Some people buy homes not to live in but to renovate and resell. It’s important to know the liabilities associated with these properties in case you help a client buy or sell one.
Failure to disclose is the most common type of errors-and-omissions claim associated with flipped properties, says Laura Prouse, Director of REAP/REALAX Data Analytics at CRES, a Gallagher Company. CRES is a Texas REALTORS® risk management partner.
A buyer may allege that renovations were not properly constructed, permitted, or covered up existing property damage. The buyer may sue the seller and name you in the lawsuit too.
Transparency is the best defense
If you are representing the seller, Prouse recommends that your seller clients disclose in writing that they specifically bought the home to flip it. “They should let buyers know it is completely refurbished,” she says. “Consider including before and after photos. Ask sellers to provide all the permits and renovation receipts. Sellers can try to put themselves in the buyers’ shoes—what would the buyers want to know? Buyers should know what the sellers know.”
Seller clients should consider putting in writing a recommendation to get inspections and to check all permits. They can also share with buyers their own purchasing documents. “Your clients could attest that they never lived in the home,” Prouse adds. “That gives the buyer a different perspective and encourages them to do a little more investigating and inspecting.”
Disclose as soon as possible
Your seller clients should disclose all relevant information related to a flipped property as well as providing the standard disclosure forms so buyers and their broker can make informed decisions.
By providing this information before going into the option period, buyers can determine if any additional inspections need to be made. “It’s about being up-front with buyers,” she says.
If your client wants to buy a flipped home
If you represent a buyer who wants to purchase a flipped home, Prouse suggests that your client ask for documentation of all renovations and request a copy of the seller’s transaction file from their purchase. Also, recommend in writing that your buyer retain third party experts to inspect the property and check permits. “A bedroom that looks like it used to be part of a garage is a big red flag,” she advises.
It is also advisable to have buyers get an appraisal if they are paying cash. This can protect the buyer from overpaying.
Complaints often come later
While there are fewer recent claims involving flipped properties, CRES is still seeing claims from transactions that took place a few years ago, she says. There is often a lag between the sale and the claims.
Some claims may arise after unusual weather events such as heavy rains, she explains. A buyer may remove renovations after a hundred-year flood to discover preexisting structural damage.
Flipping can be a success for everyone involved. With transparency and documentation, the parties can feel confident in the transaction, and you can reduce your liability.