Flipped houses are everywhere right now. Investors are pulling their money out of other investments, hiring a crew of workers and rehabbing homes and selling them for a profit. There is absolutely nothing wrong with this businessÂ model, but there are some things buyers need to be made aware of.
Many habitual flippers have a standard addendum they require buyers to sign with various terms and clauses. On the surface they seem benign but are definitely written to benefit the seller so before you sign on the bottom line, ask yourselfÂ WHY they are asking you to agree to these terms.
Here are some examples:1. Seller will pay buyer's closing costs only if buyer agrees to use one the seller's preferred lenders.
High volume flippers almost always have this requirement. Since most buyers ask for closing costs it is the sellers way of ensuring the buyer will use a lender they are familiar with since they are not allowed to outright dictate who you use for your lender. The problem here is this- the lender is likely getting a steady stream of business from this seller using this tactic so they may not have your best interests at heart but instead those of the seller. In a typical sales transaction this is not the case as the seller and your lender have no relationship to each other. Here are a couple examples of how the seller and the lender having a preexisting relationship can hurt you:
2. If the lender requires a second appraisal it is to be done at the buyer's expense
- If there are conditional issues on the property that become lender required repairs the lender may try to get the underwriter to dismiss the repairs to make the transaction easier for the seller. What happens instead is the buyer does not getÂ necessary repairs performed by the seller because the underwriter was convinced to waive the repairs. In this instance whose interests do you think the lender is serving?
- Since the lender is familiar with the listing agent and the seller, he may presume certain things will take place within the transaction and make promises to that effect and in essence, speak out of turn. Nothing in a real estate transaction is final until it is agreed upon in writing between buyer and seller, so a lender making promises on behalf of the seller does not bode well for the buyer.
On many flipped properties, FHA requires a second appraisal if the house is being resold within three months of the last time it was sold. An FHA appraisal is between $450-$550, so paying for that twice is a pretty big expense.
3. Property to be sold as-is. Seller will not perform any repairs.
- FHA guidelines dictate that the buyer is not allowed to pay for the second appraisal. How many sellers get around this issue is by saying that their credit for closing costs cover the second appraisal fee and will not pay for it outside of the predetermined credit. Depending on the lender you may have enough to cover the entire expense, but if you don't you will have to bring extra money to the close of escrow.
The business model of all flippers is to minimize expenses and maximize profits. Once they have finished the remodel they are generally not interested in spending any more money on the property.
- If the seller is saying up front that they will not perform any repairsÂ and the lender ends up requiring some you are going to be left high and dry. You will be required to bear the expense of the repairs on a house you do not even own yet. And- even the nicest houses have things the lender will want fixed so never assume nothing will need to be fixed.
4. The contract shall be considered cancelled and void if, at any time, the buyer and/or buyer's agent issues the seller a request to perform repairs or incur any additional costs.
What they are saying here is that if you so much as ask for a repair, credit or concession after the contract is accepted they reserve the right to immediately cancel escrow based simply on the request alone.
5. On or before date "xx/xx/xx" buyer shall release all contingencies in writing. Failure to do so will indicate to sellerÂ ALL buyer's contingencies are waived. Furthermore, on date "xx/xx/xx" escrow company shall release buyer's deposit to seller.
- This is simply ludicrous on two levels. First, no flipper is so talented as to have renovated a house to such perfection that an FHA appraiser will not find something that needs repair. Secondly, the contract that we use here in California has a provision built in that allows the buyer to inspect the property (that includes the appraisal) to find any defects, and then ask for repairs if they so desire. The seller in this instance is essentially crossing out that section of the contract and stripping the buyer of their rights to disprove of the condition of the property. That is NEVER a good thing.
This one is a double-whammy. What they are saying is that you need to release your contingencies on your own. They will not serve you with a notice to do so. If you do not, they will consider them ALL automatically released (often referred to as active vs. passive removal). Furthermore, upon release of the contingencies they are instructing the title company to release your deposit to them before escrow closes
Â just in case you do default, they already have your money.
- Counter offers and addendums that make your contingencies expire after a certain date without specifically being removed (passive removal)Â are not uncommon. If you are going to agree to something like this make sure you, your agent and your lender are VERY on top of your time frames.
- As for releasing the deposit to the seller immediately upon contingencies being released is, in my opinion, ridiculous and should not be done. This clause is clearly designed to the seller's benefit ONLY and is a huge risk to you, the buyer.Â
A sales transaction of any kind is a convergence of mutual interests. Despite what people believe, there cannot be one party in the transaction that has all the "power". Each party must benefit somehow, and each party must bear a certain amount of risk. For one party to ask the other party to bear all of the risk is (in my opinion) irresponsible and makes for bad business. Telling the buyer through your negotiations essentially "take this house on my terms or buy something else" is both arrogant and suspect. It fully makes me question the integrity of the seller but mostly theÂ quality of the rehab done on the home.
If you are a buyer and you get a counter offer/addendum from a flipper, make sure you read it CAREFULLY and are very comfortable agreeing to their terms. Everyone starts a transaction thinking it is going to be roses and sunshine, but anything can happen, so PROTECT YOUR INTERESTS!