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Flip Or Flop?

By Ron Rossi and Missy Cornejo

February 14, 2024

In the last few years, we have seen a phenomenon that appears to be statewide – namely, buyers unaware when buying a home that the property has been recently flipped, and it soon exhibits a substantial number of undisclosed defects. These defects range from issues like lack of building permits, inferior building materials, covered-up asbestos, pest control problems, mold issues, and foundation problems, to list a few.

Countless websites explain to the public how to buy houses and flip them with minimum repairs. They emphasize buying low, selling high, and turning the property over quickly to make sure the return on investment and capital risk is maximized. Therefore, flippers are motivated to cut costs whenever possible and make renovations as cheaply as possible, often using unlicensed contractors and slipshod methods and materials, failing to obtain permits, and making basic cosmetic repairs to temporarily conceal substantial defects. Buyers are often unaware of these defects or, in some cases, overlook them. Buying a home is often an emotional rather than a logical decision.

It is only after moving in that buyers begin noticing some of the undisclosed problems and issues with the house. Cracks, mold, and water damage reappear, and cover-ups of shoddy workmanship become apparent. When claims are made against flippers, they deny knowledge and often refuse to try to work things out with their buyer. Buyers, once they discover the defects, are at risk upon resale of the property, since they will have to disclose work done without permits and other defects that they discover.

We have seen a variety of cases in this genre:

• Buyer discovered (1) the elderly seller was not the true owner, and her son and daughter-in-law were professional flippers; (2) the entire renovation project was done without permits; (3) mold in multiple areas; (4) shoddy and improper electrical work; (5) significant water leaks; and (6) uneven flooring.

• After significant rainfall following close of escrow, Buyer discovered sizeable cracks forming in the walls and tile, doors that did not close and/or offset door frames, moving deck posts, and a sinking backyard lawn area. Upon further investigation, Buyer discovered rotating retaining walls and shoddy attempts to stabilize only portions of the foundation. Buyer was astonished to learn that the County had recommended the home be torn down completely, but instead the seller arranged for extreme corner cutting in an effort to flip the property quickly and cheaply. During that process, the County levied fines exceeding $250,000 against the seller for unabated Code violations, none of which were disclosed to Buyer.

• Buyer discovered non-permitted renovations, including additional bedrooms and other improvements, and the presence of asbestos.

• Buyer discovered a large crack in the foundation and mold due to water leaks. The seller/flipper was made aware of these issues in writing by a professional home inspector just four (4) months before the sale yet failed to disclose the writing to Buyer and instead attempted to cover up the issues.

• Seller/flipper represented to Buyer that all work was performed by a licensed contractor and that permits were “unknown,” when in fact no permits had been obtained.

There is nothing inherently wrong with buying low and selling high, but when the profits are made illegally, without proper disclosures, and without doing the work necessary to renovate a property in a workmanlike, Code-compliant manner, it’s important for buyers to be given the opportunity to review these issues.

The California legislature found the problems with flipping so important that they passed a new law, which takes effect on July 1, 2024. The provision is an addition to Civil Code § 1102.

The proposed changes to the law are as follows:
(a) A seller of a single-family residential property who accepts an offer for the sale of the single-family residential property within 18 months from the date that title for the single-family residential property was transferred to the seller shall disclose, in addition to any other disclosure required pursuant to this article, to the buyer both of the following:

(1) Any room additions, structural modifications, other alterations, or repairs made to the property since title to the property was transferred to the seller that were performed by a contractor with whom the seller entered into a contract; and

(2) The name of each contractor with whom the seller entered into a contract for the room additions, structural modifications, other alterations, or repairs disclosed in paragraph (1) and any contact information for the contractor provided by the contractor to the seller.

(b) The seller’s obligation to disclose the room additions, structural modifications, other alterations, or repairs made to the property performed by a contractor may also be satisfied by providing a list of room additions, structural modifications, other alterations, or repairs performed by, and provided by, the contractor with whom the seller contracted for the room additions, structural modifications, other alterations, or repairs.

(1) If the seller obtained a permit for any room additions, structural modifications, other alterations, or repairs provided to the buyer pursuant to subdivision (a), the seller shall provide a copy of the permit to the buyer.

(2) If the seller contracted with a third party for any room additions, structural modifications, or repairs, and the seller was not provided with a copy of any permits obtained, the seller may satisfy the obligation in paragraph (1) by informing the buyer that any information on permits may be obtained from the third party and providing the contact information for the third party provided by the third party to the seller.

Why 18 months? A flipper wants to resell the property as quickly as possible. Eighteen months was chosen as a reasonable time, since, if permits were obtained, it may have taken at least 12 months to go through governmental agencies to obtain the necessary permits. That’s what makes it so easy for flippers to look the other way when permits are required. In fact, in one lawsuit, it was alleged that a company flipped over 6,000 single-family homes without adequately disclosing the lack of permits and improper renovation work.

Sellers have to protect themselves. The Transfer Disclosure Statement form does require sellers to disclose improvements made without the benefit of permits. People often overlook this provision when reading over the documents quickly. They don’t take the time to focus on what they should. Once a buyer finds out that the property is being resold within a short period of time, they should recognize that as a red flag and substantially increase their due diligence. Once the buyer determines that a house has been flipped, it’s important to review contracts, permits, contractors, who did the work, and whether the work was done properly and to Code or whether it was slapped together with cheap, poor-quality materials just to pass the building inspection. A good real estate agent will be able to advise their principal as to licensed contractors who can further investigate these issues, as normal home inspections do not cover these points.

Buyers need agents who are aware of this new law and who can counsel and advise them on the ramifications of buying a house that has been flipped. The first thing buyers should find out is how long the seller owned the property and whether they ever lived there, in effect determining whether it is a flipped house or not. Buyers also need to hire agents who are diligent and competent and, as mentioned, properly advise them as to their rights.

Unfortunately, if buyers do not take these extra steps when purchasing a flipped house, the transaction may turn out to be a flop. The buyer may be forced to make a lot of unbudgeted repairs, may need to demand arbitration or file a lawsuit to avoid substantial losses the buyer may sustain, or may have to try and resell the property at a loss. None of these options are pleasant, but buyers need to understand that the outcome could be disastrous if they aren’t cautious and diligent when purchasing a flipped property.