Buying A Flipped House
Updated: May 30, 2020
With the popularity of shows like “Fixer Upper”, more and more investors are trying their hand at flipping houses. Flipping a house is no small feat. It is an arduous and, at times, perilous task. There are often plenty of surprises along the way and many first-time investors find that their profit margin isn’t what they thought it would be. So what does this mean for the buyers looking to purchase the finished product? I have often told my buyers that the condition of the electrical panel will tell you how the rest of the inspection will go. My reasoning? Maintenance of electrical systems in the house is a matter of safety and if a homeowner has neglected to have that work done by a licensed professional, it is likely that the rest of the house may not be what it seems. After all, many sellers make sure their homes are tidy and well-staged for showings and those shiny new appliances and updated bathrooms might indeed dupe some buyers. However, all too often the home’s systems are neglected and the renovations have been done in a hasty manner by someone who is less than qualified. Here’s how you can protect yourself and your wallet when buying a flipped house.
First, Check Permits. Fairly self explanatory, I know. You can ask the seller for permits or you can contact the local government to find out whether or not permits were both pulled and approved. Finding that unpermitted work was done in a house is incredibly common. After all, everyone has a handy friend just like everyone knows someone in real estate. The premise of this blog post is to help you determine if a flip is safe, inhabitable, and worth the money. Checking the permits is one of the simplest ways to do so.
Hire An Inspector. Even in a competitive market and even if you plan to write an As-Is offer. In a very competitive spring market, it isn’t uncommon to see buyers walk through a home for the first time with their inspector in tow. This way, they can receive an informal report and write an offer that forgoes inspection contingencies. However, it is possible to write an As-Is offer with the Right To Cancel. You may still have inspections done within the timeframe dictated in the contract and you have the right to cancel the contract if you see something you don’t feel comfortable with. As-Is with the Right To Cancel simply means you may not ask the seller for repairs and/or credits. If you are set on waiving inspections to win the bid, this might be the best way to go.
Nevertheless, having seen the inspection reports on a number of flips, I don’t often encourage buyers to go down this route with a house has been flipped. It is often counterintuitive to buyers since everything in a flip might be brand new, but buying a house from inexperienced and/or unscrupulous investors may cause trouble down the line and there is little recourse to recover damages after closing beyond going to court.
Look Behind The Façade. Open the cabinets, turn on the faucets, take a look at the attic, and check the systems. Seems excessive for an intial walkthrough? It’s not. As I said, the appeal of a brand new kitchen and appliances might cause some buyers to feel overly comfortable with the condition of the house. Opening the cabinets to check the hardware and functionality may give you some idea of how much thought went into the renovations. I’ve often seen bigger and more expensive oversights paired with improperly installed plumbing so while you’ve got those cabinets open, turn on the faucets and check for leaks. Most leaks aren’t too serious and can be easily remedied, but in a house that the seller purports to be totally renovated, faulty plumbing is a huge giveaway that the renovations were not done to standard. Story time: I recently saw a “move-in ready” flip that had an issue with water pouring out of the downstairs light fixtures when the shower in use. The tub wasn’t installed properly. As you might imagine, faulty plumbing is a health and safety issue.
In keeping with the theme of taking a look under the hood, checking out the attic is probably in your best interest. It usually doesn’t take an expert to spot signs of water and/or pest damage, particularly if the issue turns out to be extensive. Shine a flashlight around the space and keep an eye out for reflected light and mold. These are signs of moisture and may indicate issues with the roof or siding. Torn up insulation is an sign of an infestation of some sort. It is also common to find extension cords used to power permanent fixtures. This type of hazard might be hidden away in the attic. Don’t want to check out the attic? That’s why you have a buyer’s agent. Have I found creepy oil paintings sitting in the middle of an attic before? You bet. Did I continue poking around for the benefit of my clients? Yes, I did. The second I hear those Jumanji drums, I’m out though.
Lastly, it is vital to take a look at the systems in a house. Hot water heaters and HVAC will be expensive to repair. Even if it is your first time walking through the house and you yourself are not a home inspector, there are a few ways to get an idea if the systems will need attention. There will often be a label documenting the last time a system was worked on and if you can figure out the make, model, and serial number, you can go online and find out the age. Rule of thumb: if it looks old, it probably is. Note that even new HVAC systems may become damaged during renovations due to dust and debris. Don’t go against your gut. If you suspect something might be wrong, make sure to include an inspections contingency in your offer.
My aim is not to scare you. Buying a home is stressful enough. That being said, I’ve seen some interesting things and I don’t trust that every investor is competent or trustworthy enough to oversee renovations. Cut corners or ignorance might mean thousands of dollars out of your pocket in the future. Take caution when buying a flip and you might just end up with a beautifully renovated home to call your own.