Examine permits, check pricing and start with the right kind of inspection to spot shoddy work
FROM THE WASHINGTON POST; WRITTEN BY HAISTEN WILLIS
The business of house flipping looms large in the American public imagination. Between reality television shows about the practice to infomercials promoting it as a get-rich-quick scheme, nearly everyone is familiar with the concept of buying, renovating and quickly reselling real estate at a profit.
But is house flipping a good deal for those who end up moving in long-term? And if you’re looking to buy one, how do you know if the pretty house with new paint and granite countertops is a great deal or a lemon?
These questions burned through my mind nearly a decade ago, when I bought my first house as a newlywed. An adorable, renovated ranch popped up at a reasonable price and caught my eye. But that price was double what it had sold for just months earlier. It was vacant, and while the renovations looked great I wasn’t sure if they justified a 100 percent increase in the asking price.
In the end, my wife and I pulled the trigger and the choice proved wise. The house served us well while steadily appreciating in value. Best of all, we moved in knowing it wouldn’t need any big-ticket makeovers for years.
“There is nothing wrong with buying a flipped house,” said Chris Egner, a home remodeler based in New Berlin, Wis., and president of the National Association of the Remodeling Industry. “You can buy an old house and hire someone to remodel it, or you can buy one somebody else remodeled and it’s already done and ready to move into. The caution is that, like any other endeavor, there are some people doing work that are not qualified to do it.”
There are strategies new home buyers can use to identify whether the house they’re looking at was flipped and, if so, whether the work was done by quality contractors.
Finding a flip
Once a prospective homeowner identifies a house they like, the first step is figuring out whether it has been flipped. There are several ways of doing this.
The first question is, does anyone live here?
“As a general rule, a flip usually is going to be vacant,” said Bruce Barker, a North Carolina-based home inspector and president of the American Society of Home Inspectors. “A flip is going to have fresh paint, at least on the inside. Probably new carpet, probably granite or quartz countertops and a new sink in the kitchen [but with] old cabinets. That’s almost a dead giveaway.”
Of course, not all vacant houses are flips. A second way to check is to see when the house was last sold, which can be done by checking with your local government or sometimes by looking through real estate websites like Zillow and Redfin. If the house was sold less than six months ago, there’s a good chance it was flipped.
Though Egner works in the home remodeling industry, he too warns consumers to watch out for shoddy work and corner-cutting with flipped houses. Often it’s the work consumers don’t see — the plumbing, the wiring inside the walls — that will cause trouble if a flip was done unprofessionally.
If it looks like renovation work was done on the home before it was put on the market, prospective buyers should always look to see if permits were pulled for the work, which can also be done through your local government.
If a flipped home doesn’t have permits, that may be a sign that the work was done as a do-it-yourself project. More importantly, it likely also means the work wasn’t professionally inspected.
When done well, he embraces the idea of renovating houses as a business.
“A lot of people don’t have time to buy a house, move in and then spend the next six months redoing the kitchen, bathrooms and whatever else,” said Egner. “If you can buy something that’s move-in ready, that’s awesome. People doing them right are doing a great service to society in general. What better way to reuse and recycle than to take an old, rundown house and turn it into a brand-new, functional and usable property?”
Are flipped houses a good deal for the buyer? That depends on a lot of factors, according to Duluth, Minn.-based real estate agent Len Sarvela with Real Estate Masters.
“Many flipped houses are wonderfully done, with permits taken out, priced at fair market value and representing a great deal for the buyer,” said Sarvela, an agent with the National Association of Realtors. “But with the market we have now, with a shortage of inventory, buyers know what their money will get them.”
Sarvela advises comparing the sale price to what the house last sold for, which is usually a matter of public record, especially if it was last sold just a few months ago. Does the work done since that day really justify the price hike?
“If the sales price doubles, there better be a pretty good justification based on the materials and amenities that were put into the house,” said Sarvela.
Typically, a buyer can tell what has been renovated in a flipped house. The new countertops, sink, tile floors and other items usually stand out quite a bit given that the house itself is older. From there, a buyer can analyze and decide whether those new amenities justify the price hike.
Often a buyer can find older pictures of the house they’re looking at online from when it was sold before the flip. That was the case with the house I bought in 2013, the listing photos from before the flipper got it were still up on Zillow, so it was very easy to compare and see what they had done. This isn’t always the case, of course.
One of the biggest benefits of buying a renovated home is that it’s often move-in ready and won’t need any significant work done right away. The downside comes when that promise turns out to be false — if the buyer moves in only to find out that the roof needs replacing or the bathroom has no vapor barrier and mold is growing.
“Ask the buyer’s agent if they have experience with homes that have been flipped,” Savela said. “And ask that early in the process.”
Once you’ve decided you’re serious about a house and ready to commit to buying it, one of the most important remaining steps is to get a professional home inspection.
While this process is optional, and can be pricey, inspections can ultimately save the buyer money by finding problems ahead of time and asking the seller to cover the cost of repairs. If enough problems are found, the inspection can even be the impetus for a prospective buyer to walk away.
This is one place where I made the wrong choice. Rather than hiring a certified inspector, I went with a friend’s uncle-in-law who claimed that he built a lot of houses. It saved me $75 and he huffed around the house acting like an expert during his inspection.
Months later, I learned the flippers never reinstalled two of the six heating ducts under the house when they put new tile in the kitchen and bathrooms. They’d blown hot air into our crawlspace all winter! A friend and I went to Home Depot, rented some tools and hooked them back up, but it cost a lot more than $75, not to mention the effort, the headache and three months of higher heating bills.
“I inspected a house last week with new paint on the inside, new carpeting and kitchen countertops, but they hadn’t changed the bathrooms,” said Barker, the home inspector. “The water heater was older, the HVAC was older, the roof covering was at the end of its service life. Those are the kinds of things some flippers will do. They’ll do the cosmetic things to make it look good, but when you start digging into the details, that’s when you start finding things that are problematic.”
And the same level of scrutiny should be applied when finding the person who will inspect the home.
“When looking for an inspector, you definitely want to look for things like years of experience, certifications and a license if they’re in a jurisdiction that licenses inspectors,” Barker said. “Years of experience is about the only objective standard that you can go by. If you’ve done enough inspections you’ve seen most of what you’re going to see.”
Ideally, an inspection will be a simple process that finds only minor issues. Either way, it’s better to know for sure than to find out after the fact.
“Essentially, what you’re buying with a home inspection is peace of mind,” said Barker.
Getting a mortgage
The final step in purchasing a home, flipped or not, is obtaining a mortgage.
However, this process should begin before a home buyer even looks at their first house.
“We want to make sure buyers can get preapproved for a loan,” said Emanuel Santa-Donato, vice president of capital markets at New York-based Better Mortgage. “The first step is to identify what you can afford.”
While the two may not seem connected, a flipped house can become an issue when obtaining a mortgage. For buyers using a government-backed loan through the Federal Housing Administration (FHA) or the Department of Veterans Affairs, houses can’t change hands again less than 90 days from the previous sale.
“If it’s a very quick flip, FHA will not be an option,” said Santa-Donato. “That goes out to 180 days if the sale’s value doubles.”
For conventional loans there’s no set rule, as each lender will have their own criteria for what’s allowed. Santa-Donato said most banks do include a 90-day restriction, though not all.
And if the quality of work on a renovation is subpar, that can also affect a buyer’s ability to secure a mortgage.
“If the kitchen is unfinished you can’t lend on the house,” Santa-Donato said. “If you have exposed wires you can’t lend on the house. It’s a fairly clear health and safety bar that comes from the appraisal process. If there are obvious things missing, a loan can’t be made.”
While a turnaround of less than 90 days might be a warning sign of work that was done quickly and perhaps at a lower quality, in 2021’s hot housing market many buyers are still willing to take a look. Some lenders, including Better Mortgage, will make cash offers on behalf of clients, arrange for them to rent the house and then have them officially take on a mortgage after the new 90-day window closes.
Unfortunately for today’s buyers, that’s a big change from when I bought my flip in the last days of the Great Recession. They’ll have to be much quicker on their feet to land a contract.
“In some housing markets it might be different, but right now I don’t think sellers will be all that patient,” said Santa-Donato. “There’s a lot of demand out there.”