Don’t Fret Your Flip: Mitigating Risks Particular to Homes Renovated for Resale
The breathless growth of Portland’s housing market has nurtured a growing income opportunity to developers who purchase homes for renovation and resale; so-called “house flippers.” Such homes not only provide potential profit for developers, but also provide turnkey renovations for home purchasers and improved aesthetics for surrounding neighborhoods. However, misconceptions about the flipping and sale process can spark disputes between developers and their eventual purchasers. Most of these troubles can be avoided through better contracting and more candid communication on both sides. The following are recommended steps toward reducing the risk of future problems, from the perspectives of purchasers and developers.
Recently flipped homes offer the best of both worlds: old-home charm with new-home fit and finish. But that blessing is also a curse, because new renovations can mask undiscovered problems. Too many purchasers see beautiful finishes and promptly neglect the potential for hidden old-home problems. The purchase process – when done right – is more complicated for a flipped home than a new home. Several pieces of advice will help.
The first and best piece of advice is to know your contract. In the recent case of Shell v. The Schollander Companies, Inc., 358 OR 552 (2016), discussed below in a post by David Delmar, an owner sued for construction defects in a home she purchased when new. However, because hers was a contract for sale rather than a contract for construction, a different time limit applied. This distinction between a construction contract and a sale contract is far more critical with a flipped home. Purchasers tend to perceive the seller’s renovations as something akin to new construction and believe that new construction standards should apply. This is not necessarily true; a typical sale contract contains no obligation to perform construction services according to any particular standard. Moreover, the “as-is” clause could prevent a purchaser from asserting certain claims later.
Second, conduct extra due diligence to ensure you have all necessary information. A sales contract will ordinarily have some manner of disclosure which will almost certainly be in the form dictated by ORS 105.464. Though helpful, the form is limited to checkbox “Yes,” “No,” or “N/A” responses with optional explanation. Many potentially relevant issues do not fall within the checkbox response categories. To ensure you flesh out as much information as possible, ask follow-up questions based upon the disclosure form and your home inspection: What was the condition of the home before the renovation process? Exactly which components of the home were altered during the renovation? How detailed was the contractor’s pre-purchase inspection? Does the developer have any “before” photographs?
Third, get expert help beyond the usual. In addition to a real estate agent, other professionals can ensure a smooth sale, including insurance agents, mortgage brokers, warranty companies, and specialty inspectors. Particularly helpful – and underutilized – are specialty inspectors. Typical home inspectors are necessary, but their results will be limited to visual observations only, and frequently will direct clients to seek specialty help for important concealed items such as siding, roofing, and foundations. Buyers of flipped homes are well-advised to follow such directions and engage such specialty inspectors.
Developers of flipped homes can avoid potential future risk through several fairly easy steps. The first step is to describe the renovation process as part of the advertising process, as much as commercially practicable. Sales literature should detail which elements of the home were changed and how, highlighting such changes as upgrades over the former materials and layout. Such descriptions will serve to set expectations about the developer’s actual knowledge of the history of the home and the various construction methods utilized. For example, if the developer did not alter the foundation or basement, the developer is unlikely to be aware of possible nuanced foundation or basement issues. Without a detailed description, a purchaser might be inclined to assume the developer possessed a detailed understanding of all aspects of the home, and that the sales disclosure therefore accurately described the universe of possible issues. Accurate descriptions up front will avoid misunderstandings later.
Second, when selling flipped homes, developers should be careful to use contract language clearly defining their obligations to the purchasers. Most disputes regarding flipped homes originate either from disagreements about what construction techniques should have been used or disagreements about what the contractor learned about the home during the renovation process. Rehabilitation contractors should take care to establish the nature of the proposed final sale before beginning the renovation, and draft sale addenda to clarify what warranties the developer is or is not willing to grant. Although the standard sale form includes an “as-is” clause, the language should be modified via addenda to ensure both parties are clear.
Third is the same piece of advice given to purchasers: get expert help and rely on that help. Flipping homes often involves making difficult decisions about layouts, structural alterations, mechanical/electrical upgrades, and unclear permit/inspection requirements. In litigation, such decisions often become focal points. To mitigate risk, get expert help regarding these decisions, and rely on the advice of those experts. If a structural alteration is required, get a specific sign-off from an engineer. If a window distributor says a particular window can be retrofitted into an old opening, get it in writing. If a building official says no permit is required for your basement work, get it in writing. The more a developer demonstrably relies upon experts for difficult decision, the less risk that developer assumes.
One last piece of advice for developers: be “legit.” Be licensed, bonded, and insured, which is required by the Construction Contractors Board for developers flipping homes. Use a formal business entity such as an LLC or corporation to purchase, renovate, and sell homes. Finally, avoid commingling personal and corporate funds.
Flipping homes should be a smooth and beneficial process for developer and purchaser. As long as both parties communicate well and play their hands “cards-up,” future disputes are mostly avoidable.
Note: I authored this post for www.constructionlawwatch.com while I was employed at Ball Janik.