BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
INFORMATION REGARDING THE NEW CONTRACTOR “FLIP” DISCLOSURE LAW GOING INTO EFFECT JULY 1, 2024
On July 1, 2024, a new law goes into effect requiring that “flippers” disclose all recent repairs and renovations. The law will apply to all transactions entered into or ratified on or after January 1, 2024. The law applies to residential properties one to four units. While the term “flipper” is not used in the statute, it applies to any seller who has accepted an offer within 18 months from the date that the seller acquired title.
The disclosure will be required if the following exists:
- The property is residential one to four units (it applies to all properties for which a Transfer Disclosure Statement is required).
- The seller accepts an offer within 18 months from the date the seller acquired title.
- All renovations or repairs were prepared by a contractor who contracted with the seller.
The new law requires a seller to disclose to the buyer on a “flip” home the following:
- Any room additions, structural modifications, repairs, or other alterations made by the seller; and
- A copy of all permits, if obtained (or if the seller contracted with a third party and was not provided with a copy of any permits, the seller may inform the buyer that the permits may be obtained through the third party and provide their contact information).
These disclosures may be disclosed as a list given by the contractor to the seller and provided to the buyer.
Where the cost of labor and materials was $500 or greater (California law requires that a contractor perform the work, not a handyman), the seller will disclose the name of each contractor and the contract information for each contractor, as provided to the seller.
DISCUSSION:
While these disclosures are now required under the law, Broker Risk Management (“BRM”) previously recommended that such disclosures be made.
If an agent is listing a property for a “flipper,” it is recommended that the agent inquire of the seller what improvements were made and request that the seller create a list of those improvements. The listing agent should also encourage the flipper seller to disclose whether any of the repairs or improvements were made with permits. If not, that fact should be disclosed. If the seller represents that the repairs or improvements were made with permits, the seller should provide copies of those permits or identify where the permits can be located.
As a reminder, real estate agents are not required to check public records or pull or obtain permits on behalf of their clients. It is strongly recommended by BRM that agents, whether a listing agent or buyer’s agent, refrain from pulling permits or even going to the building department to review permits. If a seller represents that the seller pulled permits, the listing agent should disclose it as follows: “Seller represents that seller obtained permits for the repairs and improvements made to the property. Agent has not verified the existence or extent of the permits. Buyer should investigate the issue.” The listing agent should provide the buyer with all documents provided by the seller, including any permits. However, the agent should not obtain permits from the local building department.
As a further reminder, in California, any work exceeding the value of $500 is required to be performed by a licensed contractor. If a handyman (essentially an unlicensed contractor) performed any of the work at the property, it should be disclosed to a buyer.
It is also recommended that a listing agent obtain the disclosures and reports from when the seller purchased the property and provide those disclosures and reports to the buyer.
If a buyer is representing a client on a “flip” property, the buyer’s agent should recommend to the buyer that the buyer check the permitting at the local building department. As indicated herein, the buyer’s agent should refrain from undertaking that investigation themselves as it is outside the course and scope of a real estate agent’s duties. A real estate agent representing a buyer should also recommend that the buyer undertake their own inspections including the following: general home inspection; pest; roof; chimney; and pool, if applicable. If there are any red flags, the buyer’s agent should recommend further follow-up inspection into those areas.
Please be advised that the California Transfer Disclosure Statement has been updated to address these requirements and is being released by CAR this week.
PRACTICE TIPS:
- Agents listing homes for “flippers,” should make inquiries of the sellers seeking a list of all improvements and repairs, inquiring as to whether permits were obtained, and inquiring as to who performed the work.
- Listing agents representing “flippers,” should review the seller’s disclosures and ensure they are consistent. For example, if a seller states that the seller does not have permits for some of the improvements or repairs, it should be disclosed on the Transfer Disclosure Statement. In addition, the TDS should disclose all aspects of the property which do not comply with local building codes.
- Listing agents representing flipped property should request from the seller the disclosures and transaction file from when the seller purchased the property and provide it to any buyer.
- Agents, whether representing the seller or buyer, should not obtain permits or any other documents for their clients at the building department.
- Agents representing buyers on flipped homes should recommend that their buyers thoroughly inspect the property and that they go to the building department to pull permits.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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