Flip or Flop: Some Things to Think About With Regard to a Remodeled/Renovated Home
By David Hamerslough
Scenario: your client has identified a home they want to see. Marketing material states that the home has been substantially remodeled/renovated, claims it is “like new” with a kitchen and bathrooms that have been completely redone, states it has new lighting and says that walls have been moved to create a more open floor plan. The visual tour and/or photographs show the home in its best light. When you and your client visit the property, it looks even better than it does in the photos. Your client has an emotional attachment to this home and wants to write an offer.
In this article, I will discuss some of the issues that might be taken into consideration prior to writing the offer, in the offer itself, and/or during the escrow. Market conditions will certainly have an impact on what can be considered or accomplished and in what timeframe.
Whether the offer is written on a PRDS or a C.A.R. purchase contract, the first issue to consider is the fact that neither form allows a buyer to make invasive or destructive investigations of the property (except to the extent allowed for under a pest-control provision), and neither allows for inspections by any governmental building or zoning inspector or employee without the seller’s written consent or unless required by law. These limitations, unless waived by the seller, make evaluation of the remodeling or renovation more challenging.
One way to try and overcome this limitation is to ask questions and request historical information and documentation before the offer is written or include these requests in the offer. These questions and requests may take into account any disclosures, reports, and other information provided in an up-front disclosure by the seller. For example, a CLUE report may identify conditions that have been repaired as part of the remodeling/renovation. If a preliminary report is provided, it may identify any prior notices of violations, red tags, etc.
Where questions are asked before the offer is written and answers are provided, a good practice is to promptly confirm the information in writing with the listing agent to ensure that you have accurately understood the information and request that the listing agent clarify any inaccuracies. A separate email to your client confirming the information that has been provided is also a good practice but should identify the source of the information and state whether you know whether it is true or not and advise your client to investigate any of the information if it is significant to their decision-making process.
The following is a checklist of questions, issues, and topics for investigation and/or evaluation in this type of situation:
- What remodeling/renovation was done, when was it done (were there any delays? If so, why and how long, and what impact did those delays have on the condition of the property?), by whom (seller, predecessor of seller, seller vs. contractors, licensed or unlicensed individuals, handymen vs. contractors, qualified to do the type of work performed, etc.), and why it was done (personal use, in preparation for resale, flipping – the answer may provide insight as to the motivation of the property owner and the degree of care that may have been taken with the project)?
- Are there plans, specifications, details, drawings, lists of subcontractors and suppliers, photographs depicting the progress of the work, change orders, status or inspection reports, etc.? If the seller does not have this information or documentation, is it available and can it be obtained from other sources?
- Were architects or engineers involved in the design of the remodeling/renovation, and did they participate in any on-site review of the work as it progressed?
- Are there written contracts between the property owner and the architects (vs. a designer), engineers (vs. a foundation specialist or a landscaper), and contractors with the appropriate license for the type of work?
- What information can be obtained regarding the knowledge, training, skill, and experience of all individuals and entities involved in the remodeling/renovation? Are there other projects performed by any of these individuals or entities that can be reviewed or inspected? Are references from past clients available? Have any complaints been filed with the Contractors’ State Licensing Board or other similar agency? What is the reputation in the community of these individuals or entities? Are they insured, and, if so, are the policies available? Do they have a reputation for standing behind their work? Are they still in business?
- Were permits pulled? Were they finales? Do they extend and apply to all of the remodeling/renovation or just some part of it?
- Are there any issues with regard to floor area ratios, maximum development areas, slope constraints, or similar zoning or land-use issues?
- Have there been any subsequent problems or repairs?
- Do any inspection reports or disclosures identify any potential issues with the quality or Code compliance of the work that has been done? Do any inspection reports or disclosures identify any other potential issues (e.g., soil, structural, etc.) that are beyond the expertise of the inspector?
- Is the seller a single entity LLC or corporation that was formed or created solely for this one project?
The purpose of this checklist is to help the buyer obtain as much information and documentation as possible about the remodeling/renovation and retain appropriate and qualified professionals to assist the buyer in evaluating this information and documentation. The appropriate professionals might include a home inspector, a pest inspector, a general contractor, engineers and/or architects, or a land-use consultant. A land-use consultant is someone who is qualified to discuss the status of permits, what would be involved in finalizing any incomplete permits, and whether the remodeling/renovation violates any zoning or use ordinance (e.g., by converting portions of the property into living space where that is not otherwise authorized or by exceeding the floor-area ratios or the maximum development area of a particular lot). Qualified engineers can better evaluate the quality of any work, whether that work meets various building or other codes, whether there are potential future issues based upon the performance of the home since the remodeling/renovation was done, and whether the work appears to be consistent with any approved plans, drawings, specifications, etc.
Other issues to consider are to what degree the seller was actively involved in the remodeling/renovation and if the permits were pulled in the name of the seller or the contractor. If the seller was a passive participant and did not control the method or manner in which any of the work was done, then the seller may not be responsible for any issues or defects in the work other than those they are aware of based on their knowledge. In other words, the seller may have no legal responsibility for the performance or the quality of the work that was done unless they were acting as a general contractor, an owner-builder, or a developer.
There is no precise definition of a “developer.” Generally speaking, a developer is an individual or entity who acquires a piece of property and obtains entitlements on that property or, in addition, constructs and/or remodels or renovates a property for purposes of selling it for profit. The passive seller, who had the work done for their own use and benefit rather than for purposes of resale for profit, generally speaking will have no legal responsibility for defects or deficiencies in the remodeling/renovation work itself. A seller will always have an obligation to disclose material facts that might affect the value or desirability of the property, but this requires, among other things, establishing knowledge on the part of the seller of the specific defects or deficiencies.
This is why it is important to request and obtain assignments of any contract rights and/or warranty rights that the seller may have against any architect, engineer, and/or contractor. A formal assignment would need to be part of the purchase contract and should be signed before escrow closes. If the contracts with the architects, engineers, and/or contractors prevent an assignment, it will be necessary to obtain their consent to any such assignment. An assignment can give your buyer the ability to bring a direct contract action (as distinguished from a cause of action for negligence) against the architect, engineer, and/or contractor. Depending on the language of the contract with the design or construction professional, a direct contract action may expand the legal rights that your buyer will have against those individuals or entities based on any standards of performance set forth in the contract, compliance with manufacturers’ specifications, etc., and may also provide the opportunity to recover attorneys’ fees in the event of a claim.
While the foregoing list of potential issues may seem daunting, problems with the quality, legality, and Code and zoning compliance of remodeled/renovated or flipped properties continue to give rise to lawsuits and, unfortunately, a frustration of our clients’ expectations. Those expectations start with an emotional attachment to a given property and everyone’s hope that any work was done competently and there is an individual or entity standing behind that work in the event that the property doesn’t meet the buyer’s expectations. Often, if a single-entity LLC was involved, that entity will not still be around in order to stand behind the work, or if unlicensed individuals were employed to perform some or all of the work, the buyer will have little or no recourse if the remodeling/renovation work turns out to be substandard.
Many of these issues are identified in the San Mateo/Santa Clara County Advisory, and buyers and sellers should review that document to better understand not only the issues that exist and need to be inspected and evaluated but also their disclosure obligations. As an agent, if information and/or documentation do not exist or there is any reluctance on the part of the seller or listing agent to provide such information, then it may be necessary to have your buyer re-evaluate whether they want to move forward with the purchase. This is always a difficult discussion and decision when a buyer is emotionally attached to a particular property, but it is always best for a buyer to have as much knowledge and information about these issues, and potential issues that may arise in the future, before they have written the offer and/or closed escrow.