Beware the Flipping Flop
Most home buyers encounter flipped homes during their search. Flipping is when an investor (the “flipper”) purchases a distressed, dated, damaged, or otherwise inexpensive property to renovate and resell. This can be very lucrative for the flipper. But is it a good deal for the buyer?
Flippers are not created equal. I purchased my first rental property as a flip gone wrong. Unfortunately, I didn’t know it went wrong until a year later. It seemed like a great deal at the time, and it still turned out to be a very profitable rental house. Note I said “still turned out.” I got lucky. Here are five things I learned about buying flips:
- Don’t be distracted by fresh paint, new carpet, and beautiful counters and cabinets. Anybody can slap paint on a wall. Carpet installers are everywhere and even the cheapest carpet looks great when it is installed. New countertops are available by the square foot at home improvement centers everywhere. New cabinets are available from discounters, home improvement centers, or even by sanding and painting the old cabinets.
In the beginning, I was awed by the clean look of the freshly painted walls, the beautiful new cabinets and countertops, and the fresh carpeting. That was a huge amateur mistake because I didn’t take a closer look. Always look beyond the fluff and buff.
- Pay attention to the quality of finishes. Those new cabinets may be inferior to the old original cabinets. Many old cabinets are solid wood while new cabinets are cheap, slapped-together pressboard. What happens when that cheap pressboard gets wet from normal use? How will it hold up after a year of living in a humid bathroom? Is the carpet cheap or quality? Did the flipper use a cheap pad or even reuse the old pad? Was the paint applied correctly and evenly with primer, or will it peel because it was simply slapped over the old paint? Did the flipper even bother to wash the walls before applying new paint?
Ignoring quality was a huge mistake. Those new cabinets fell apart in less than a year. Worse, they couldn’t be repaired because the pressboard was disintegrating. I had to buy replacement kitchen and bathroom cabinets. The carpet became garbage quickly. After tearing it out, I discovered firsthand that reusing the old pad trick. Don’t remind me about the paint peeling off the bathroom walls. We won’t talk about the new concrete stoop cracking beyond repair in just four years.
- How are the big ticket items and mechanicals? Kitchen appliances are important; bad appliances add thousands of unexpected costs. But don’t forget the furnace, water heater, electrical panel, roof, and windows. Are they original to the house? Older replacements? New replacements? If new replacements, was the work done correctly?
My rental house came with an older replacement furnace, water heater, and electrical panel. The windows were original. The roof was a new replacement. My water heater died less than six months after purchase. I later learned that the flipper may have found it on the side of the road, cleaned it to make it look newer, and installed it in the house to replace an even worse old one. The furnace had to be replaced in less than two years due to a cracked heat exchanger. I got lucky; a carbon monoxide alarm caught the issue before it became a true health hazard. (Carbon monoxide can kill.) The roof was done completely wrong by the random people the flipper hired from Craigslist. It constantly leaked over my period of ownership and required frequent patching.
- How is the foundation? Are the basement walls cracking? Is everything plumb? Are there any water leaks? Were cracks filled with putty? Are the walls freshly painted to hide damage and flaws?
Through sheer luck, my foundation was 100% solid and completely plumb. While the neighborhood suffered from a massive flood in 2010, my property remained high and dry.
- Was the flip done legally?
This is huge. Many flippers take a dim view of municipal government, inspectors, and building code. Was the plumbing done by a real plumber? Were electrical upgrades done by qualified electricians? Were permits pulled wherever necessary?
Generally speaking, the current property owner is responsible for failure to obtain permits. This even includes work done prior to their period of ownership! The current owner must make all repairs required to bring the property to code. Most municipalities triple permit costs and show no mercy, requiring the current owner (our hapless buyer, me) to tear out illegal alterations and to restore the property to legal condition. That may also include additional work like declaring previously grandfathered conditions unlawful and mandating special upgrades. Guess who had to gut and re-do a kitchen after a tenant filed a retaliatory complaint for eviction for non-payment of rent?
I got lucky. While this property was a nightmare, I purchased it inexpensively at the absolute bottom of the market. I could afford to eat these near-constant financial hits. Each repair improved the property and increased my resale value. Finally, after nine years of ownership and tens of thousands of dollars of unplanned expenses, I sold the house at a profit to another investor. He got a property that was upgraded, upgraded correctly, and that was upgraded legally.
Can you ignore tens of thousands of dollars in near-constant repairs? If not, be careful of flips. Demand receipts proving that the work was done by professionals. Verify that permits were pulled with the municipality. Hire the best and strictest inspector available. If you have questions about buying flips or even doing flips, please don’t hesitate to contact me. I’ll be happy to help!