Flips. You can almost spot them from the listing sheet. They tend to be among
the smaller homes in an area and the listing sheet highlights the fact of new
carpet, new appliances, and/or fresh paint. Sometimes a major selling point
is that a buyer can "rent to own." And the houses are almost always vacant.
These are all symptomatic of an investor owned home that was bought with the
idea of doing a quick fix up before reselling or "flipping"
the property.
Some investors buy a house and rent it out in its original condition for a
year or two before doing a rehab, others buy with the idea of being in and out
of the property in three or four months with a substantial profit so you can't
always identify a flip from property deeds or sales history. But, if the deed
tells you the house was purchased only months earlier you know for sure.
Flips are beginning to crowd the market as home sales slow. Investors who
mistimed
the market are finding that it is taking much longer than they planned
to resell their property. Some who bought with the idea of renting for a few
years to allow some natural appreciation are seeing their adjustable rate
mortgages
resetting to levels incompatible with the local rental market. Many investors
who read too many books, watched too many infomercials about getting rich in
real estate or watch the numerous
house
flipping TV shows went into the process with insufficient capital and are
now trying to get out with their shirts still on their back.
So why should a buyer care if it is a flip? Several reasons.
First of all, from the perspective of a bargain hunter, a "motivated" seller
is sometimes a fairly desperate seller. Aided by a little research a flip could
be a bargain buy.
The necessary research is not complicated. A trip to the county land office,
registry of deeds, or wherever real estate documents are recorded and kept in
your locality will give you all the information you need.
The deed will tell you when the house was purchased, by whom, and for how much.
The "by whom" can tell you a lot. Is the house owned by an individual
or a company? If it is a construction company they will have a quite different
expense ratio for any work they did on the property than will a non-builder.
If it is one of those companies that advertise they buy houses, they may have
deep pockets that will make them poor candidates for a cutthroat negotiation.
With the Internet and Google you can usually find out a lot about any individual
or company recorded on the deed. The deed will also provide clues about the
owner's financial condition. Mechanics and tax liens will show up on record
as will any foreclosure activity or bankruptcy. In the latter two instances
you will have a heads up that you may not be dealing directly with the owner
in any negotiation but with the bank or the courts.
Another recorded document is the mortgage. From this document you can derive
the amount the buyer put down - don't be surprised to find it was
zero - and the terms of the mortgage; whether it is a fixed rate or adjustable,
what the rate and payment is, and, if it is an adjustable, when and by what
index and margin it will adjust.
Armed with this information you will be better prepared to make an offer.
But there are reasons to beware of flips.
While it is unlikely that an innocent bystander would be dragged in, there
are networks of con artists who buy and flip properties repeatedly, escalating
the price each time and pulling cash from each transactions. These criminals
usually disappear once they have driven the price up past any realistic number,
sticking the bank with the property and the debt.
However, the expression "quick and dirty" might have been invented
to describe some of the methods used in turning properties around for resale.
Not to say that all or even most investor rehabs are shoddy, but it is something
to bear in mind if you are interested in buying a home you suspect may be a
flip.
This is the time for a really thorough home
inspection. Pay extra if necessary to have the inspector crawl through the
attic, basement, and crawl spaces. You want to know one important thing.
Did the seller merely put lipstick on a pig?
Have problems been repaired or just covered up? New spray paint made especially
for the purpose do a good but temporary job of covering scarred and stained
laminate countertops but those stains will be back within months. Wallpaper
can camouflage crumbling plaster or water stains from ice dams or leaking siding.
Insist that the inspector pull the electric box to check for problems (corroded
connections, aluminum wiring). Ask if he seems any evidence of water intrusion
in the basement or attic or if there is any sign of insect or fire damage. If
necessary call out a separate expert to check the condition and efficiency of
heating and air conditioning systems.
Are the appliances new? If so are they of reasonable quality and with a factory
warranty? If they are not new, are the heating elements working; the dishwasher
tub relatively rust free; is the energy rating one that won't break the
bank?
Carpeting and resilient floor coverings can be new and still be a piece of
garbage. Cheap carpeting will not hold up and will be unpleasant to walk on
barefoot or for a baby to crawl on. Inexpensive vinyl floor coverings do not
always adhere properly, may tear easily, and often quickly lose shine and stain
resistance.
There is nothing intrinsically wrong with a flip. Many investors do a fine
job of returning distressed properties to useful life and there are many good
deals out there right now. Just know what you are buying, go
for a bargain if that appears appropriate, and don't be blown away by a slick
job of cosmetic repair.