In today's inventory-strapped real estate market, a flipped house can seem like a diamond in the rough: updated, located in an up-and-coming area, and 100% move-in ready. They're often priced competitively, too.
As they say, though, you can't judge a book by its cover -- and sometimes, when it's flip houses we're talking about, that cover can be pretty misleading.
The value of a flipped house relies heavily on the skills of the seller. Did they choose the right location and projects? Did they hire trustworthy and experienced contractors? Did they cut any corners to save money or up their profit?
If you're thinking of buying flipped real estate, then answering these questions and more is critical.
Here's a full list of what you'll want to do before buying a flip home:
- Do a very detailed walk-through.
- Check out the house flippers.
- Get the home's history.
- Ask for a full list of all updates and work.
- Bring in a buyer agent's expertise -- especially when determining what to pay.
- Craft your purchase agreement accordingly.
- Check for permits on all upgrades and additions.
- Know what loan you'll be using.
- Get the names of the contractors used.
- Go beyond the standard home inspection.
- Check for a certificate of occupancy.
- Ask about any warranties.
- Know the red flags.
Now, let's go into each one of these items in more detail.
1. Do a very detailed walk-through
When you're touring a flipped house, you'll want to be as thorough as possible. Ask to check out the basement, attic, and crawl space, open up all the cabinets, and check that all the faucets, fixtures, and appliances work. You should also check the home's paint job and little things like molding and baseboards. If these things look haphazard, you can probably guess the flipper wasn't thorough elsewhere either.
2. Check out the house flippers
Not all house flippers are created equal, so try to learn what you can about the person who bought and flipped yours. A local real estate agent may be able to help you here, as they may have worked with the seller before or may know someone who has). If it's a company or firm that did the flip, you may be able to look them up with the Better Business Bureau or find online reviews about them.
Finally, be sure to search their name/company name plus "lawsuit" or "legal claim" online. If a homeowner has sued them for poor practices, you might be able to find a record of it.
3. Get the home's history
Do some digging into the property itself. Who were the previous owners? When was it built and by what builder? This information could be critical if you have an issue crop up months or years down the line. You should also ask about how long the home was vacant. Vacant homes are more likely to have damage due to frozen pipes, leaks, termites, and other issues that can go unnoticed.
4. Ask for a full list of all updates and work
Ask the seller or their agent for a detailed list of what was done to the property, as well as anything that was repaired due to previous defects. You should also ask for an updated seller disclosure statement, which should note any defects that the seller is aware of on the property in its current condition
5. Bring in a buyer agent's expertise -- especially when determining what to pay
Having an agent on your side can be smart in any real estate transaction, but when buying a flip, it can be particularly helpful. Not only can they potentially provide insight on the house flippers, but they can also help you home in on the right purchase price to offer. They'll take into account local comps and the state of the market and neighborhood as well as the value of the property and work with you to determine the right bid to make on the home.
6. Craft your purchase agreement accordingly
You have to be very careful when putting together a sales contract on a flipped property. For one, you need to include the right contingencies. Make sure there's both an inspection contingency and an appraisal one (your lender will definitely want an appraisal), and consider a financing contingency, too.
You should also ask for a home warranty as part of your deal, and be smart about how much earnest money you put down, too. You don't want to be out too much cash if you have to pull out unexpectedly, so talk to your agent about the right number to fall on here
7. Check for permits on all upgrades and additions
Use the seller's list of upgrades to double-check the property's permits. If parts of the home are found to be out of code or unpermitted, it could mean serious penalties or you may have to repair -- or even remove -- part of your home as a result. It also means the upgrades probably weren't done right -- another huge red flag.
To check for permits, you'll just need to contact the city. Find out what permits were applied for on the property, and make sure they were inspected and approved once finished, too.
8. Know what loan you'll be using
Flipping houses isn't looked at so kindly by mortgage lenders. In fact, if you'll be using an FHA loan for your home purchase, you'll need to tread especially lightly. The FHA has what's called the 90-day flipping rule, and it won't approve an FHA-backed loan on any property that was owned less than 90 days by the previous owner. If the home was only owned 91 to 180 days, you'll also need a second appraisal before the FHA will insure your loan.
Most house flippers aren't going to wait months for your FHA loan to come through, nor do they want to deal with multiple, time-consuming appraisals. Because of this, there's a chance an FHA loan could hurt your deal, as sellers might prefer buyers with conventional loans or other types of financing.
9. Get the names of the contractors used
Though they're not required to give this information to you, it's smart to ask the seller what contractors, architects, and other pros they used in flipping the house. This allows you to check up on their licensing, experience, past work, and any pending legal action. You can also ask your agent for feedback on any local contractors used, as they may have heard about them through the grapevine as well.
10. Go beyond the standard home inspection
A home inspection is vital no matter what type of real estate transaction you're going into, but when you're buying a flipped house, you have to go above and beyond. That means you'll want a termite inspection, a mold inspection, and maybe even a sewer inspection, if the house is older. The point here? Be thorough.
11. Check for a certificate of occupancy
Depending on your municipality and the work that was done to the house, a certificate of occupancy (CO) may be required before you can inhabit the property. This essentially says the home is up to code and passed official inspection. To determine whether a CO is necessary or has been issued, you'll need to contact the planning or building department of your local municipality.
12. Ask about any warranties
You'll definitely want to ask the seller for a home warranty as part of your negotiations, but you should also inquire about other warranties that may be in place, too -- ones that came with new appliances or systems installed in the home or warranties on any contract work done as well. Make sure the warranties are transferable and that you have the contact info and other details necessary to call on those policies when needed.
13. Know the red flags
When buying flipped real estate, you need to be on high alert at all times, looking for red flags at every turn in the transaction. Is the seller cagey about giving out contractor info or showing you the list of repairs and upgrades? Did their LLC just launch 10 days before the property was purchased? Are they close-lipped about permits, COs, and other legally required processes? These could be signs the flipper isn't trustworthy.
You should also look out for red flags physically -- things like:
- Doors and windows that don't open/shut properly.
- Signs of water damage on the ceiling or drywall or in cabinets.
- Faucets and fixtures that won't get hot or cold or have poor water pressure.
- Attics and other less visible areas in poor repair.
- Uneven baseboards or paint lines.
- A water heater older than 10 years.
- Mismatched plumbing and pipes or rusted pipes.
These can all be indicative of either shoddy workmanship or larger underlying problems -- both of which could cost you in the long run.
The bottom line
Buying a flipped house can be tempting, especially in an area short on listings. But don't let a quick makeover fool you. Be thorough in evaluating any potential property and the people selling it, bring in some pros to help, and protect yourself with a smart contract, warranties, and thorough inspections.
At the end of the day, remember that real estate investors get into flipping houses for a profit. Take steps to safeguard your money as well.