Help Your Clients Avoid the Pitfalls of Flipping Houses
Recently a couple came to our office because their seller allegedly failed to disclose recent flooding in the home they had just purchased. The buyer intended to “flip” the house, and was now concerned with the added costs of fixing and repairing the home because of water damage, and more importantly their obligation to now disclose flooding in the home. After the sale, the basement flooded during the recent downpours, damaging newly installed carpeting, furniture and other expensive items. This was a surprising and unexpected loss of time and money. The Buyers discovered from neighbors that there had recently been a flood in the basement of the home. This failure to disclose potentially subjects the Sellers and possibly their real estate agent to liability for damages to the Buyer. The couple sitting before us had a more immediate question. What can they do to protect themselves from future liability? Predictably the conversation included their inquiry about who they can blame for their plight.
Tragedies of Using Amateurs to “Help” with Upgrades …
We cannot stress enough that one of the primary pitfalls sellers fall into is performing upgrades and repairs on their own. A professional should be used in order to get the job done right. Slow leaks that resulted in mold, for example, need to be remediated by a mold remediation specialist. If plumbing needs to be replaced for any reason, advise your clients to use a licensed plumber rather than a friend who says he “knows plumbing”.
We’re familiar with one example where a friend of a seller began a remodeling job in a bathroom and began to sweat the plumbing, which is the process of heating the cut end of a copper pipe and connecting piece causing solder to melt and create a leak-proof union. Unfortunately, because of his inexperience, this friend caused the wall of the bathroom to catch fire. This is in turn caused smoke to fill the home. So now, instead of the cost of a simple bathroom upgrade, the whole house needed fire and smoke damage restoration, which was very costly and severely limited the profitability of the flip.
A second tragic example involved not using a professional painter. This person purchased a 100 year old home, and decided to perform what was supposed to be the cheapest upgrade possible – repainting the exterior of the home. Instead, she used an inexperienced painter to remove years of old paint on the front porch of the home with a heat gun. The old wood underneath caught on fire and the home was essentially destroyed. The potential profit of this buyer went up in smoke as well.
With regard to the above two situations, guess what added insult to the injury when the sellers decided to really cut their costs? Neither had homeowners insurance on their property, causing them thousands of dollars of out of pocket expenses and total loss of money.
… and Don’t Forget Due Diligence!
>A final example is a man who purchased a home to rehab and resell because it was listed at one third the value – and the “comps” of the surrounding homes were so good. In his happiness about his good fortune of finding such a great deal, the investor forgot one critical step: a home inspection. He hurried to the bank, closed on the property with cash, only to find out a few weeks later that the home had not one, but two underground storage tanks leaking into the ground around the home. Now this investor’s great find is costing him tens of thousands of dollars to remove the tanks and remediate the soil. He may never be able to bring it to market due to state and local ordinances governing soil contamination. This loss could have potentially been prevented with a proper and relatively inexpensive due diligence.
Here’s a Short List to Keep in Mind…..
With the above tragedies in mind, we offer a short list of tips to help your clients avoid the perils of flipping houses, and protecting yourself from being caught in the potential future cross-fire:
Encourage your client to make a plan, using the advice of an accountant and real estate attorney. Not doing soputs your client’s investment at a serious risk before they buy their first property.
Encourage your client to take time to network and put a team of professionals together. Get to know them and their work before they start shopping for properties with your help.
Advise your clients not to cut corners! If your client does not know how to do a repair, encourage him or her to hire a contractor that specializes in that area. If repairs aren’t done correctly it can cost your client more than their initial investment. It might also shift any future accountability for possible problems away from your client.
Get good insurance. A specialty policy exists for buildings that are vacant and under construction. And, there are separate policies for building repairs that all licensed contractors must hold to be in business. This is an expense your clients can afford and must budget for!
Tell your client that they must now disclose any defect, or problem, they fixed in order to sell the home.
Become an expert and keep these tips in mind. The last step in rehabbing a house is actually selling it, and without your competent expertise in assisting your client with pricing, staging, and marketing, your client’s profits can easily disappear while the house sits vacant on the block.
In closing, sellers must be mindful that the nature of this business comes with increased risk. The buyer of a rehabbed and resold house containing previously undiscovered defects will be looking for a scapegoat. That could be you. If you’re going to help people resell rehabbed properties, you need to help them “do it right”.