There were rules to flipping houses, and buying a flip, before the pandemic and the post-pandemic housing market is creating new rules you really cannot afford to ignore. According to realtor.com there were more than 59000 home flips across the U.S. from April to June 2021 – the highest level since 2005 and up 23% from 2020 when construction was halted. Yet profits for flips are down more than 66% in the 150 largest metro areas. Skyrocketing construction costs and rising costs of homes, even those that need extensive renovation, are the main culprits of flippers’ profit decline.
The impact to buyers can be substantial. Higher material costs, supply chain problems and a labor shortage have all substantially contributed to costs that can temp some investors and/or contractors to cut corners during a flip renovation. If you are considering purchasing a flip, here are some critical things to consider.
- The dreaded LLC. Many flippers or real estate investors will form an LLC to purchase a property. If you are considering purchasing a home owned by an LLC, know that completely protects the seller(s). There is no mandate (at least in California) that the LLC needs to be funded, needs to stay in business after the home is sold, or needs any form of business insurance. If you discover a major issue after the home is sold, it might be extremely difficult to resolve that issue. Be extra diligent on working with the right realtor, inspector and other experts. If during the home buying process, a potential ‘red flag’ arises – run.
- Have a Real Estate Lawyer review the contract. In some states, like Illinois, this is a requirement but, in most states, you are on your own. Since there is a high probability that the ‘flipper’ never lived in the home – and therefore can deny knowing of problems – you’ll want to be extra diligent with understanding the contracts. A real estate attorney can provide that state-specific information.
- Invest in more than a general home inspection. First, hire a home inspector on your own. Don’t ask your realtor and do not let your realtor hire one for you. Seriously consider a structural inspection from an engineer. If you are on a hillside or the home has prior earthquake damage (California), consider a geological inspection. An HVAC specialist can tell you how long that air conditioning unit will last. A pool/spa specialist can identify any potential problems associated with an inground pool and/or spa. The extra inspection expense up front might help you negotiate a better price and save you a lot of money in the future.
In 2021, here are the best and worst places to flip a home according to realtor.com. Remember that’s from the seller’s perspective!