Is it possible to redirect an under ground stream under a home using concrete fill?

It's an interesting question that can probably only be answered fully by the AHJ (authority having jurisdiction) , which in your case would be the Colorado Division of Water Resources.
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I do have a couple of comments on the situation though. From what I could tell about your neighbor's water diversion project, it would have been a major undertaking involving a backhoe and a pit (pits) deeper than the depth of the basement, or at least comparable depth. He would definitely have to obtain a permit, clear it with utilities etc. I just don't see how the local muni department dealing with permits would give the permit if the project was not legal under the AHJ. It is simply possible that, having dealt with overflowing sump before, they were simply better prepared this time around - a more powerful sump pump or discharge hoses extended far enough is perhaps all it took to prevent the basement flooding.
I did look at the regulations posted on Colorado DWR website (which obviously does not make me a local CO water resources expert) but all the regulations I could see related to residential construction seem to concern with wells and basically the concept of <strong>taking water</strong> from underground, not in any way with <strong>diverting water</strong> which is still underground. I think it's plausible that the diversion project you describe is perfectly legal. I still don't know how you might miss the backhoe and all the rest of the activity around a considerable by residential standards earth moving project.
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I live in an townhome in Colorado. My neighbors back in 2010 or 2011 had water in their basement. I didn't have any. It was found that an underground stream was flowing below their home and during large rainfall would rise and leak into their basement at the seam of the concrete slab and foundation wall. This rainfall is rare for our area. This water would seep in on their side of the demising wall. I had thought they had put in a sump pump to take care of the problem. But now, after recent flooding and heavy rainfall, I think they actually undercut the problem area and filled it with more concrete. During this recent heavy rainfall they had no water in their basement at all but I had some seepage and the neighbors behind them (where the water flow was coming from) had about 3" in their entire basement. Is this possible to redirect the underground stream this way and is it legal?
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My thinking on this is that your neighbor was simply trying to keep his basement dry...not divert an underground river... Simple property preservation activity...or maintenance.
There is a huge industry created around waterproofing basements. Folks variously, paint with waterproof products on the inside of basement walls, install french drains and sumps to pump water out from under basement slabs, excavate and install tile drainage systems around and rubber membranes to below grade walls. Techniques and systems available in the marketplace are diverse.
Here is an interesting tidbit: water pressure is 1 lb/ each ft of depth below grade, so at 9ft below grade your external water pressure on the outside of your basement wall is 9 lbs pressure. If you have cracks or holes the water will easily push its way thru unless it has another easier route to travel away from your wall/floor.
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