Flipped homes — properties purchased by investors that are renovated and sold for profit — are one of the most popular types of sales in the Washington area, especially for townhouses and single-family residences. In 2016, there were about 4,500 flipped houses sold in the District.
The supply of single-family residences, including rowhouses and detached dwellings, grows very little compared to the condominium market because of a lack of land available for constructing homes.
Thus, flipped properties may be attractive to some buyers seeking a like-new home. But although newly constructed homes in the District are under a two-year warranty after the first unit in the project is sold, flipped properties do not have the same protection.
Here are tips to help you avoid some of the pitfalls often associated with buying a flipped home:
• Every home has a history.
Most of the rowhouses in the District are about 100 years old in most places (if not older). With most flipped properties, the chain of title of the home likely extends through many owners. Using the District’s Office and Tax Revenue real property tax database along with the multiple-listing service, a prospective owner can learn many details regarding the history of a property. This can tell you many things, such as how long the flipper has spent working on the property.
Moreover, it’s important to learn if the developer and/or builder pulled the proper building permits before completing work on the property. This information can be found through the D.C. Department of Consumer and Regulatory Affairs’ website. Subpar and illegal builders will cut corners by not pulling the proper permit while thorough builders will follow District regulations. This information can also be useful as an entire history of permits can be found online for the property. If renovations were done previously, these permits will also be listed.
• Flippers are not created equally.
Because of the historically high rates of returns on flipped properties in the District, there has been an influx of developers throughout the city. However, some developers may have more experience than others in flipping properties. Part-time developers may flip one to two properties a year, while full-time developers may develop more each year. Regardless, purchasers should ask for a history of properties the developer has completed. These examples will also show a buyer how long a flipper’s properties remain on market, on average what they sell for, as well as other considerations for a potential offer.
Moreover, high-quality builders are often more forthcoming with information regarding their renovation. From the types of materials used to a development timeline, the more information a purchaser can obtain, the better. This information can then be analyzed for quality and durability. While the finished product may appear polished, high-quality materials will be needed to stand the test of time.
Purchasers may also want to consider contacting the architect and head general contractor for a project before deciding on making an offer.
• Look at the quality of the most noticeable items.
A properly done flip will include a quality aesthetic that extends beyond the walls. However, most purchasers can get a good idea of the quality of a flipped project just by looking around. For example, does the craftsmanship of simple projects such as caulking and mortaring look uniform? Do the appliances work properly? Does the home appear to be uniformly completed instead of just a few spaces?
One contingency purchasers should not neglect if uncomfortable with these questions would be a home inspection. While a home inspector won’t be able to look beyond the walls in most cases, the inspector can test the safety of the home and look at the major elements of a home: electrical, plumbing, structure and functionality of major components. For buyers interested in a flip but in competitive situations, this inspection can occur prior to submitting an offer, thus waiving their right to inspect as a contingency of their contract.
• Some of the most important details cannot be seen.
Most of the real work done in improving a property may be behind the walls. While a home inspector can check the safety and code of an electrical panel, much of the electrical and plumbing work will not be noticeable in a home inspection. In this case, potential buyers should obtain as much information about the contractor, subcontractors and architects of work done beyond the walls of the home.
• Lending concerns can be a factor.
For the most part, obtaining a loan on a flipped property is straightforward. However, obtaining a loan will be subject to an appraisal, and purchasers should note that flipped homes may be priced on the high end of their desired market. In this case, low appraisals are certainly a possibility.
Specific to Federal Housing Administration buyers, purchasers may not enter a contract until the investor has owned the property for at least 90 days. This may avoid quick flip jobs but does make FHA buyers slightly less competitive if the owner has flipped a property quickly. Moreover, properties owned for less than 180 days to be financed with an FHA loan may be subject to other considerations such as a second appraisal.
• Plan for the future.
At the end of the day, expect the unexpected. Many home buyers decide to negotiate a home warranty as a part of their contract or choose to purchase one on their own. These warranties are offered in tiered pricing, covering different elements of the home at different price points. Additionally, buyers should also make sure to keep records of the manufacturer’s warranty on major appliances in the kitchen, HVAC and any warranties that may come with a new roof.
Tim Savoy, a real estate agent with Coldwell Banker Residential Brokerage Capitol Hill, writes an occasional column about the Washington-area housing market. He can be reached at Timothy.Savoy@cbmove.com and on Twitter @SavoyRealEstate.