Beware of the Flip

Sparkling new quartz countertops, polished hardwood floors, stainless steel kitchen appliances. Aren’t your buyers lucky? But when sellers are flippers, a good buyer’s rep should help clients engage in some old-fashioned sleuthing.

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, says Seth Captain, managing broker of Captain Realty in Chicago.

But now, Captain notes changes: “Low inventory and many buyers’ eagerness for new construction and remodeled homes has caused some buyers not to do enough checking,” at least in Chicago, he says. And some buyers don’t insist on an inspection if sellers won’t permit it as a contingency, adds Frank Lesh, owner of Home Sweet Home Inspection Company in Indian Head Park, Ill., and executive director of the American Society of Home Inspectors (ASHI), a national organization based in Des Plaines, Ill.

Your job is to guide buyers through this rough terrain. The first thing to do with a remodel is to look at the public record and see when the property your buyers are interested in 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, you can help clients by asking for information about who completed the work, says broker Mark Ferguson with Pro Realty Inc. in North Greeley, Colo. Ferguson, also a real estate investor and blogger at InvestFourMore, says most problems arise with work done by DIY owner-flippers, who lack the skills of licensed contractors.

Here are more ways you can be an advocate for buyers who plan 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 yourself

Don’t buy at auction or without seeing a house in person, says Eric Workman, senior vice president of marketing at Chicago-based Renovo Financial, a private lender. 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 home

Workman suggests asking officials in your community and real estate salespeople if they know 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, Captain says. “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,” he says. He suggests buyers ask for names of others who’ve bought from the same flipper to learn how well their houses have fared over time.

A buyer 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, Ferguson says. Or, if mold was a problem, a buyer can ask if the work was done by someone licensed to handle mold remediation, he says. They 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. Understanding the Flipping Process

Because 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. Captain notes 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, Captain says: “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.”

Read the full article from RealtorMag