It’s buyer beware when it comes to flipped homes. Those like-new renovated homes could have hidden unaddressed issues that will not come up on your typical home inspection report. So how do you protect yourself as a buyer or real estate investor?
CNBC wrote in an article recently which said that “those picture-perfect flipped homes can be masked money pits.” While some experienced renovators and talented newcomers are doing exceptional work, there are many unqualified and possibly unscrupulous flippers out there.
A flipped home is one that has been sold at least twice in a year — usually with upgrades. It’s been such a hot activity in recent years Trulia says that more than six percent of all homes sales last year were flips.
When it comes to buying flipped homes, buyers need to pay as much attention to what they “can’t” see, as to what they can. CNBC spoke with a couple who bought a flipped home in a historic part of Washington, D.C. They thought they’d be living “the dream” in their new home.
They had traded a larger home in the suburbs for a completely upgraded three-bed three-bath condo with all new appliances, new wood floors, and other improvements.
Buyer Cameron McGuire told CNBC: “That was actually part of the appeal — to have something that was completely finished, that from top to bottom had been redone.” He said: “All new electric. All new everything in it. High-end appliances. All of those things were part of the appeal for us.”
And they “did” live their dream, for about six months. That’s when a housing inspector got a hold of them and their dream started unraveling.
There had apparently been claims against the developer that had done their renovation work, so the inspector was following up. And the McGuires say the inspector came up with a long list of problems including lack of permits, improper zoning, and code violations.
One of the biggest surprises — the developer had enlarged the condo with an extension off the back for two bedrooms and two bathrooms. It was not permitted and the city had every legal right to force the McGuires to tear it all off.
They paid more than $600,000 for the home that was only legally a one-bed, one-bath unit. McGuire doesn’t expect the city will force him and his wife to remove that addition, but CNBC writes that all the other fixes will cost them $100,000.
Broker Stephen Carpenter-Israel of Buyer’s Edge told CNBC: “It’s like putting lipstick on a pig.” He says: “They’re just doing cosmetic stuff and actually covering up problems, and that’s scary because it’s very difficult to figure it out.”
In some cases, it could be a lack of experience on the part of the flippers. You may have seen some of those house flipping TV reality shows like “Flip or Flop” or “Flipping Vegas”. Young couples with little or no experience take on the task of renovating entire homes. They may call in advisers to help them figure out things as they go, but they are novices and the work they do may be less than professional.
And then there are the other kind of renovators who like to “cover up” problems. They may know that a home has a major problem like termites, water damage, mold, or structural issues, but ignore them. They do a little cosmetic work to get the home to market and those problems are left hiding behind freshly painted walls.
Executive Director of the American Society of Home Inspectors, Frank Lesh, said in a CNBC interview that you have to beware of a home that has been totally renovated. He warns: “That’s a good sign that it was probably flipped fairly quickly.”
He says flippers are working against deadlines and may cut corners to get the home back on the market quickly. He says the risk is higher in hot markets and that buyers get into trouble when they skip home inspections. You also may need to hire specialized inspectors to dig deeper into any potential problems.
CNBC came up with a list of tips for buyers:
- Make sure the flipper used a licensed contractor. That would eliminate those TV home flippers.
- Request an updated disclosure statement from the seller.
- Ask for a list of all the work done along with receipts and warranty information for both services and appliances.
- Go to city hall and check for permits on all the upgrades.
- Make sure those upgrades have passed any inspections.
- Make sure the property has a certificate of occupancy.
- Get a professional mold and termite inspection.
- Check for water damage and the existence of old wiring in the basement and the attic if the home has them.
Flipping is a big industry right now. Attom Data Solutions says 193,000 single-family homes were flipped in the U.S. last year. And it says the average return on investment was about 49%. That’s the most number of flipped homes since 2006, and the highest ROI since the company started tracking those figures in the year 2000.
States with the most flipped homes are Texas and Florida. Phoenix made it on to that list along with Los Angeles. We’ll have a link on our blog to the Core Logic list of cities with the most, and the least, flipped homes.
With a tight housing market, flippers won’t have a hard time selling homes. It’ll be up to buyers to figure out if the work was done correctly.
And the same is true for “turnkey rental property” for sale. Turnkey property is basically a flip, but to landlords vs homeowners. There’s great demand for rental property today, and out-of-state investors love to buy either new or fully renovated and rented property for a passive investment.
The problem is, they don’t always end up being “passive.” That’s why Real Wealth Network as adopted the highest standards when vetting turnkey rental property providers. We turn down 9 out of 10…
So if you’re in the market for a flipped home, for yourself or for a rental, make sure you are not one of the ones caught with a lemon.
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