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Buying a ‘flipped home?’ Buyer beware

Posted: December 31, 2011 1:30 a.m.
Updated: December 31, 2011 1:30 a.m.
 


When the Federal Housing Authority announced an extension of the anti-flipping waiver through 2012 this week, Sam Heller with Keller Williams VIP Properties praised the action but also issued a warning: buyer beware.

“It should be remembered that while this waiver of the flipping regulation is positive, there can be major pitfalls in purchasing a ‘flipper’,” said Heller.

But, Heller also commended the agency for taking some positive action to help the real estate market.

“Positive actions like this are long overdue and desperately needed if we are going to turn around our nation’s economy,” he said.

The FHA’s extension is intended to stabilize home values and improve conditions in communities experiencing high foreclosure activity.

Heller says he both lists and sells homes that have been flipped, but always checks to see if a home was listed in the
Multiple Listing Service and contacts the prior listing agent to get feedback on the condition of the property first. At times, he even contacts the prior owners.

“The extension does include good and fair rules to avoid fraud,” he said.

Buying a flipped property can prove to be a great value for a new homebuyer, or a buyer looking to move up in the market, but there are risks.

Hidden damage

A good paint job can cover signs of mold and who knows what else, Heller said.

And most clients in need of an FHA loan, because they have limited funds, are least likely to have the cash reserves to make repairs or initiate a lawsuit to recover from damages incurred by a home with serious hidden defects.

Homeowners foreclosed on by lenders often take out their frustration or anger by damaging homes in ways that aren’t discovered until it’s too late.

Some of the sabotage is cleverly hidden because the party being foreclosed on doesn’t want the lending institution to come after them later for vandalism, Heller said.

And when the flipper may only have owned the home for 30 days, good luck proving that he or she knew about the damage or never climbed into the attic, Heller said.

Heller isn’t saying, however, that all flippers practice deceit.

Flipper risks

“Many of the homes purchased for flipping are purchased at foreclosure sales and the purchaser/investor lacks knowledge about the home’s true condition,” Heller said.

Often the buyers at foreclosure sales have no access to the homes to conduct inspections prior to the purchase of “as is” properties.

And if a home could not be sold while it was listed with a Realtor because of defects, or not listed at all because sellers did not want to disclose problems, the investor buying the home inherits all the problems.

Investors and flippers are in business to earn money after all, and achieving maximum profit can be risky when buying homes with untold problems.

“This could include bad pipes, mold, cracked slabs or worse,” Heller said. “In a traditional sale, even in a short sale, defects if known would have to be disclosed by the sellers.”

Not so, in the case of properties being sold at foreclosure sales or auctions.

Banks exempt

“The problem arises because banks are exempt from most disclosures,” Heller said. “Defects are passed on to the investor or flipper and ultimately the family home purchaser.”

Ironic in that lenders are blamed for creating the mortgage mess and collapse of the real estate market, yet in most cases they are not required to disclose any damage.

Many times the cost to repair or correct defects inherited upon purchase of the property is very costly. And not all investments turn a profit. Sometimes the investors or flippers lose money on the deal.

As it is, new regulations and requirements place have made it very difficult and expensive for investors to purchase properties, Heller said. “Most investors need 30 percent or more for a down payment on a non-owner occupied property.”

Still, Heller advises buyers to be careful.

Ask questions

A family purchasing a flipped home to raise their children usually can least afford to make any repairs, Heller said.

But once the new owners become aware of any problems, they are required to disclose them when they put their house up for sale creating a possible nightmare dilemma for the new owners – invest a lot of money to make the required repairs, disclose the defects and drop the sales price to less than what they paid for the property, or worse, remain in the house without being able to afford to make any repairs.

Buyers should ask questions and check to ensure that the seller is not suffering from a case of selective amnesia, Heller said.

“A licensed home inspector cannot be expected to catch every defect or shortcoming,” he said.

Sellers and buyers should work together, guided by their Realtor, during a real estate transaction to confirm disclosures.

“Flipped homes can be a great deal for the end purchasers,”  Heller said. “but the Realtor and purchaser need to keep their eyes open.”

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