Title Problems: What Would You Do?

Renovation Headaches

Presented by Kay M. Creasman, VP & Virginia State Counsel

BANG! The newly renovated home you just purchased days ago explodes. Good news: no one was home at the time, so no one was injured. Bad news (beyond a destroyed home): the fire marshal arrests you and your spouse for suspected arson. WHAT IS GOING ON!?

The facts above are based on a true story from 2024*. A home was renovated by a flipper, someone who buys homes that need to be fixed up and resold within a matter of months. Unfortunately, no building permit is needed when the exterior walls, interior walls, or any electrical, gas, mechanical or plumbing matters are not being moved/changed. In this case, the flipper replaced the stove and connected the gas incorrectly, leading to the explosion, as the gas never completely turned off. Significant other changes had been made to the residence without a permit or inspection as well.

We’ve been told of one Class A contractor who is considering surrendering his license, dissolving his company and simply working on homes he owns in his own name. As a general rule, a homeowner can work on their own property without a license as long as they have proper permits. This contractor needs to read the rules more carefully. Permits and inspections are needed. Contractors and flippers often don’t obtain the permits because the inspections take too long and it all costs too much. But how much more expensive is it if someone is injured because of poor quality work that was not permitted nor inspected?

Why bring this up in an article on title insurance? It’s not a title insurance issue--other than to make sure no mechanic’s lien can be filed and to decline to issue an ALTA® Homeowners Policy if no permits and final inspections were obtained. Correct--it is NOT a title insurance issue, but it may well be a settlement agent issue. Settlement agents need to be aware of the potential for problems in renovation transactions. Regardless of whether it’s reasonable or not, consumers expect settlement agents to look out for them, just as they expect their real estate agents to look out for them. Settlement agents need to make sure to inform the purchasers to make inquiries about recent renovation work and require the seller to provide permits and inspection reports if it’s significant to the consumer. Most people just assume the work has been properly done. It’s an erroneous assumption in many cases.

One precaution settlement agents can take in determining if renovation work has been done is to compare the real estate tax records with the listing agreement to determine if “new appliances, countertops and upgraded bathrooms” are a selling point. If yes, require the permit inspection reports showing the work had proper permits and has passed final inspections.

Our mechanics lien requirements have been amended to include renovation work. With any construction/renovation/fix-up work that’s been done we require the following:

1. Owner to provide:

• Summary of the work that was done;
• Estimated expenses; how much was spent on goods (tangible personal property) and how much was spent on labor (paid to others or the owner itself);
• Purchase price of the property;
• Date of purchase;
• Contract sales price;
• Statement as to what permits were required and a copy of the final inspection report(s), (for example electrical, HVAC, plumbing, moving a load bearing wall, etc. ); and
• Lien waivers or evidence of payment such as a credit card receipt for all goods or labor that cost $15,000 or more.
• NOTE: upon review of the matters above additional requirements may be made

2. Owner to sign:

• Statutory affidavit of payment (MLA 6-23);
• Old Republic Title indemnity agreement (MLA 7-23)

3. General Contractor, if not owner, to sign a lien waiver saying they have been paid in full.

4. If there are no final inspections from the locality for permits that were issued or should have been issued, then only a standard owner's policy may be issued. 

*As for the rest of the story above, the purchaser works in the title insurance industry.