s or contractor’s lien can be placed on a property when they don’t receive payment for a project because they have a legal interest in the improved property. An official mechanic’s lien will show up in the title search, but the time range from when a builder does work or supplies materials for a job until the time they have to file a lien for non-payment varies widely. It can be up to six months in some states.
Unlucky homeowners may find themselves in a court battle over a bill from someone they have never met several weeks or even months after closing.
In “unpaid balance” lien states, only the direct contractor has the right to place a lien on the property when the property owner owes money. Other states are known as “full price” lien states, meaning that any party contributing work or materials to the property has a right to file a lien against the property.
If you own a home in a “full price” lien state, you could end up paying twice for work your direct contractor doesn’t pay the subcontractors. New owners could end up paying for work they thought was settled with the previous owner.
Legal liability and title claims
Timing is everything when it comes to catching a mechanic’s lien before issuing a title policy and taking the proper precautions to avoid a title claim or lawsuit. That’s why one underwriter required a title agency to provide a statement that no mechanic’s liens or evidence of commencement of work before issuing a title policy on one commercial property planned for condominium development.
The complexity and financial liability with open permits becoming mechanic’s liens in commercial real estate is heightened.
When aerial photos showed evidence of work, the underwriter filed suit against the agency for breach of contract. The judge agreed that the agency failed to abide by the “usual and customary practices and procedures” in the industry, to adhere to “prudent underwriting principles,” and to “follow the manuals, underwriting bulletins, and/or instructions” provided by the underwriter.
In cases of residential real estate, a new owner may bring lawsuits against any of the professionals involved for failing to disclose a property defect when they’re left with liens or other permitting problems.
Resolving permit problems
In Florida, new rules on building permits make the process of searching for and remedying open permits easier. The new statute encourages municipalities to:
- Send written notices to homeowners 30 days before a permit expires
- Allow a property owner to close expired or open permits by hiring a new contractor if needed
- Clarifies the new contractor is only liable for their own work
- Administratively close out permits that are more than six years old if no safety hazards are present.
- Limit the fees municipalities can charge for a permit history search based on the parcel number.
This is great news for real estate and title professionals who have been wary of ordering these searches in the past because the results could lead to closing delays, renegotiations, and more time spent on resolution.
At PropLogix, our property analysts take the time to ask municipalities what steps need to be taken when open or expired permits are found. If instructions aren’t received before your closing date, the report will be delivered, and the analyst will continue to follow up daily to get the instructions to send them separately. There is no additional service charge for this.
While the resolution of open or expired permits may not be a quick fix, we’re here to provide the information you need to avoid mechanic’s liens, title claims, lawsuits, or upset clients.