Building Permits

Sometimes I'm my own worst enemy. I just talked myself out of a sale by providing service that exceeds my clients' expectations. My clients were very interested in a wonderful old Central Tucson house. They even flew in from out of state to see it. They loved almost everything about it, and decided they could probably deal with the things they didn't love. Like many Tucson houses, this one has a guesthouse.

Tucsonans have a Wild West state of mind, so the chances that the guesthouse was built without a building permit were pretty high. I asked the listing agent whether the guesthouse was permitted. She didn't know, even though she represented the seller in their purchase of the property.

The guesthouse was about 25% of the total floor area of the house, and the additional area did not appear in the assessor's records. That is usually a pretty strong clue that the guesthouse was built without a permit.

It's possible to look for building permits online, but the records have been digital for only a few years, so to find anything older requires a trip down to the Maps and Records Department of the City of Tucson Development Services Office, followed by a battle with their microfiche machine. I found permits for all kinds of things pertaining to this house, but I did not find the thing I needed most, a permit for the guesthouse.

I told my buyer that the guesthouse wasn't permitted, and he asked what were the consequences. Unpermitted structures are common in Tucson, and usually there are no consequences to purchasing a property with unpermitted additions, but I can't say that there will never be problems.

One of my neighbors was always worried that I was going to turn the big shed behind one of my rentals into an illegal guesthouse. I kept telling him I had no interest in doing that, but he decided just to be sure, he'd better call the City building code compliance office and have them check it out. They determined the shed was built without a permit, and they made me bring it up to current code. I had to add more studs, and attach the roof to the walls and the walls to the floor with some sort of fasteners. I made three trips to City offices over the course of a month and spent $1,000 on a shed that doesn't even have water or electricity.

I ran into a problem a few years ago selling a listing with an unpermitted carport-to-family-room conversion. The first buyer to make an offer on my listing demanded that my seller get a building permit for the addition. I learned that getting a building permit after a a structure is built is no easy matter. For starts, the permit cost is doubled. Then the owner has to draw the building as if he were applying for a permit to build it, and he has to show all the plumbing, electrical, framing, roofing and mechanical systems. Of course, he doesn't know what they look like, so the walls have to be opened to show the inspector. The foundation and all other systems must meet current building code (not the code when the addition was built), and the structure must meet property line set-back requirements. If it's not possible to do this, in theory, the City could require the structure be removed.

I have never heard of that happening, but because it's possible in theory, I always tell my buyers to consider this potential risk. Most of them don't worry about it, especially if they already live in Tucson and they know how prevalent unpermitted additions are.

Sometimes I will see a house with an obvious illegal addition (ceilings too low, windows too small, furnace closet or garage window in a bedroom, etc.) and the assessor has included the addition in their records. Although some people accept this as proof that the addition is legal, I recommend digging deeper. The assessor may have just added the square feet of the addition because the additional area showed on the Multiple Listing Service (MLS) listing. The assessor is only concerned with collecting enough property tax on the house. The larger the house, the higher the tax bill. The assessor is not interested in whether the building meets code.

I am told the City building inspectors do not have time to sneak around alleys looking for illegal additions. They only respond to complaints. But you might have a neighbor like I had, who called the City to try to prevent me from building an illegal guesthouse. Or if you or your tenants annoy the neighbors, they may decide to take revenge with a visit from a building inspector. Not likely scenarios, but it could happen, and I think it's my job to help you with your due diligence.

So, my buyer decided to wait for a less complicated house to come along. We're both disappointed, but at least he won't be asking me a few years from now what do I know about unpermitted guesthouses, and when did I know it.

Arizona Opera

Saturday night we went to our first opera at the Tucson Convention Center Music Hall. Arizona Opera presented "Lucia di Lammermoor", an opera based on a story by Sir Walter Scott. It is basically the Romeo and Juliet story with an extra death, set among the nobility of seventeenth century Scotland. The stage set was stunning, the costumes were gorgeous, and the soprano, Tracy Dahl, was beyond beautiful. Her voice was like water music, and very touching. Although the melodrama was a bit overwrought at times, the famous scene in which Lucia went mad was riveting. The opera was in Italian, with English surtitles above the stage. I expected the surtitles to be distracting, but it only takes a second to read them, and then you return your eyes to stage.

This being Tucson, we saw many people dressed in "Tucson Casual", which means jeans and tee shirts. My pal Alona and I got dolled up, and while we weren't out of place, we were certainly in the minority.

We're looking forward to "The Magic Flute" in the spring. The music is by Mozart and the singing is in English. It's said to be one of the most accessible operas. If you've ever wondered whether you have an opera fan hidden deep within you, this might be the performance for you to see first.

New Improved FHA

Although I bought my first two houses with Federal Housing Administration (FHA) mortgages, as a real estate broker, I have never enjoyed working with government-insured loans. FHA insures mortgages so that people with little-or-no down payment, high debt-to-income ratios or marginal credit can buy houses. FHA used to be the only mortgage option for people in those circumstances.

FHA sounded good to the first-time buyer, because the seller was required to pay some of the buyer's closing costs. Of course, for this very reason, it sounded very bad to the seller. Then the seller learned that he would be required to provide a two-year roof warranty, which often resulted in providing a new roof. A "clear termite report" was required, which usually meant the seller paid for termite treatment and often repairs due to damage by termites, water or mold. Sometimes the appraiser appraised the house below the sale price. Result: no sale. The appraiser would always present the seller with a list of arbitrary and unpredictable repair requirements. Closing the sale would take at least six weeks instead of the usual four weeks needed for a conventional mortgage.

During the seller's market of 2003 to 2006, sellers would laugh if a buyer made an offer with FHA financing. There were plenty of investors with deep pockets, conventional financing or cash, and the FHA buyers were out of luck.

FHA was not such a great deal for the buyer, either. When a buyer puts less than 20% down on a house, the lender considers the loan risky. The lender wants to be compensated for the risk, and charges a mortgage insurance premium (MIP) that in effect adds about 0.5% to the interest rate. With a conventional mortgage, the buyer can stop paying the MIP once he has 20% equity in the house, either through appreciation or paying down the mortgage. With FHA, the MIP is for the life of the loan. I wasted $34 per month on MIP on a house I bought with FHA financing, even ten years after I bought the house and I had 70% equity. The risk of default was non-existent, but I had to pay this useless MIP until I refinanced.

All the wild and crazy lending practices of the last several years created new and better loan programs in the conventional, or non-government-insured, mortgage market. No savings, no credit, lots of debt? No problem! Buyers were no longer interested in FHA and its byzantine complexities.

FHA's share of the market dwindled to almost nothing.

Then, as we all know, all those wild and crazy mortgages came home to roost. The sub-prime conventional mortgage industry is history. Fortunately, the mortgage melt down occurred just as FHA decided that maybe they should stop making it so difficult to use FHA loans.

Last week, Jane Penttinen with Sunstreet Mortgage sent me these glad tidings regarding FHA.

The new and improved FHA guidelines may be the answer for buyers with limited cash to close, a less than stellar credit history, or both.

Maximum loan amount for Pima County is $239,850. Congress is considering raising this to $417,000.
Minimum down payment is 2.85%
Seller contributions up to 6% allowed. Buyer must have 3% of purchase price invested in the transaction
Debt ratios of 31/43 allowed (possible to go higher with strong compensating factors).
Non-occupant co-borrowers allowed (family members).
No cash reserves required.
Lenient credit standards.
No minimum credit score required.
Two-year minimum wait after discharge of a bankruptcy (three years if foreclosure involved).
Gift funds (from family) allowed for entire down payment and closing costs.
No clear termite report required unless appraiser calls for it.
No two-year roof certification unless appraiser calls for it.
No mandatory seller-paid closing costs.
Cash-out refinance allowed up to 95% of value provided borrower has occupied the property as a primary residence for at least the last 12 months (less than 12 months limited to 85%).
Condos must be on the FHA-approved list and must have 51% owner occupancy.
Nehemiah and Ameridream no longer allowed!
MIP can be dropped after five years if the buyer has 22% equity in the property, based on the original purchase price.

FHA: no longer a bureaucratic nightmare!

For more information, contact loan wizard Jane Penttinen at Sunstreet Mortgage. 520-237-8430 or 888-634-6399 or jpenttinen@sunstreetmortgage.com