When you buy a home, you sign a sales contract that outlines the terms of the sale including purchase price, financing requirements and inspections. One condition of a sale, even though the contract may not explicitly state it, is that the house must be habitable. For a brand new or recently renovated home, this means that the home requires a certificate of occupancy. If the seller does not provide one, you can cancel the contract.
Certificate of Occupancy
All houses, townhomes and condominiums require a certificate of occupancy on file with the city or county. The building department issues the certificate of occupancy when a house or condominium is built and passes the department’s final inspection. The CO certifies that the home has a sound structure and sufficient access to utilities to support you living there. You therefore cannot legally occupy a home unless a CO exists.
Rarely does anyone mention a certificate of occupancy when referring to existing homes that have a mortgage. However, if you buy from a builder or condo developer, a CO is crucial. Without it, you cannot obtain a regular mortgage. Without a CO, your future home is considered “under construction,” and you can only obtain a construction loan or a purchase and renovation loan to buy the house.
If you buy from a builder who refuses to provide a CO, you can file a complaint with the building department. A builder who tries to sell an unfinished home to an owner occupant probably seriously violates city and state laws. However, if the builder is in financial trouble, he may refuse to obtain a CO because he does not have the money to complete construction. In this case, you can negotiate a lower purchase price that would cover the cost of completion, construction financing and your time and effort.
Existing Home Renovation
If you buy an existing home that has undergone renovation on an inhabited part of the house, you may need a CO. For example, if the seller finished the basement or added a third bedroom, the seller must provide you with a CO for this work. Exercise caution with improvements that the seller wants you to pay for that he did not properly permit. Otherwise, you run the risk of discovering faulty wiring or poor insulation, which you will need to correct after you close on the house.
If the current homeowner who renovated his house refuses to provide a CO, you can negotiate the price down to factor in the cost of attaining a CO for the work he did. If you had an inspection done and believe everything is fine, you can reduce the purchase price to what it would be without the renovations. If the seller refuses both options, you can void your contract. If the seller attempts to keep your deposit, you can report the undocumented renovations to the building department to validate your claim.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.