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from Local Attorney, Michael H. Wasserman

Wednesday, April 11, 2012

BUYING FLIPPED PROPERTIES

by: Michael Wasserman

Here is a really great article from a blog over at Zillow detailing some of the potential pitfalls of buying recently rehabbed / "flip" properties. Flipping is a "term of art" used to describe an investor's quick sale following the purchase of a home or condo, (hopefully with a tidy profit earned in the process).  There have been many reports in the media these days about  "flipping" properties, mostly touting them as investment opportunities, and the massive profit potential they offer.

Six years ago, those flips would have started with  pre-construction condo purchases, resold shortly after the properties were completed. These days, almost all the flips I see involve the "rehabilitation" of foreclosed or otherwise distressed real estate. (Including, ironically enough, flips of those new-construction condos from years gone by).

From a Sellers' point of view, there are great opportunities for profit here. I have several clients who are doing very nicely on these projects. A key is finding "the right" properties - ones that can be renovated quickly and economically. There is A LOT of competition out there looking for those opportunities, so anyone considering this sort of investment play really needs to assemble a quality team of Realtor, lawyer and contractor to make the deals

Buyers seem to LOVE these deals too. At first, anyway. They show nicely when compared to some of the really shabby "inventory" out there. Particularly when priced to this current market. I have been also representing many Buyers looking at these types of homes lately, particularly first time home Buyers, and Buyers on tight budgets.

As described in the linked article, a good many of the rehab/flippers are cutting corners - doing shoddy construction work. Some to code, some not. Some with building permits, some without. Buyers sometimes get blinded by shiny new appliances and fresh paint, and fail to see or appreciate the potential problems that lurk behind. Sadly, Buyers usually do not find out about problems in the construction until it is too late.

What to do? The best buyers can do is to find out as much as they can before making a deal to buy one of these flipped properties. A couple of  things come to mind -

First, a quick check with the Cook County Recorder of Deeds can help identify how long the Seller has actually owned a property (and who the Seller bought it from). Next, a City of Chicago Building Department web portal can help buyers determine whether or not there are open building code violations or permit applications for local properties.  I check both of these sites as a matter of routine now for every client buying a home or condo in the City.

Second, a really thorough home inspection is in order. You really want a bulldog here. The most miserable, thorough,  passionate inspector you can find, doing his or her best to rip the place apart. They may not discover every defect, but trained eyes help. A lot.

Finally, consider the warranty offer - if any. Many sellers are selling these properties "as is" leaving Buyers "stuck" with whatever unpleasantness is discovered after a closing. Others offer only  third party homeowners warranties that covers the appliances and systems (but not necessarily construction or improvements). Even if the seller is giving a direct warranty, Buyers must give thought to the likelihood that a Seller will be around to back a warranty up. Many Sellers use shell entities like LLCs to limit there exposures to risk. If something goes wrong, they may simply shut the LLC down and start again under a different name.

As always, competent legal counsel and a very conscientious realtor are recommended. As the Zillow blog points out, Buyers have too much at risk and deserve all the help they can get.