Case Study: Even the Beautiful Ones Can Be Ugly

Shanna Hardy – Consumer Protection Officer

A broker and his firm listed a property built in 1960, and advertised it as being totally renovated – including all new flooring, roof, HVAC system, kitchen cabinets and countertops, vinyl siding, remodeled bathrooms, windows and doors.  On the Residential Property Disclosure, the seller marked “no representation” for all questions.  This property had all the beautiful finishes that a newly constructed home would have.  A first time homebuyer discovered the beauty and was anxious to place an offer.  Her offer was accepted and the property went under contract.

During the due diligence period, the buyer performed all standard inspections.  The inspector noted that certain renovations did not appear to have been performed by licensed contractors and that further investigation was recommended.   An inquiry was made to the seller about the renovations. In response, the seller stated that all work was cosmetic and only cost $26,250 which, he said, fell under the $30,000 threshold to require permits.  Both the listing and selling brokers accepted this answer without question.  Closing couldn’t come fast enough for this buyer, who was excited to move into her new home. 

After moving into the home, the buyer reported having very serious and costly problems.  The first problem occurred when she noticed termites in the bathroom.  Then the new HVAC system stopped working.  The buyer called a technician who reported that not only had the system overheated and the interior components melted, nearly causing a fire, but the electrical wiring in the crawl space caused burn marks on the floor joist.  Next, the vinyl siding began buckling and upon further examination by a general contractor, it was discovered that the newly installed vinyl was nailed on top of old deteriorated wood siding.  And, if that wasn’t bad enough, during the night, the new kitchen cabinets detached from the wall and crashed to the floor.  The buyer reported over twenty-one claims to her insurance company during the first twelve months of ownership.

Due to the overwhelming amount of insurance claims, the new homeowner’s insurance company conducted its own investigation and discovered that none of the renovations were performed by licensed contractors, nor were any permits pulled for the work, which, contrary to the seller’s assertions, were required for replacement of the HVAC system and remodeling the bathroom.  The homeowner’s insurance company cancelled the insurance policy for the property. 

The listing broker and his firm failed in their duty to properly discover and disclose material facts about this property before listing.  The seller performed significant renovations that included work requiring plumbing, electrical work, mechanical, and building permits. The listing broker failed to confirm that his seller-client obtained the proper permits ensuring the work was performed in a workmanlike manner. The listing broker’s failure to disclose the material fact that the renovations were unpermitted caused financial harm to the buyer of the property. The buyer agent was aware of the significant renovations and failed to confirm whether the renovations were permitted or discuss the issue with the buyer. The listing broker and buyer agent were both disciplined and agreed in a settlement to reimburse the buyer for expenses associated with properly permitting and repairing the property.  

Remember to ask questions.  $30,000 is the threshold for hiring a General Contractor, not whether any permits are required or whether a licensed contractor is required for a particular project. Permits are often necessary for HVAC changes, electrical improvements, water heater replacement, and changes to internal structures such as removing walls. Additionally, a homeowner may decide that costs can be controlled intentionally to keep a project below that general contractor threshold, regardless of whether the work being done is good quality. When listing a property, you should ask: Who did the repairs and renovations? Do you have invoices or receipts? How much were the repairs?  Were permits obtained?  Were they required?  Asking questions on the front end can save you and your clients lots of headaches later on.