Today’s flippers are more often professional investors with access to cash as banks tightened mortgage loan guidelines and available work crews. But now, “low inventory and many buyers’ eagerness for new construction and remodeled homes has caused some buyers not to do enough checking,” says Seth Captain, managing broker of Captain Realty in the Windy City.
And some buyers don’t insist on an inspection if sellers won’t permit it as a contingency, adds Frank Lesh, executive director of the American Society of Home Inspectors (ASHI).
The REALTORS®’ 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. Broker Mark Ferguson, 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. 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
A real estate professional can let an investor 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.
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. Or, if mold was a problem, a buyer can ask if the work was done by someone licensed to handle mold remediation. 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. Understand the flipping process
Is Your Buyer a Flipper?
Ferguson cautions wannabe flippers about the difficulty of making a sizable profit. “You may see flippers on TV shows appear to make a lot of money, but it is extremely rare to make $100,000 or even $50,000 unless you are dealing in high-value, high-risk properties.” Most shows leave out the costs associated with a flip such as financing, real estate sales commissions, closing costs, homeowners’ insurance, property maintenance, taxes, and possibly homeowners’ association dues. These additional costs can be 15 to 20 percent of the sales price. “A $100,000 profit on TV may only be a $50,000 profit in real life,” he says. Ferguson, an experienced flipper, has found his average profit ranges between $20,000 and $40,000 on a purchase that cost him between $75,000 and $150,000. In addition, many buyers don’t understand the time frame, he says. “It can often take me six months or more to sell a flip once I buy it,” he says. But it may be worth it if you’re motivated by more than money, he adds: “It can be fun, done on a part-time basis if you do the repairs yourself, and you can make money with realistic ideas of costs and profit margins.”
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. 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.”
4. Hire a certified home inspector
Even if the flipper says the home was preinspected, advise buyers to bring in their own expert to avoid surprises later. But even home inspectors can miss signs of problems beyond the surface. Perhaps water wasn’t run long enough during the inspection to find out that pipes hidden behind newly tiled walls are corroded. A good inspector will follow up on possible trouble spots—say, a wall that sounds hollow and may be lacking solid backer board and studs.