Red Tags in Santa Cruz County

Key Takeaways

Summary: A red tag in Santa Cruz County is a posted code violation notice, often a Stop Work order, issued by the County’s Code Compliance team or by a city building department. Left uncorrected, the violation can be recorded against title as a Notice of Violation, which blocks most conventional financing until it’s cleared and expunged. Owners can fix the problem and pay the County’s enforcement costs, or sell the property as-is to a cash buyer, a hard money borrower, or a buyer with a renovation loan, making sure the violation is fully disclosed.

It seems that many of the properties I get the most inquiries about are the ones with red tags on them. They tend to be the cheapest of the cheap, so they get a lot of interest. Red-tagged properties also tend to sit on the market a long time, so it’s not uncommon for me to have several buyers write to me about the same property.

What Is a Red Tag?

A red tag is a notification that a building or improvement is out of compliance with the county code. It might be a violation of the building code, the zoning ordinance, or the environmental protection ordinances (grading, drainage, and sensitive habitat rules are big ones in the Santa Cruz Mountains), or it could be that the building is hazardous and needs abatement. In Santa Cruz County the most common version is a Stop Work notice, which tells the owner to stop the work until the County authorizes it or the necessary permits are issued.

How Does a Property Get Red Tagged?

What often happens is that a neighbor tells the county they suspect some kind of violation is happening on a given property, as might happen if someone is building a fence that’s too high and might block a view or create some other hazard. Another common way to get a red tag is to convert part of a home (a garage, for example) into living space, and then rent out that living space. Many a disgruntled tenant has informed the Planning Department, after being evicted, that their landlord has an illegal dwelling unit on the property! And let’s not forget the disgruntled ex-spouse, who, after leaving a property, tells the county about the violations they know exist.

It’s easy to file a complaint that can lead to a red tag. For homes in unincorporated Santa Cruz County, you can do it right from your web browser using the County’s online Code Complaint Form, or by mail to the Planning Department at 701 Ocean Street, 4th floor. The complainant’s name is kept confidential, though a judge can order it disclosed if the case ends up in litigation. If the property is inside the City of Santa Cruz, the complaint goes to the city’s Code Compliance division instead, and Capitola, Scotts Valley, and Watsonville each run their own enforcement.

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What Happens After a Red Tag Is Issued?

The County opens a case, researches the property, and mails the owner a first contact letter. Complaints are prioritized by risk, so an imminent threat to health or safety gets a response within hours, while minor issues can take a month or so. If the violation isn’t corrected, the County mails a Notice of Intent to Record by certified mail, and the owner has 20 days to request a meeting and show that the violation doesn’t exist. If no meeting is requested, or the violation is confirmed, the County can record a Notice of Violation with the County Recorder. That puts every future buyer and lender on notice. If the problem still isn’t fixed within about 90 days, the County can move to administrative hearings, civil penalties, or a referral to Superior Court.

Two things surprise a lot of owners here. First, there’s no statute of limitations on these violations, and each day a violation continues counts as a separate offense, so a red tag doesn’t go away by waiting it out. Second, fixing the problem doesn’t automatically clean up your title. You have to ask the investigator for an expungement, pay the County’s code compliance enforcement costs plus an expungement fee, and then the County records an expungement notice. The County’s Code Compliance FAQ walks through the process.

Fixing a Red Tag: Easy Fixes vs. Expensive Ones

Some red tags are easy to rectify. For example, if you’ve built a fence that’s too tall, just lower it. If you’ve illegally converted a garage into living space, you can remove what you added, like the toilet, shower, and sink, and whatever else the county or city asks of you. You’ll usually still need permits and inspections to close out the case, and the County’s investigation and permit fees can add up.

Other red tags are much harder to fix. Illegal grading is a good example, since it violates the environmental protection ordinances. To correct it you’ll need an engineer to design a proper retaining wall or drainage plan, which can easily cost thousands of dollars before a shovel hits the ground, then apply for the grading permit, and then build the wall.

Another example is a house with severe structural problems, such as a failing foundation. That can be very expensive to fix, $50,000 or $100,000 or quite a bit more at today’s Bay Area construction costs. How many people, even homeowners, can easily get their hands on that kind of money? A homeowner who can’t is exactly the kind of owner who may be forced by circumstances to sell the property with the red tag still on it.

If the red tag is for an unpermitted second unit, there’s better news than there used to be. Under California’s AB 2533 (Government Code Section 66311.7), local agencies generally can’t deny a permit to legalize an ADU or junior ADU built before January 1, 2020 just because it was built without permits, unless the unit is actually substandard under Health and Safety Code 17920.3, and they can’t charge penalty fees to legalize it. Owners can also request a five-year delay in enforcement for many of these older units. It’s still worth talking to the County or city early, because every unit is different. I’ve written more about the risks in buying a home with unpermitted renovation work and why renovating without a permit is a big no-no.

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Why a Red Tag Makes Financing So Hard

Unfortunately, a recorded code violation is treated as a cloud on title by most lenders and title insurers, and lenders are very, very wary of any kind of cloud on title! That means it’s comparatively difficult to get a loan on a red-tagged property. As a result, a seller usually needs to discount the price quite heavily, beyond the cost of fixing the red tag itself, to find a buyer who can pay all cash or who has a lender willing to work with a red-tagged property. Those lenders are typically hard money lenders, who require the buyer to put down a significant amount of cash (often 25% to 35%) and who charge much higher rates than a conventional mortgage, commonly somewhere around 9% to 12% plus one to three points. The idea behind this kind of financing is that the buyer uses it short term only, improves the property, clears the red tag, and then refinances into a traditional loan.

How to Sell a House With a Red Tag in Santa Cruz County

The good news is that you can certainly sell a property with a red tag on it. Conventional lenders won’t lend if there’s a recorded code violation, but the violation may not be recorded yet. The County has to send its Notice of Intent to Record and give the owner time to respond first, so recording often takes months, and sometimes it happens faster. If there’s no recorded violation on title, a buyer may still be able to get a conventional loan, assuming the appraiser doesn’t raise red flags with the lender because of an obvious problem with the property’s condition. Either way, the violation still has to be disclosed.

Even if the red tag has been recorded, the property can still sell, just not with conventional financing. You have a few options:

• Sell to a cash buyer or an investor using private money or a hard money loan.
• Find a buyer with a conventional loan and let the buyer, with your written permission, correct the violation during escrow and get it cleared and expunged before the loan funds. This takes a cooperative County investigator and a long enough escrow.
• Fix the problem yourself before listing, then request the expungement, which usually brings the biggest pool of buyers and the best price if you have the time and the money.
• Sell to a buyer using renovation financing, like an FHA 203(k) loan, which lends the buyer money above the purchase price to do the repairs after closing. The Limited 203(k) covers up to $75,000 of non-structural repairs, while the Standard 203(k) handles larger and structural work (minimum $5,000 in repairs) with a HUD-approved consultant. FHA loan limits and property standards still apply, so it isn’t a fit for every red tag.

Whichever route you take, disclose the red tag. California sellers have to disclose known violations of building codes, permits, and zoning on the Transfer Disclosure Statement and related forms, and hiding a known red tag is a quick way to end up in a lawsuit after closing. Pull the County’s permit history, the case file, and a preliminary title report before you list so everyone knows exactly what they’re dealing with. My quick guide to Bay Area seller disclosures covers the rest.

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Red Tags, Estates, and Longtime Homeowners

A lot of the red-tagged homes I see belong to longtime owners or to families settling an estate. A garage that was converted in the 1980s, a deck that Dad built himself, or a hillside that was regraded decades ago can all surface when an heir or a buyer starts asking questions. If you’re a trustee or executor, you don’t have to fix everything before selling, but you do need to know what’s on record, disclose it, and price the home realistically. My guide to selling a house in a trust after a parent dies walks through the rest of that process.

Getting your Santa Cruz property red-tagged is no fun, but it’s not the end of the world. You can fix it, or if you need to, you can sell the property and make it someone else’s problem. If you want to see what similar homes are selling for right now, check my Santa Cruz home prices page, and when you’re ready, just call me and let’s get moving!

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