The Honest Broker: Buyer Beware of Flipped Properties
Real estate has been a great investment for centuries and the American dream for most families. The general rule of thumb was that a home was purchased to raise a family in. Most families stayed in that home 25-30 years, until they were ready to down size after their children grew up and retirement was in their plans. During that time, the home’s equity rose approximately 6% per year and at the time of the sale, that property had built enough equity to generate a nice little nest egg. Unfortunately, the real estate market became a place where the potential to make a “fast buck” was being exploited by individuals, LLC’s, investment groups, etc. which took a distressed property, used as little money as possible to make aesthetic changes, and then “flipped” or resold in a few months for a much higher price.
The problem with that practice is, in my experience, the critical issues; i.e., plumbing, electrical, foundation or roofing problems of the home were, in most instances not being addressed or the work had been done without permits by handymen or the unexperienced. As the old saying goes…, the investor had “put lipstick on a pig”. The buyer still ends up with the pig, but by the time they find out, it’s usually too late.
How does the buyer protect themselves from a poorly done flip?
Not all flips are bad, some are done very well. However, the role of the professional realtor becomes very important and crucial. After the home search is complete and the buyer has found the “home of their dreams”; newly renovated and updated, the work of their realtor isn’t over. The realtor should check on the history of the home or condo prior to a contract being placed.
Three critical things that should be determined are: length of ownership, permit history and using the inspection to determine its true condition. For instance, how long has the property been owned? Has it been owned for years or bought 3-6 months ago? If recently purchased, I usually check the MLS to view any old pictures available. Seeing pictures of it prior to being renovated will give insight as to the previous condition before the “lipstick” was applied. I also check on the property’s permit history to determine if there was work done without them, or if there are permits, were they closed out? This is easily done by going on the city/county website and doing a permit search. When a contract is placed, the professional inspector should be made aware that it is a “flip” and to be very thorough. However, the inspection has its limits.
Next week, I’ll go more in depth about the inspection……
Diane Lott, Broker
Paradise Found Realty
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