BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Advertising Nonconforming Properties
Q: I am a listing agent on a home which we recently put on the market. The seller told me that he had remodeled the lower level into a studio apartment without permits, and rents it out. The zoning is R-1. I think I should let buyers know of this nonconforming use, so I plan to put the following language in the MLS and in the property brochure: “Bonus nonconforming in-law unit. Legality not warranted by agent.” Is this the right way to do this?
A: In a word, “No.” This is typical language which agents often use to describe such a unit or improvement. However, words like “bonus unit,” “nonconforming,” “in-law unit” or “unwarranted” may signify to other agents that such a unit or improvement is not legally permitted, but such terms are not specific enough to let buyers know the true illegal status of the unit or improvement.
A unit or improvement can be illegal for a number of reasons:
1. The work was done without permits.
2. The work was not done to code.
3. The unit is not a separately rentable legal unit.
Or, there could be a combination of: (a) the work could have been built to code, but no permit was ever obtained; (b) the work could have been built to code and with permits, but modified later without permits and/or not to code; and/or (c) a legally-constructed “in-law” unit was built for use as a separate living area on the property, but the property is not zoned or approved for a separately-rented unit.
You are right that you need to disclose that the work was done without permits and that this is not a legal rental unit. Follow these tips in your advertising to create a true picture of what the buyer is buying
PRACTICE TIPS:
1. MLS: If you list a property with a nonconforming unit and/or unpermitted work, make those statements only in the confidential remarks of the MLS viewable only by agents. Otherwise, these remarks will likely be printed on an MLS public website.
2. ADVERTISING MATERIALS: Do not put the nonconforming use or unpermitted work in the property brochures, flyers, websites or other places where it can be widely read by the public.
3. The reason for this is that a neighbor may see the MLS posting or pick up a flyer at an open house and, based on that information, turn the owner in to the city or county. This could well trigger an inspection by the building inspection department, a red tag violation, and maybe an order to shut down and remove the rental unit. This, in turn, could cause the seller to have to evict the tenant, which could result in a violation of the tenant’s lease agreement (causing even worse consequences in rent-controlled jurisdictions).
4. DO NOT use vague disclaimers such as: “Legality of lower unit is not warranted.” This is not a sufficient disclaimer to put a buyer on actual notice of the illegal, nonconforming use and/or unpermitted work.
5. DO NOT use industry terms such as “in-law unit” or “bonus room.” A buyer will likely allege that they did not know what that actually meant.
6. DO advise seller to put that disclosure information in the TDS and in the purchase agreement – clearly and with a proper explanation such as: “Remodel of lower unit done without permits. Lower unit is not a legal rental unit.” If this information is also added to the purchase agreement itself, the buyer cannot later claim that they did not see the disclosure and were unaware.
7. If you learn information about the illegality or nonconformity of an improvement or unit, or are expanding on what has been previously disclosed based on information that you have learned, do so in the “Attribute and Disclaim” format: “Seller/Neighbor/Third Party has advised agent that the rental unit is not a legal unit. Agent has not and will not verify this information. Buyers should conduct their own investigation and satisfy themselves prior to removing their inspection contingency.”
See Weekly Practice Tip “Attribute and Disclaim”
8. DO give the TDS to the buyer early in the transaction, or even before an offer is written, so that buyer doesn’t incur expenses for inspections and loans only to discover the illegality or nonconformity, which could be a deal killer. Buyers get upset if they expend funds, and only then are told about an issue that causes them to want to cancel.
9. If you prepare a work sheet on the property showing the cost of owning this property, do not include the rental income from the illegal unit. If the building inspection department shuts down the unit, the buyer will lose this income and blame you.
10. As a buyer’s agent you have a fiduciary duty to place yourself in the position of the buyer and consider the type of information required for the buyer to make a well-informed decision. If you see a vague or incomplete description of any improvement, alteration or unit, bring it to the buyer’s attention and assist them in obtaining a clear picture of what it is they are purchasing. Document the file.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2017 04/28/17