Renting out units with unpermitted work?

Question

I bought a major fixer-upper in Chicago a few years back. I completed the rehab in 2021. I got it all done without a permit including electrical, plumbing, HVAC.

Okay. I know. I know. What I did was not exactly best practice but at the time I just couldn't tolerate the city getting involved, slowing everything down while getting rich off my investments. It's like every year there's new regulations and codes especially here in this corrupted city. Like if the tax hike wasn't enough, they use the codes violations to fatten up their pockets.

During my entire renovation I avoided by all means the city's attention. They would've made me hire an architect, a structural engineer and everyone up and down the ladder with certifications hanging from their office walls, and obviously, I would have never been able to complete my rehab.

So I get that that wasn't exactly legal but I'm confident that everything is up to code. I hired some knowledgeable guys to do the heavy intervention stuff (electric, putting in windows, etc.).

I've been renting out 2 of the units now 3. None of them have asked me about permits so I have a don't ask, don't tell personal policy. No issues so far but I was wondering what kinds of issues could come up in the future. One of my buddies had a similar set up but he got into a dispute with the tenant about a code violation, the tenant discovered the lack of permits and is threatening to go to the city. If that happens to me, what are the consequences? I think my case might be different because, like I said, I'm sure that I did everything up to code. Also, am I legally obligated to disclose to tenants the permit status of the building? They could look it up but I'd rather not steer them that way if I don't have to. Like I said, all the work is safe and up to standard anyway.

Jonathan R McLaughlin · Answer

Your insurance won’t pay any claims. Who are these “knowledgeable guys” anyway? Are they licensed? “Would have made me hire a structural engineer…” yeah, you know, to make sure what you do is structurally sound and safe. Sounds like a reasonable requirement to me.Cingrats, you built yourself a time bomb.

Dave E. · Answer

@Brandon Hill I was a contractor in Chicago and this happened to the owner of an apartment building that found out after the purchase that the previous owner did a bunch of work without permits. They brought the company I worked for at the time in to fix the problems since we had a good rapport with the city inspectors. Basically, they just had to do inspections to make sure everything was up to code. Most of it was no big deal, but we did have to open up some walls and ceilings so that they could make sure electrical was in conduit, fire blocking was in place, duct work was correct, etc. They didn’t get too carried away when we started opening walls because they saw things were done correctly. However, if they would have found a single issue, we would have been gutting the units in question to the studs on one side of every wall so that they could see everything. So that would be your worse case. Best case, you need to knock some holes in the walls so that they can poke around. Hope it never becomes an issue.

Chris Seveney · Answer

@Brandon Hill1. Selling the property could be a major issue, as you will need to disclose on the sales disclosure you did the work without permits2. If someone gets hurt and it’s because of faulty work hope you enjoy orange jumpsuits and cuddling next to bubba3. Even if you have insurance, you most likely are not covered4. If you get a mortgage and do not disclose could be considered mortgage fraud.

Andy Sabisch · Answer

I can sympathize with your challenges with the city. We lived in a town just outside Detroit a few years ago and the permitting process got so frustrating that we sold our primary residence and other properties and moved 5 miles outside of town and found the county process way easier and less restrictive in terms of what they wanted and what they actually knew if they showed up. Most of the time we paid the fee, they issued the permit and when we asked about getting the inspection, they asked if the work was done to code and if so, proceed . . in other words, simply pay the fees and we will come by if the coffee pot is empty. The county was 180 degrees apart. They were helpful, worked with us not against us and supported our schedule . . . projects went smoothly and far less frustrating.With that being said, if you have done work that bypassed permits, you have two potential liability areas. The first is if there is a problem and the city finds that the work was done without permits . . . you may find your insurance will not pay off leaving you open to liability claims. The other is if and when you sell and the buyer finds that work was done without permits resulting in the same problems. It sounds like you are willing to roll the dice but keep the downsides on your next project . . . and assess if Chicago is the right location for your renos.

Richard F. · Answer

Aloha,I cannot speak to specifics of ChiTown, but all of the liability is on you if someone is injured or worse due to poor workmanship. Regarding Code Enforcement, that is always a potential issue, with or without permitted work. A Tenant can complain and ultimately let the inspector in to look for problem areas. Once they are in, if ANYTHING looks wrong, you will likely need to tear it out and go through the whole process, and pay potential penalties, and possibly have the unit/property deemed uninhabitable, in which case you are also out the rent. Permits are public record, so easy to check online in many areas.In reality, depending on the jurisdiction, sometimes you can obtain a permit after the fact, paying a hefty "fee" which may be over the counter OR under the table. It all depends on local custom, and the individual inspector. As always, it is better to do things right the first time. Being proactive is always less costly than being reactive.

Danny Polanski · Answer

I wouldnt worry about it, as long as it is built to code.Get it rented and get that cash flow.

Andy Sabisch · Answer

While there is no obligation to disclose permit status (never had a tenant ask) but the bigger issue is that he may be subject to a liability suit of there is an issue and when he sells, he may be stuck with a huge repair bill to come up to code if the work was done without permits . . . permits are there for a reason (may be just to pad their pockets) but at least the city is on the hook for ensuring the work was done to code

Bruce Woodruff · Answer

@Brandon Hill A salient point that no one has caught is this: it doesn't matter if the work is 'up-to-code'. It doesn't even matter if it was performed by a State Licensed Contractor. No permits means no permits. Period. Dumb move on your part. You'd better pray nothing ever happens to that building or you're screwed. Even if something happens that was not related to your 'work' or lack thereof...

Todd Jones · Answer

Every liability mentioned here is correct regarding potential issues with selling, possible suit, insurance, etc.folks are more clever and sue happy. Now the big question, should you be worried?Answer: Yes but there are ways to help mitigate:1) Treat every tenant with respect but still be stern so they respect you.2$ Put x money aside from every monthly rent received for a very good attorney in case things go south or for redoing the whole thing when you’re discovered. Minor work, I can understand. But plumbing, electrical, and HVAC?These are the 3 most destructive areas in an home if done wrong. For these, “looks up to code” is not good enough. You can’t see what was done in the walls. A bad HVAC install w/o proper venting install could cause a carbon monoxide issue. I assume these folk’s weren’t licensed or insured else they would have pulled a permit. If you sell, the new owner will have to deal with the consequences of you not pulling permits, causing unnecessary stress on them. The karma debt isn’t worth it.In the “Real Estate Rookie “ podcast, they talk about an incident where they wanted to put electrical work on an extension of the home. But the extension was installed w/o a permit from the previous owner and it costed them $$$$.I get it. In my area, there are suburbs where pulling permits is unprofessional and subjective to how much they like you.But your approach will have you spending dollars to save dimes.Recommend changing your “no permit” perspective on other projects or it will cost you the cash flow you tried to save.

Zack Oberlies · Answer

I don't necessarily want to condone permitted work, but you should be alright. Having run a PM and contracting company in Chicago for the last six years, I can confidently confirm that quite a few investors take the same route. Where you could run into some road blocks is if you're renting any of the units out as Section 8. Then you're having a trained eye inspect the units periodically. Even then, not the end of the world...they may just ask you to fix it and its generally not too comprehensive. Again, not condoning unpermitted work, but I've seen the worst of the worst in Chicago and it really only becomes an issue if something is visibly wrong and reported by a neighbor or angry tenant. At the end of the day, tenant safety and liability is the priority, and if that's not an issue, you should be fine. To your note about the tenant complaints, (usually) the only two times I see tenants get involved in those matters are if their quality of life is affected by a building malfunction or if they're what I would call "professional" tenants. There are plenty of people in Chicago who know how to leverage landlords, withhold rent until the issue is resolved, not pay rent for 6-8 months, and move onto the next place before they can be evicted. Chicago is extremely tenant friendly as I'm sure you know, which makes it impossible to evict tenants quickly through the city. You can avoid the first part by just being an attentive landlord to maintenance issues (whether it's you or a pm company), and the second part can usually be avoided by being diligent in the application process. I personally wouldn't have had the patience myself, but I had a client who owned 150 units, and even after hiring us, chose to do a 30 minute interview with every applicant prior to accepting them. With that being an extreme end of the spectrum, I would just recommend a lease history and landlord verification along with the background check.