New Funding Resources 
When it comes to planning construction costs for your rehab project, one of the main factors to consider is whether you need a construction permit or not. Pulling permits requires opening your property up to an inspector who might ask you to bring many areas of your home “up to code.” This adds extra expenses to your renovation. On the other hand, not getting a permit might result in retroactive changes to the areas you’ve already completed. As the result, not only do your costs increase, you might also experience major delays. One of the worst mistakes a rehabber can make is to plunge in the house flip process without carefully considering whether to get a construction permit or not.
Here are three serious mistakes every investor should avoid when deciding on permits.
IGNORING RENOVATION SCOPE
We had a client who told us that his house flip needs light updates which he planned to do himself. So far so good. He then submitted a scope of work that included replacing baseboard heating with a central air system. He also planned to move the gas stoves around (along with the gas pipes). Alarmingly, he still considered his renovation “cosmetic” and was intent on doing them himself. Needless to say, such a scenario is literally “explosive.” This is exactly why regulations exist. They protect inexperienced or irresponsible folk from harming themselves and others. If your scope of work requires major renovations, new additions, overhaul of the property electrical systems or has anything to do with gas, please do a responsible thing and get a permit.
On the other end of the spectrum, it’s safe to assume that true cosmetic repairs such as new paint, carpets, flooring and appliances might not require a permit. However, there is also a gray area in between that poses the most challenging questions. The best way to tackle it is to make well-informed decisions and be prepared to live with their consequences.
NOT TALKING TO EXPERTS
When deciding on whether your house flip project needs a permit or not, talk to the experts. Such experts include your contractor, real estate agent, an experienced rehabber and your private lender. It’s also a good idea to call your city or county and ask them your questions anonymously. If you decided not to pull the permit, you should be prepared for a possibility that the county will place a stop work order on your project. This is another compelling reason NOT to hope for the best case scenario when evaluating your costs. Also, this is why it’s essential to have sufficient reserves to cover additional costs without causing further delays.
One more thing to remember: once an inspector is in the property, chances are he’ll be taking a close look at the entire house – regardless of what he came to inspect. If he sees any improvements that aren’t cosmetic, the inspector can require them to meet the code.
IGNORING CONSTRUCTION PERMIT REQUIREMENTS AND CULTURE IN YOUR AREA
The permitting requirements vary greatly by area. For example, it’s safe to assume that a house flip in Washington, DC would need a construction permit. This is why renovations in DC are notoriously expensive and lengthy (but profitable nevertheless). Historically, the Maryland counties have been more relaxed, but that appears to be changing. Maryland inspectors are becoming more proactive in handing out the stop work orders and requiring permits for any type of non-cosmetic improvements.
The bottom line is that you can take a chance and not pull a permit. Unless an inspector catches you in the middle of a major remodel on a random drive-by or your neighbors complain, you may get away with it. However, if you are taking this risk you should be aware of its consequences. You must be prepared to meet the additional expenses if required.
New Funding Resources is a private mortgage lender doing business exclusively in Maryland, Washington, DC and Virginia. In business for over 11 years we work closely with the DC area rehabbers to help them make money and manage their risk.
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