How City Fines for Code Violations Affect Lenders and Property Owners

Both property owners looking to sell and lenders need to be aware of how code violations affect them.


Code violations may be the result of improper construction, maintenance, or failure to obtain permits.

Code Violations Can Occur for Many Reasons

First, what are code violations? Generally, they involve violations of city laws or regulations of some sort. They can cover a number of potential issues with buildings. Cities, local municipalities, counties, and states all potentially have jurisdiction over areas in which code violations can occur, depending on where you live.

Code violations can occur if, for example, a building has not been properly maintained. A decaying roof or insufficiently maintained electrical wiring can trigger code violations, because they may indicate that the building is not habitable or may be dangerous to inhabitants. Pests can trigger code violations, because conditions have led to them being widespread, and thus a public health hazard.

Violations can also occur if property owners have not obtained necessary building permits. This type of code violation can also happen for many reasons. A property owner building out to the property line, for example, is not always allowed by the city. If a property owner added to the original dwelling, they may be unaware that code was violated.

Code violations can occur because a later addition is not allowed in a municipality. Adding a bathroom to a garage to make it a dwelling, for instance, is often prohibited.

Finally, unpaid city property taxes or homeowner association (HOA) fees are violations that will be on record if a house changes hands in a sale.

Issues triggering code violations must be resolved before a sale can occur -- and many lenders require this before writing a mortgage.


Issues of Code Violations in a Sale

Regardless of the cause, though, code violations are an issue in sales, for several reasons.

First, code violations can affect the title. A seller will not have a clear title if there are existing code violations. This means, of course, that a seller will not be able to pass on a clear title to a buyer until the violation is officially remedied. This requires that the condition triggering the code violation be cleared up, which may require additional construction, permits, payment of outstanding monies, or all three. A buyer will not be able to get title insurance until this is resolved.

Second, liens can be placed against the property if there are fines or outstanding taxes or fines against the property. Sixteen states and the District of Columbia have the power to place a “super lien,” which means that their lien takes precedence over any other lien against the property.

Third, most lenders will not issue a mortgage against a property with code violations. They also will not issue a mortgage against any property with a lien against it.

Because of these issues, many sellers may choose to walk away from a sale involving a property with city code violations. The process of rectifying the condition that led to the violation may be long if it involves construction, such as tearing down and rebuilding part of the property.

Property owners should, of course, endeavor to avoid code violations of any type and to quickly resolve them if they occur. If the violations are for maintenance issues or not receiving proper permits, they can damage the equity and thus any potential sale value in the home. It’s thus a prudent idea to always maintain a home well and to know the zoning and permitting policies of all the potential public agencies in areas where your buildings are.

Lenders should do a thorough title search on all buildings on which they have mortgages, to ensure that no code violations and attendant problems exist.