What Is a CU in Real Estate Investing?

A "CU" is what is known as a Certificate of Use in real estate investing. These property reviews are licensed engineers' inspections of structures under certain circumstances. In a growing number of cities and counties, these inspections have to be completed before a title transfer. Cities and counties have started to require them because of dramatic changes in their local housing markets because of foreclosures. These reports are necessarily not the same as Re-occupancy (RO) or Re-certification (RC) certificate required by some cities.

The intent of having a certified engineer's inspection report was started to check that foreclosed properties were not a safety or health hazard for the buyers. In many cases, bank-owned properties (REOs) were allowed to go without maintenance for months or even years. The result was many structures started to rapidly decay and become eyesores and health hazards for the community.

Pro-active city officials decided to make it a requirement that these properties had to be inspected before they could be sold. The actual result of these certified inspections was required to be recorded in the public record for anyone to see who was thinking about buying the property. One issue was that these certifications also listed the expected repair costs which could vary greatly from one inspector to another.

As an investor looking at a CU for a specific property, there can be an opportunity to reassess the repair estimates published in the report. Especially if the investor is a contractor or handyman, he may be able to substantially reduce the actual repair costs. The original estimate by the engineer, if high, might cause the average investor to pass on buying the property.

The other reason cities or counties started the CU requirements was to generate revenue for the municipality. They did this in a couple of ways; first the report has to be recorded in the public record which has a fee to do this. Secondly, the professional engineer is a community member and a job is generated locally.

Most importantly however, is the fact that a copy of the CU is sent to the building department and code enforcement to determine if permits are needed for work already completed, or for work that has to be done to make the property livable. Building permits and inspections are a key source of income for municipalities and with the CU inspection the municipality can look inside a property that couldn't have been done previously without a court order.

Any illegal rehabs suddenly surface and are immediately "tagged" by code officers for enforcement. The unsuspecting buyer will be taking over the problems left behind by a former investor or bank that just wanted to dump the property.
The requirement to get a CU is usually focused on already foreclosed (REO) properties that are going to be sold. It is the law that the selling lender gets a CU before the sale and has the report recorded in the public record. In many cases, the reports are almost certain to have most buyers back off offer substantially lower their offers. The banks have overcome this "disclosure" problem by having a prospective buyer waive his legal right to receiving a CU before the closing.

The penalties for non-compliance for getting the CU are virtually non-existent for the banks, but ultimately the buyer has to comply with the CU inspection report after he buys the property. The cities track title changes on REOs and come after the new owner within a few months of his buying the property.

In summary, if you are looking to buy a foreclosed property, check with the closing agent and the municipality where the property is located to determine if there is a need for either a re-occupancy or re-certification certificate, or possibly a Certificate of Use (CU). The municipality tracks the need for a CU by the summons or lis pendens that the foreclosing lender has issued by the court. Even if the property results in a short sale, the CU statute may come into play. A little investigation before the closing could save you tons of aggravation later - and possibly a huge loss of money.

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