Allow me to introduce you to a hypothetical character named Joe. Joe is a real estate investor who focuses on buying foreclosures and short sales and flipping them to sell again in a short period of time. This isn't an uncommon practice among real estate investors. There are even multiple television shows about the topic. Joe, however, was recently caught in a sticky situation concerning one of his flipped properties. He purchased a foreclosure. Before the original owner vacated the property after foreclosure, he decided to get his "revenge" by trashing the home. When Joe bought the property, he hired a handyman to help him fix it up. Six weeks later, Joe's house went on the market and was snatched up by the O'Donnell family at a great price. After the O'Donnells had been living in the house for a month, they began to have problems with their plumbing and discovered mold inside the walls. When they spoke with a neighbor, the O'Donnells were surprised to hear that the home had been trashed by the original owner. This fact had not been disclosed when they bought the home. Not only did Joe have some explaining to do, but he and the listing and selling agents also had a lawsuit on their hands!
According to Realtor Magazine, "This case is an example of a growing number of lawsuits in California and elsewhere involving short sales and foreclosures that are quickly fixed up and then flipped." When dealing with a flipped property, all parties involved in the transaction should take care to do their part to ensure that no unforeseen problems crop up due to undisclosed material facts. What can you as a seller, buyer, or real estate agent do to protect yourself from these issues?
"First, parties who flip foreclosed or short-sale properties are not exempt from making disclosures just because they haven't lived there, especially if repair or remodeling work has been done on the properties," states Realtor Magazine. No matter if a seller has or has not lived in a property, that seller must fill out completely whatever disclosure forms his or her state requires. This disclosure must include any and all known material facts about the property, even if the issues have been repaired. Sellers who flip should also know that any work that requires a permit must be performed by a licensed contractor. Don't try to cut corners and costs by hiring a non-licensed handyman to repair problems that could be more serious than they appear.
As a buyer, you are responsible for making your wants and needs known. If you prefer not to buy a property that was previously a foreclosure or short sale, make sure your Realtor researches to make sure the property you're looking at was not flipped from either one of those. It won't take much work for him or her to find that information. In addition, be sure to ask about any disclosures that have been made regarding the property.
If you are the buyer's agent, ask the listing agent of seller about the property's previous condition, what repairs have been done, what defects might not have been repaired, and whether the work was done by a licensed contractor. It's also important to make sure the seller can back up claims that repairs were done the correct way (through receipts, permits, etc.). The seller's agent should be sure that he or she can answer these questions efficiently by asking the seller firsthand before any contact is made with other agents or potential buyers. Ensure that the seller fills out disclosure forms fully and accurately.
Do you have experienced with flipping properties, or with buying flipped properties? Are you an agent who has represented a buyer or seller in this type of transaction? Have these types of transactions always gone smoothly, or have you hit snags along the way? What are some of the problems you've had concerning flipped homes? Let us know in the comments section below!
*Information Source: Realtor Magazine, May/June2014