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Representing Buyers on a “Flip”

by | Jun 5, 2020 | Advisories and Forms, Broker Practice

QUESTION:  We represent Buyers who are interested in a Property where the Owner is allegedly a contractor (but we do not know his license status); he bought the Property last year as a “fixer-upper” and is now “flipping it.”  The brochure says the Property was “completely remodeled with newly-added appliances;” it is obvious that the Owner has done considerable work to improve the Property.  Are there any kind of statutory or other warranties that automatically go along with this type of sale?  Are there any issues that we should warn the Buyers about before writing the offer?

ANSWER: The only statutory or mandatory warranty that affects real property is contained in the Homebuyers’ Rights Against Builders and Developers for Construction Defects in New Homes law, Civil Code Sections 895-945.5 (formerly known as SB800).  That law does not apply to remodels or flips of “fixer-upper” properties.

There are several issues that Buyers need to be warned about before preparing an offer to buy a “flip” including, but not limited to, warranties, the license status of whoever did the work and properly evaluating the actual work that was performed.

WARRANTIES: There may be warranties on some newly-added appliances or systems that may be contractually transferred to Buyers but your clients will need to investigate the actual transferability of those warranties. Buyers’ Agents should warn Buyers, in an email, about the following specific issues concerning any warranties:

  1. Buyers should make no assumptions on either the transferability of any warranties or the extent of coverage afforded by those warranties. It is critical that all warranty documentation be carefully reviewed by Buyers during their investigation contingency;
  2. “Newly added” does not automatically mean that the installed items or systems were actually new at the time they were installed. Unless there is proof that the appliances are unused (i.e., the manufacturer’s wrappings are still in place), no one should assume that an appliance or other equipment is, in fact, “new;” and
  3. Buyers should insist upon receiving copies of all purchase orders and warranties for all appliances and systems that were installed by the Seller. That documentation should be received during the Buyers’ investigation contingency period so that the Buyers can assure themselves of the quality and age of those appliances and systems as well as determine the transferability of any warranties before the Buyers remove their contingencies.

LICENSE STATUS/BOND/INSURANCE:  Some flippers purport to have extensive building experience, a contractor’s license or they claim that they used people who were licensed. Some flippers set up companies or limited liability entities using the name “Builder,” “Construction Expert” or “Restoration.”  Use of that terminology is not a guarantee or assurance that any of the work was done by a licensed contractor using licensed tradespeople.

Buyers’ Agents should strongly advise Buyers, in an email, that Buyers should obtain from the Seller the names of all persons and entities who provided work on the project, and determine with respect to each:

  1. Their actual license status to determine whether those individual and entities were licensed to do the work that has been done by each. License status can be determined online on the California Contractor’s State Licensing Board website.
  2. That each has been fully compensated so that there will be no mechanics’ liens filed against the Property. Buyers should also discuss with the Title Officer (not the escrow officer) obtaining an endorsement to their Title Insurance Policy to protect them against any potential post-closing mechanics’ liens that are filed; and
  3. That they had any required performance bonds and/or insurance to make sure that if there are any post Close of Escrow problems there is someone who is financially able to pay for their liability.

 EVALUATION OF THE ACTUAL WORK PERFORMED:  Regardless of how a flip is advertised, these properties are never “completely remodeled.”  At the very least, the residence will be constructed on an existing foundation and using some or all of the original framing.  It is thus important for the Buyers to thoroughly assess the quality and durability of the actual work that was performed.  Buyers’ Agents should warn Buyers, in an email, that:

  1. Buyers should carefully review all city/county planning files regarding all work done on the Property.  “Contractor” flippers often use builder-owner exceptions as a means to not pull any or all required permits.  The work is then not scrutinized at all by any governmental employee. Of great concern is that the work performed was simply cosmetic and often covered up “red flags” without fixing the underlying problems;
  2. Buyers should obtain all disclosures and reports that the Seller received when the Seller acquired the Property along with any documentation (reports, estimates, invoices) that the Seller has regarding the work done since the Seller acquired that Property.  Buyers should make their purchase contingent on the Seller providing all of that documentation and Buyers reviewing/approving all of the material that the Seller provides.  The Seller’s current Broker/Agent may have the historical documentation but, if that is not the same Broker/Agent who was involved in the prior transaction, it may be more difficult to get that documentation;
  3. Extensive work on a Property may trigger the need to bring certain features up to current code, such as water-conserving plumbing fixtures and pool/spa safety mechanisms to prevent drowning. Buyers should confirm with a licensed contractor that all required retrofits have been taken care of; and
  4. Because “flipped” properties often are made to look beautiful but hide significant defects, the Purchase Agreement must have an inspection contingency and, before removing that contingency, Buyers should retain the services of a licensed contractor to assess everything that was done at the Property. That expert should go with the Buyers to check on the Planning/Building Department files.  That licensed individual can also compare the historical documentation from when the Seller bought the Property with the work that was done to determine if any or all of the known problems have been adequately addressed as part of the remodel.

PRACTICE TIPS:

  1. Buyers’ Agents should confirm, in an email, that the Buyers have been advised that their offer must have an investigation/inspection contingency period that is sufficiently long enough to enable the Buyers to conduct all of the investigations and document reviews specified above. Alternatively, the Buyers should be provided with the separately-attached Advisory: “Buyer Advisory – Acquiring Property That Has Been Remodeled/Renovated.”
  1. If the Buyers choose not to follow any or all of the Buyers’ Agent’s recommendations specified above, then document that the Buyers are proceeding at their own risk. 

 See Weekly Practice Tip:  How to Handle Clients Who Will Not Follow Advice? (11/16/2018)

 

WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS.  This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.

© Copyright Broker Risk Management 2020                                                                                   06/05/2020

ADVISORY FORM FOLLOWS:  

BUYER ADVISORY — ACQUIRING REMODELED/RENOVATED PROPERTY 

Many property owners remodel or renovate their homes; some do this for their own use and enjoyment while others acquire property, make improvements and then resell the property for profit.  Regardless of why the Seller has made changes to the look or condition of any residence, Buyers should exercise caution when evaluating these properties as part of their investigation process; Buyers should not simply accept the representations made by Sellers or Agents as to the actual condition of the Property or the quality/sufficiency of any work that was completed.

Regardless of how a home is advertised, properties are never “completely remodeled.”  Upgraded properties often look beautiful but the upgrades may hide significant defects. The best advice is to structure the Purchase Agreement to include an inspection contingency.  Before removing that contingency, Buyers should retain the services of an independent licensed contractor to aid in the investigation process, which should include the following issues: 

  1. WARRANTIES: Review all written warranties for transferability and extent of coverage. Not all warranties are transferrable.  “Newly added” may not mean that the installed items or systems were actually new. Insist upon receiving copies of all purchase orders and all available documentation regarding all appliances and systems installed by the Seller.
  1. LICENSE STATUS/BOND/INSURANCE: The Seller’s company name or references to the Seller may include terms such as “Builder,” “Construction” or “Restoration.” That terminology is no guarantee that they are a licensed contractor, and no guarantee or assurance that any of the work was done by a licensed contractor using licensed tradespeople.

Obtain from the Seller the names of all persons and entities that provided work on the project, and determine with respect to each:

  • Their actual license status to determine whether those individual and entities were licensed to do the work that has been done by each. License status can be determined online on the California Contractor’s State Licensing Board website.
  • That they have been fully compensated so that there will be no mechanics’ liens filed against the Property. Discuss with the Title Officer (not the Escrow Officer) obtaining an endorsement to the Title Insurance Policy to protect against any potential post-closing mechanics’ liens.
  • Whether they had obtained any required performance bonds and/or insurance to make sure that if there are any post Close of Escrow problems that there is someone who is financially able to pay for their liability.
  1. EVALUATION OF THE ACTUAL WORK PERFORMED: Review all city/county planning files regarding all work done on the Property.  Some Sellers use builder-owner exceptions as a means to not pull any or all required permits.  The work is then not scrutinized at all by any governmental employee.
  • Obtain all documentation the Seller received when the Seller acquired the Property along with all disclosures, reports, estimates, invoices and photographs the Seller has regarding the work done prior to selling.
  • An independent,  licensed contractor should (a) go with you to check the Planning/Building Department files; (b) compare the historical documentation from when the Seller bought the Property with the work that was done to determine whether known problems have been adequately addressed as part of the remodel; and (c) confirm that all required government retrofits have been taken care of, including any that may have been triggered, to bring certain features up to current code including, but not limited to, water-conserving plumbing fixtures and pool/spa safety mechanisms.

The undersigned acknowledge receipt of this Advisory:

Buyer: _____________________________________________              Date: __________________ 

Buyer: _____________________________________________              Date: __________________