Country Club Hills residents John and Pat Murphy (not their real names) recently found themselves in an all-too common situation. Forced to sell their home because of a hardship, they owed more than the home was worth, and had to sell it “short”. So, like thousands of others, they put their home on the market. Fortunately, after a couple months it went under contract.
Once their home was under contract, they paid their village for its mandatory inspection. Like many cities across Illinois and the nation, Country Club Hills requires a village inspection, otherwise known as a point-of-sale inspection, before the sale is allowed to take place. Unfortunately for the Murphy’s, upon completion of the inspection, they learned that thousands of dollars of improvements would have to be done before the sale would be allowed. Not having the money, (hence the reason for the short-sale), they appealed to the prospective buyer to cover the costs to bring the home up to village standards. The buyer refused, the contract was voided, and the home ultimately was foreclosed on. And while this is not a typical story, point-of-sale inspections are something sellers must be aware of, especially in tough economic times.
Orland Park Attorney Al Beaudreau, who represented the Murphy’s, along with thousands of other buyers and sellers in his career, describes point-of-sale inspections as good intentions run amok.
“The stated reason for these inspections is that villages want to ensure homes are habitable, but often towns lose perspective and overreach. It’s one thing to focus on safety concerns such as electric, but when you force cosmetic changes you have lost sight, Beaudreau said.
In the case of the Murphy’s, they could not adjust the price to entice the buyer to take on the costs of the required repair because the bank, which was already taking a loss, would not accept a lower sales price, Beaudreau said. He added that because Country Club Hills, like most cities with mandatory point-of-sale inspections, only inspects once a home is under contract, it is hard to anticipate the scope of the required work. In addition, with FHA loans becoming more common, the terms of the loan state that the seller is responsible for this sort of thing and buyers are barred from using their own money to bring the home up to a city’s standards, Beaudreau explained.
“I’ve seen many deals fall apart over strict city requirements, Beaudreau said.
“It’s mostly a revenue generator for these cities, since 90 percent of my buyers have private home inspections. Another problem is that sometimes the requirements change depending on which inspector happens to come out and the state of his mood.”
Currently 37 of 88 Chicago-area municipalities require some sort of point-of-sale inspection, according to the Illinois Real Estate Lawyers Association. The cost of the inspections range from no-cost to $250, as is the case in south-suburban University Park.
Chicago Attorney Peter Friedman, who represents many state and local government agencies, said point-of-sale inspections are a good way to ensure compliance.
“They are simply a means to enforce regulations that are already in place,” Friedman said, noting that most municipalities do not have the workforce needed to inspect every home. Doing it at the point of sale makes it convenient, Friedman, who also works fulltime as the head of the Real Estate Practice in the Chicago office of Holland and Knight, explained.
Nobody wants to interfere with the sale of real estate. It’s good for everybody,” Friedman said.
While this view is not shared by all --several municipalities have been challenged in court in Illinois and across the country, Friedman said if the ordinances are written correctly they are hard to challenge. He pointed to the ordinance in Calumet City, which was just challenged and upheld in the U.S. District Court in Chicago as a good road-map for municipalities thinking of enacting similar legislation.
In that case, the Mainstreet Organization of Realtors, an association of south Cook and DuPage County real estate brokers, sued Calumet City 505 F.3d 742, 744 (7th Cir. 2007) for refusing to issue transfer stamps to some sellers until they made upgrades or renovations. Mainstreet accused Calumet City of insisting on cosmetic changes and illegally delayed issuing transfer stamps to sellers of legal multifamily buildings in areas zoned for single-family units in an effort to force the homeowners to convert their properties back to single-family units. The Court issued a preliminary injunction against enforcement of the of the POS ordinance, ruling that the city was guilty of unreasonable restraint. In May, the city’s appeal was heard and the suit was dismissed.
In 2005, Mainstreet also sued south-suburban Dolton for, among other things, stopping “as is” home sales and requiring home sellers to perform cosmetic improvements. In that case, Dolton was ordered to reinstate “as is” home sales and limit point-of-sale home inspections to health or safety issues.
Over the years, several municipalities across the country have been challenged, usually by local real estate broker associations. The National Association of Realtors leaves these disputes to state and local boards, according to NAR Senior Public Affairs Specialist Walter Maloney.
“Unless it has national reach like lead-paint disclosures, those types of things are handled locally,” Maloney said.
For sellers and buyers acting on their own, most do not have the means or patience to challenge a municipality, said Illinois State Bar Association President John O’Brien.
“Finding sellers willing to sue is hard to do. Most of the time it is less expensive to just comply,” said O’Brien, who is also a veteran real estate attorney from Arlington Heights.