RECR and remodeling

The buyer has a real estate condition report (RECR) that states the seller did work to the property; but the seller didn’t pull permits. What does that mean to the property or transaction?

When work is done without permits, the municipality dictates which penalties may apply and what work needs to be done.

If the work was done without a permit, the municipality may require the permit still be pulled. This typically results in a penalty or fee for not pulling the permit in the proper time frame, such as, for example, doubling the permit fee. However, the more serious concern would be whether the municipality may require the new owner to remove or take down some of the remodeling. For example, the inspector reviewing the electrical work may need to have the walls and finished product removed to view the electrical work. Obviously, this can be an extremely high cost, and the new homeowner would be faced with finishing the project again, essentially repaying for the work. And of course, there is always the possibility that something is not up to code and needs to be fixed or replaced, even if nothing else needs to be removed to inspect it.

How are permits referenced in the RECR? 

The most recent statutory changes to the RECR include the following:

E6. Are you aware of any remodeling, replacements, or repairs affecting the property’s structure or mechanical systems that were done or additions to this property that were made during your period of ownership without the required permits?

A seller is also asked to disclose whether the seller is aware that remodeling was done.

E2. Are you aware that remodeling was done that may increase the property’s assessed value? 

The seller’s RECR indicated the seller performed work in the basement without pulling permits. What can the buyer consider when drafting an offer in this situation? 

Based on the seller’s disclosures in the RECR, the offer may be drafted to require the seller to:

• Obtain the necessary permits before closing.
• Conduct inspections and obtain compliance certificates, if any. 
• Or pay for any costs to repair, replace or remove work done, as the case may be.

While a buyer may purchase a property knowing the seller did not pull the required permits, the buyer is subjecting himself to potential fines and expenses. Therefore, the buyer may choose to negotiate a lower price based upon the and/or increased assessed value based upon the improvement. Therefore, the buyer may choose to negotiate a lower price based upon the potential increased costs.

If the offer does not contain such provisions, the broker may document the fact that the buyer was informed of the potential risks and was referred to the proper resources for information and investigation. 

Broker investigation

The buyer asked the broker to investigate and report on the impact of no permits. Does the broker have to investigate?

When such questions arise during a transaction, best practice would be to refer the client directly to a reputable source for required factual information because an agent taking on that role may incur liability if the information provided by the agent is inaccurate or incomplete. The real estate licensee does not have an affirmative duty to investigate nor can the licensee engage in the unlicensed practice of law.

A Wisconsin licensee can be found liable for making inaccurate statements to the buyer that appear to the buyer to have been made from the broker’s own personal knowledge. In Wisconsin, the law provides that a buyer should be entitled to rely on the factual statements made by a professional. Thus when a licensee receives information from the seller, the municipality, building inspector’s office or another third party, and then restates the information personally in the MLS data sheet, in advertising or directly to the party as if it were fact, the licensee may be held responsible for the accuracy of the information. Accordingly, REALTORS^® are recommended to specifically attribute information to its source, provide explanations and qualifiers relative to the information, and/or use general disclaimers. Disclaimers may not, however, provide certain and absolute protection in all cases. The licensee should not give the buyer legal advice regarding the transaction. Doing so may expose the licensee or the licensee’s firm to potential liability. 

Disclosure obligations

What tools are available to help sellers and licensees with their respective disclosure obligations? 

A prudent REALTOR^® would provide the seller a copy of the WRA’s Listing Questionnaire Regarding Title Issues form. Question 2 on this form asks the seller to answer yes or no to the question:
“Remodeling or construction work without proper building permits?” The questionnaire is a good way to help call to mind items the sellers might otherwise forget when filling out listing paperwork. 

When the seller completed the RECR, the seller stated he hadn’t pulled permits for work but didn’t include that information in the RECR. What is the listing agent’s duty to disclose? 

You have heard this time and time again: real estate licensees have a duty to disclose material adverse facts and information suggesting material adverse facts. If the seller’s disclosure is incomplete, inaccurate or inconsistent with the licensee’s observations and knowledge, then a written material adverse fact disclosure would be provided to the seller and potential buyers.

Is there really a risk for the seller who does not disclose information about remodeling without permits? 

Yes. In the 2009 Wisconsin case Shister v. Bipin, the sellers were found liable when, after closing, the buyers discovered the sellers had remodeled the basement without permits for the repairs. The assessed value increased by nearly $60,000, which resulted in a total of $4,408.34 in increased property taxes over a period of three years, and the buyer also had to pay $2,143.20 for retroactive remodeling permits.  See “The Seller’s Dirty Little Secret,” in the February 2015 Wisconsin Real Estate Magazine: www.wra.org/WREM/Feb15/Secret.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.