Before the Great Recession of 2008, housing prices climbed dramatically, and homes sold faster than buyers could gush, “I love that spa bathroom.” Contractors and even handy DIYers got in on the uptick by buying fixer-uppers and improving them in the quickest ways possible, selling them, and reaping the profits. Enter the real estate phenomenon of flipping.
The trend waned a bit as the housing market hit the skids, but then returned with some significant differences. Today’s flippers are more often professional investors with access to cash as banks tightened mortgage loan guidelines and available work crews.
But now, Low inventory and many buyers’ eagerness for new construction and remodeled homes has caused some buyers not to do enough checking. And some buyers don’t insist on an inspection if sellers won’t permit it as a contingency. Beware of this!
The first thing I do with a remodel is to look at the public record and see when the property last changed hands. If it’s less than a year ago, the property may require a more thorough examination. While not every flip represents a potential landmine, I can help my clients by asking for information like who completed the work. Most problems arise with work done by DIY owner-flippers, who lack the skills of licensed contractors. While some small projects can make a home look great and are easy to do – others really do need a professional licensed contractor to do the job right.
Here are more ways I can be an advocate for you if you’re planning to purchase a house that’s being flipped. Many of the caveats reflect the same type of thoroughness that should be undertaken with any sale.
1. See it yourselfDon’t buy at auction or without seeing a house in person. Buyers should inspect the structure so they see firsthand if visible problems exist that may be red flags for deeper trouble. This is the first step before they call in experts.
2. Learn the history of a homeIts a good idea to find out how long a home may have been vacant. The number of seasons a property goes through while being empty of occupants can help predict whether its plumbing and other mechanical systems may have been neglected or damaged.
One of the most important reasons to trace a home’s lineage is that if no one has lived in the remodeled house yet, it’s hard to know how well the systems work. There may never have been a heavy rain to know if the home’s drainage system will stand up, or if termites are chewing away at support joists and not visible. I like to ask for names of others who’ve bought from the same flipper to learn how well their houses have fared over time.
We can also request to see the permits that the flipper pulled to perform work, especially important in cases where the floor plan was changed or a load-bearing wall was removed. Or, if mold was a problem, we can ask if the work was done by someone licensed to handle mold remediation. We can also check the area’s Better Business Bureau to see if complaints or lawsuits have been brought against the seller by a prior buyer or real estate commission.
3. Understand the flipping processBecause a flipper’s goal is to make a profit in a relatively short period, many changes are cosmetic, such as refinishing hardwood floors and painting kitchen cabinets. Flippers often replace countertops, appliances, and fixtures in what tend to be buyers’ favorite rooms: the kitchen and bathrooms. They may forgo fixing the more expensive, time-consuming, and less visible problems. For example, a rotted subfloor may be deemed not worth fixing if it’s underneath gleaming boards, and dated plumbing may be left as long as faucets work and water pressure seems okay, they don’t want to kill the deal, but won’t go above and beyond. They also know that most buyers reach a point where they want to be done looking and are happy to focus just on what’s new and pretty.
4. Hire a certified home inspectorEven if the flipper says the home was preinspected, advise buyers to bring in their own expert to avoid surprises later. But even home inspectors can miss signs of problems beyond the surface, Lesh says. “Perhaps water wasn’t run long enough during the inspection to find out that pipes hidden behind newly tiled walls are corroded,” he says. A good inspector will follow up on possible trouble spots — say, a wall that sounds hollow and may be lacking solid backer board and studs — with requests for more information. “We might ask, ‘What’s going on here?’ We won’t rip off the wall, but will request receipts to show work was done properly.”
Inspection fees typically vary by a home’s price, size, and age. Lesh charges between $650 and $700 for a 15-year-old $500,000 house. Cultivate a list of inspectors you trust, and give it to buyers so they can choose the one they want to work with.
5. Bring in additional specialistsCertain systems warrant calling in a skilled expert. Its a good idea to have a plumbing inspection even if all seems perfect. With today’s technology, a licensed plumber can do a video camera inspection of the main sewer line to see if there are mechanical defects in the pipe, which most home inspectors don’t see. There might be a small leak in the line from roots growing, but it could take several seasons for them to be large enough to cause problems, and that could be long after the purchase. By then, repairs would also be more expensive. An average plumbing inspection ranges from $150 to $400.
In the case of electrical work, a new junction box may suggest all’s well, but that doesn’t mean wiring was brought up to code. Houses built in the late 1960s and early ’70s often were wired with aluminum, which was outlawed, and copper was required. But some might not know because they’re behind walls. A good inspector will pull off the panel cover and look.
Some buyers may be content waiting to hire an expert only if the general home inspector picks up on problems such as foundation cracks that could reflect structural defects. At that point, a structural engineer can determine the seriousness of the problem. And many home owners find that it helps to bring in a structural engineer in cases where a house is very old since more problems may lurk beneath floors, below floors, between walls, and above ceilings.
6. Avoid legal glitchesBefore you sign on the dotted line, it might be a good idea to have a lawyer check that there are no legal problems with the transfer of ownership. All kinds of issues may arise when buying a property that has been flipped, for example, if sellers acquired a property through a short sale, they need to obtain detailed information on the short sale to ensure that both transactions comply with state regulations and the original lender’s short-sale requirements. There may also be a requirement that the flipper owned the property for a minimum amount of time before selling, and proofs of payment of liens must be verified. Typically in Florida, title companies are attorney-based so they handle this sort of thing for you.
With all this information in hand, your buyers can decide whether a flip is still worth buying, particularly if the seller won’t deduct estimated repair costs or fix problems. But, if a flip passes muster, it may be just as desirable as any other purchase. What difference does it make if a flipper made money in a short time if the buyer finds a wonderful home?