Friday, February 18, 2011

Beware the Flip

Often when taking Buyers around their targeted neighborhoods, we encounter a property that is obviously in the stages of being flipped. I am sure that most of you know by now what "flipped" means, but for those of you who don't, it is the practice of buying a distressed home at a low cost, investing some time and money into renovating it, then selling it at a higher price in order to make a profit. The seasoned Flipper can make some good money doing this, but Buyer... Beware.

Why should someone be cautious about purchasing a flipped property? At first glance, everything is sparkling and new! The walls usually have a crisp coat of fresh paint, the floors have often been treated to a high sheen or newly carpeted. Many times, the kitchen has been appointed with new cabinetry and modern appliances. What could be wrong with that?

The issue with a flipped house can be multi-fold. With the big boom in Real Estate five years ago, combined with the numerous television programs on the home improvement channels, many people perceived flipping houses as a great way to make a fast buck. Unfortunately, the majority of the people that attempted to tackle this task had no training, no knowledge, and no experience in renovating a house!

I have no experience in auto repair but I do enjoy cars. I like to watch shows on TV like Top Gear, American Chopper, The Rebuilders, etc. I have never been under the hood of a car. Should I pull my engine apart to find that weird knocking noise, or should I take it to a professional at an auto shop or dealer?  With my limited knowledge of the workings of a car engine, if I get in there and start messing around, I may do more harm than good. 

More harm is what some house flippers are doing.

The house flipper has one big thought in their head: MONEY. That is why they began the process... the promise of easy cash. In order to make the most profit, they had to buy the house cheap, put as little money into it to fix it up, and then sell the new and improved version for a premium. In my line of work, I find that when dealing with bargain properties, there is a reason for the low price. There is often major work that needs to be done. Major work usually means major money, which will cut into the bottom line.

That bottom line is what drives many of the Flipper's decisions. The number one mistake I see is when a Flipper will attempt to save on costs by doing the repairs themselves. Again, should I get under the hood of my car if I have never gone there before? No. When fixing up a home, there are projects that need to be done by a professional, especially when dealing with electrical and plumbing. Yet, professionals cost money!

Rather than enlisting a Plumber or Electrician, a cheaper solution is to purchase a DIY book at the local hardware store. This is a practice that I have seen way too often and strongly urge against. An improperly wired lighting fixture or spliced wire to a breaker box can eventually lead to a fire. Lack of proper knowledge on how to join and seal piping and plumbing could result in flooding and severe water damage.  This is not what the Buyer is expecting after they move into their new home!

The Buyer is not expecting that the new house they just purchased has had half-assed, dangerous work done to it. They are looking at this new home with rose colored glasses believing that everything has been done properly and up to code. Often, Flippers just give the house a face-lift or (as we like to call it) put a coat of "Lipstick" on it.

There was one occasion where a Flipper put lipstick on a home which lead to some expensive issues for the Buyer:

Some people decided they were going to flip their first home. Unfortunately, they did not know what they were doing or what to look for. After attending an auction, they purchased a house that had been sitting vacant for some time (dirt cheap) then immediately began working on it. In order to save money, they were going to do the majority of the work themselves.

The house was cleaned out, kitchen cabinets stripped and painted, new do-it-yourself sticky floor tiles installed in the bathrooms. They had a new water heater installed and got a clean bill of health on the forced air furnace. In the living room, there was one wall that was severely stained, but a couple coats of primer and fresh paint fixed that issue. The home looked great and they were ahead of schedule. They would have it on the market for resale faster than expected.

Even faster than that was the acceptance of a purchase offer! Once they listed the property, the first Open House brought the Buyer. A young couple looking for their first home saw the place and immediately fell in love with it. Within the week, they were moving forward on the sale. The home was inspected, all contingencies removed, and after 6 weeks of waiting, they closed. The Sellers walked away with a nice profit and the Buyers moved in to begin living in their new dream home.

The dream would soon turn into a bit of a nightmare. Shortly after moving in, the young couple began to notice a slight discoloring on one of the walls in the living room. The paint was getting darker around the area where the wall met the ceiling. Within a short time, the stain grew darker and bigger, extending half-way down the wall. Perplexed, the husband called a buddy of his who just happened to be a retired contractor. The friend came over and looked at the stain and concluded that they had a water issue. There must be a leak somewhere in the wall. Even though he didn't want to, the husband made some calls and got a professional in to fix the problem.

What a problem it turned out to be! After punching a hole in the wall, it was determined that there was a water leak in a pipe leading from the upstairs bathroom shower. Water was travelling along the pipe and then being deposited on the interior of the wall when it hit an elbow joint. To get to the source of the leak, they would have to tear open the ceiling in the kitchen. Now they had two giant holes in their home.

In addition, it was determined that the water leak had been going on for so long, mold was growing inside the wall. There was a large amount of contaminated plaster, even the studs were afflicted. A professional mold remediator would need to be called in to take care of the issue. The dollar amount for repair of this problem was increasing rapidly. The new homeowners were extremely upset. "Law suit" on was on the lips of the homeowners. They believed that the sellers of the property knew about this and purposely hid the problem.

The initial problem was that the Flippers didn't know what they were doing and were ignorant to the warning signs. Instead of investigating the source of the stain, they merely put a couple coats of paint over it. They weren't being malicious or deceitful, they just didn't realize that there was an issue. The stain appeared old and dry, but that was because the house had been vacant for quite a long time, and while they were working on the house, the upstairs shower was only turned on once to clean it. Inexperience was the culprit with this flip.

Now you are probably asking, "So I should never buy a flipped house"? No, I am not saying that. First, there are people out there turning homes that do a great job and know what they are doing. Second, sometimes a flipped house only needs a cosmetic face lift.  What I am trying to convey is to use caution with homes of this kind and be aware of potential issues. There are always going to be items that pop up after you purchase a home (even with new construction), but you can use some knowledge to limit what you encounter. You can use the following 10 tips as an initial line of defense against the unforeseen:

  1. Use a good Real Estate Agent: An agent that knows his/her business will be able to guide you through the process as well as research and investigate a home if it is a contender for purchase. In most areas, a Buyers' Agent will cost the buyer nothing. The commission is paid for by the seller, so why not have representation for yourself at no cost to you!? (I recommend this for any Real Estate transaction.)
  2. Enlist an attorney to represent you in the transaction. (Again, recommended for all RE purchases)
  3. In most cases, your agent has access to records showing the previous sales transactions on a property. He should be able to get this information. You will be able to see timelines with each transaction and know how many hands have been involved with your potential new home. 
  4. Have your agent get a detailed list of the improvements done to the property, on paper with dates of completion and the names of the people that did the work. You want the names and contact information of all the people that did any outsourced work. If someone has done a good job of the renovations, they are going to want to brag about their handy work, in addition to justifying the price that they are asking for. If they will not supply this information freely, then you should consider that a red warning flag. 
  5. Always have a home inspection done by a professional. If there is an issue, the inspector will probably find it. Unfortunately, they will not be able to discover everything, like in the previous mold example. They will not punch holes in walls or dig up pipes. Yet, since they are trained, do the job everyday, usually come from some type of construction background, and in some cases require licensing, they will see things the average person may not. 
  6. In most areas, it is required that the Seller provides the potential Buyer with a "Property Condition Disclosure". This is a 4 to 5 page form, filled out by the Seller to the best of their knowledge, stating the condition of the property. For example, if every Spring a river of water runs through the foundation flooding the basement, they need to list it in the disclosure. Review the disclosure and make sure there is nothing that stands out as an issue. Your agent will be able to supply you with this.
  7. If something in the flipped house is brand new, like appliances, have your agent place a clause in the purchase contract that states all warranties will be transferred to the buyer at time of close. This also applies to any construction or handy-work. If there are any guarantees or warranties, you want them. 
  8. If any work or major renovations/additions made to the home required permits, have your agent include a clause (if there isn't one already on the purchase offer) stating that certificates of compliance will be supplied to the Buyer's attorney for review prior to close. Often people take out permits to do projects, but then never have the permit closed and a compliance certificate issued. 
  9. Ask if there are any "Before" pictures that you can have/see. If there are some available, try to get them before the inspection. If you see something that might be a concern, you can have your inspector pay special attention to it.
  10. Have your agent research other transactions that the sellers have had in the past. Are they seasoned flippers? Have they done other flips in the past? If so, and if possible, contact the current owners of the houses to see how happy they are with their home. Weigh what they say carefully, though. As I mentioned before, there are usually some issues that arise after the purchase of a house, so be sure to differentiate what is normal and what might have been caused by an inexperienced flipper. If you have trouble doing so, pass the information by your agent for assistance.
If you use any of these tips, it will make buying a flipped home more of a stable decision. I hope this hasn't scared you in purchasing a property that has been flipped. There are people that turn houses for a living, that do it well, and really do care that they present a good product... It is the ones that have logged many hours in front of HGTV and have dollar signs for eyeballs that you have to worry about.

Now I must wrap this up... I have an appointment for an oil change I have to get to.

Until next time, Roc and Roll!


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