Wednesday
July 23, 2014

Be Cautious With Flips

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Be Cautious With Flips

Encourage buyers to scrutinize a quickly remodeled home.

Foreclosures can bring out the ugly in people. When a home owner from Mission Viejo, Calif., was foreclosed upon by the second lien holder on his mortgage, his response was to hammer holes in the walls and fiberglass showers, damage the pipes and plumbing, and let water in the sinks and tubs overflow on his way out of the door.

Facing more repairs than expected, the individual who held the second lien hired a handyman. The holes were patched, the walls painted, new carpet installed, and the landscaping spruced up. The house looked beautiful and the licensee who listed the property described it as having $50,000 in upgrades.

The house soon sold to buyers who, concerned about possibly concealed defects, had earlier told the real estate practitioner representing them that they didn’t want to buy a foreclosure or a short sale. They made the purchase under the impression it was neither of those.

Soon after the closing, problems cropped up. Pipes were found leaking, and mold was discovered when the owners opened up the walls. They learned from a neighbor that the seller had owned the property for only six weeks and that it had, indeed, been a trashed foreclosure.

The seller—again, the second lien holder—had actually made only $20,000 in repairs, not $50,000, as receipts produced in pre-trial discovery would show. The listing agent had made an affirmative representation of an unverified material fact. Upgrades of $50,000 require permits and so do many of the items the listing agent claimed the seller had upgraded.  Most of the work done by the handyman required a licensed contractor and was done incorrectly, according to the local building inspector.

The buyers called their attorney. Both licensees and the seller were sued. The buyers recovered funds and had licensed contractors make repairs with permits as required, but it all came after much grief. 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.

What Your Client Should Know

Disclosure rules vary by state, but there are steps you can take to avoid getting caught up in a situation like this.

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. All sellers are responsible for filling out disclosure forms, as required by their states, as accurately and completely as possible.

Second, if you know any material facts concerning the property that a reasonable and prudent buyer would want to know, you must disclose those.

Third, it is reasonable for the listing agent or the selling agent to educate the buyers about questions they might ask the seller. These include:

  • What was the property’s condition when it was taken back in foreclosure?
  • Are there receipts from licensed contractors to verify the amount of money the seller spent?
  • Is there a list of what was done to correct each defective condition?
  • Were here defects that were not repaired?
  • What work was done by a handyman?
  • Were permits available for the work that was done, and what work was done without permits?

The answers to these questions will help buyers make informed decisions about properties they’re viewing. Buyers can also check with local building departments as to which projects require permits. Meanwhile, avoid saying, “Wow, doesn’t this look nice?” until the buyer has the full story from the seller. Or that “Wow” might be your reaction to a lawsuit you didn’t see coming.

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