Flipped Houses: The Battle Between GOOD (Construction) and EVIL (Investment Costs)
Home flipping took off like a rocket ship in the 2010 to 2015 timeframe with the popularity of various house remodeling shows on prime-time television. These shows highlighted the glam of the industry, leaving everyone feeling like they had what it took to buy, remodel and flip houses for huge profits. Some were correct and were handsomely rewarded. Others were not and learned very tough and expensive lessons. In all, “house flipping” is a term to describe the process of buying a house to renovate and improve it solely for an immediate sale.
Through it all, a cult industry was born where people were buying the most disgusting houses imaginable, often site unseen. This approach, however, was a high-risk and high reward proposition forcing flippers to weigh the needed home improvements over the budgets available for projects to be completed. This led to increased buyer expenses and inconvenience.
Flipped homes may look bright, shiny, and new, but may have undercurrents of hidden or obscure issues that come to light some time later. After all, due diligence and expense take the profit margins in the wrong direction. As such, home flippers have an ethical dilemma on their hands, and (unfortunately) that occasionally leaves an unsuspecting home buyer holding the bag once it comes to the surface. This can be prevented by hiring a discriminating Home Inspector who will go through the home with a fine-tooth comb, searching for any potential issues that can become costly down the road.
So How Do You Know?
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If you landed here, you may be either targeting or thinking you have a flipped home on your hands.
If you are looking at a house that has been listed significantly higher than the last sale price, this is an indicator (particularly if that transaction was less than 6 months ago). Another strong indication is if the sellers are an LLC/company and not an individual. You can ask the realtor to confirm if anyone lives in the house. Most flippers are not living in the houses they flip, as you can imagine. A dead giveaway tends to be brand new counters and sink but older looking cabinets (possibly painted). Look for new carpet and paint, pretty much throughout. For help researching the history of a house, you can look HERE. Once confirmed, let’s look at the most common House Flipping issues that we have encountered and found in houses so you know what to be on the lookout for:
1. Painted cabinets or vanities that delaminate or peel
Refinishing kitchen cabinets costs thousands of dollars when professionals are brought in to prepare the surfaces, prime the materials, and professionally paint. To flippers, that may sound like dollars flowing down the drain. Some may successfully be able to DIY a kitchen repainting process, but many will skip primer or poorly apply the paint (or use rollers/brushes instead of air-spraying) which will look phenomenal for months and deteriorate thereafter. If the cabinets look painted, open the doors and study the jambs or the side door profile. Many DIY painters will have a heavy build-up of paint, possibly paint runs, in these locations. A professional will have a nice and even coat no matter where you look on the doors or frames. When done correctly, this is a great option to modernize the most outdated kitchens. When done incorrectly, however…..
2. Cabinets or vanities do not match the configuration/layout of the space
Following a similar line to the discussion above, many flippers recycle old cabinetry or install already in-hand items in lieu of a custom assembled kitchen designed for the space. If the kitchen or vanity stops at some awkward position short of a perimeter door or threshold, this may have been the case. Review the layout and make sure it all works. Open the doors of the refrigerator and dishwasher to make sure they don’t obstruct each other from operation. Open and close the doors/drawers to make sure they were not put in misaligned. Measure the spaces around the kitchen to ensure you can navigate around the area, and can pull the refrigerator in/out without needing to remove a cabinet. This helps flush out any of the organizational or arrangement-related defects that would have normally been found, and likely fixed, if the house had at all been lived in.
Unfortunately for the buyers, flippers do not see a positive rate of return on items like heating, ventilation, and air-conditioning (HVAC) units. If you have a flipped house with new equipment, it may have been in really bad shape prior (or possibly it was stolen when the last tenant moved out). If it was there prior, make sure your inspector looks into the blower to see if there is any visible debris. If the handler is not new, it is not out of the ordinary to see that the system was run while workers were in there doing drywall work (leaving drywall dust caked up on every surface). Contractors do this type of thing when nobody is there to make them turn off the systems or control their dust.
Water lines are a common DIY project for some house flippers, which could lead to scary surprises for the unsuspecting buyer. The water lines have not been run very much, so early installation failures have not been flushed (pun totally intended) out yet. Your inspector should look into the plumbing materials used and look for the presence of subpar means/methods used in the installation. The presence of shark-bites, or equivalent push to connect fittings (as opposed to permanently glued or soldered joints) are a dead giveaway that a DIY or novice plumber conducted the repair. You should consider having a more extensive plumbing evaluation done by a plumber if you have a reason to believe that extensive reworking has been done. At Red Flag, we assure that a pressure test and consumption monitoring are done to ensure there are no leaks at the time of our inspection, to help aid in the peace of mind for your purchase.
As for the drainage side of the plumbing system, the house flipper may fall similarly victim to inadequately performing drain lines as you could have after their purchase. The question, however, is whether the house flipper would cure the root cause of the drainage issue or tackle the symptom of the drainage issue. For example, the house may have a degraded cast iron pipe drainage system below grade. These systems have very jagged inner pipe profiles that can temporarily grab paper products and lead to blockages. A house flipper could (possibly) pour a gallon of drain-o down the drain and get the system working again. This would not fix the core issue (the rough and degrading pipes) but it would get the plumbing working again for the time being. Another side of the drainage piping is the waste arms and other support pipes. Again, these may or may not be aligned and sealed properly. They may take the initial volumes of water deposited, but may fail shortly thereafter due to a previously unseen issue. Your inspector must be diligent about looking for signs and symptoms of installation failure.
5. Ceiling Stains Painted Over
A ceiling stain is a beacon of failure screaming for attention, but roofs (the typical overlying cause) are really expensive to repair. Roofs are very much like HVAC equipment in that the rate of return is not favorable to the flipper. Most cost-conscious house flipper will opt to conduct localized repair when at all possible. If you see a new roof, it was either REALLY bad before they bought the house or you landed a really great flipper. These ceiling stains, however, rarely see sections of drywall removed and replaced. This means that the attic side of the drywall may have mold growth and insulation in the attic could be matted down (which reduces the thermal insulative properties). If the roof is not properly sealed, then the roof leakage and stain will likely return.
6. Inadequate Insulation
Like so many other things on this list, there is no Return on Investment to be found in insulation. When is the last time you bought a house and said “I really want this house, the insulation is amazing?” Those funds get steered in other directions, as the concept of adding insulation is one that benefits the buyers into the future (not the value of the home for the seller, in the present). This is also observed as a simple/easy issue to fix post-purchase, so there is even less concern about it rocking the boat come closing time.
7. Exterior/Envelope Repairs
A building “envelope” is the exterior facing components that keep the outside…OUT and the inside IN. Think of it as your walls, window, the slab-on-grade or wood-framed flooring, the roof. Some repairs to an envelope component are quick and easy, like filling in cracking or delamination on stucco. There you have little concern over the integrity of the repairs carried out. Wood or Composite Siding tends to be pretty expensive to repair and sometimes more difficult to replace. We have seen circumstances where wood-fillers were used in lieu of removal and replacement. One time I saw a paint can lid used to cover a prior/abandoned hole in the siding. Your inspector knows the trouble spots in an exterior building, and knows where to look to see if there has been any funny business going on.
8. Removed Walls or Columns
Who doesn’t love an Open Floor Plan? Home Improvement TV shows are littered with success stories of opening up an outdated dump to turn it into a gold mine. Admittedly, it really does wonders for the visual appeal of a space. Sometimes, however, these renovators fail to assess whether the removed components are load-bearing or not. We have seen sagging and collapsing roofs that resulted from removal of prior supports. This condition does not always show immediately, as the members elongate and deform once subjected to the additional load (but the load adjustment can be quick and catastrophic). This work is definitely something that needs to be left to the professionals. Checking with the appropriate municipal office to see if a permit for renovation work was obtained would be good to see if this type of larger renovation was carried out.
9. Awkward Building Additions or Enclosures
Listing a house with 4 Bedrooms and 3 Bathrooms may be more enticing than listing a 3 Bedroom, 3 Bath with an attached garage or patio. Patios and attached garages provide an enticing footprint for flippers to squeeze out that crucial extra bedroom or man-cave. For an in-depth breakdown of the pros/cons of this build-out, read our prior article on the topic HERE. Some of the high-level defects this can bring are loss of on-site storage, the awkwardness of the resulting layout, inadequate HVAC design/installation, and insulation. Bear in mind that these additions are pretty expensive to do correctly, and the lack of permitting may result in you being required to bring it up to code at a significant expense. A contractor should be brought in to evaluate known additions, to ensure compliance with current building codes.
Lesser Flip-House Concerns:
Electrical in most flipped houses tends to be up to par. I think even house flippers know the liability and safety that comes with subpar electrical work.
I do not see any reasons why the concern for structural elements gets raised with house flipping with the one exception being the removed support element discussed above. I think a house flipper of any level of experience would know not to mess with structural elements, but I also believe that the incidence of them NOT knowing to mess with it is comparable to the general public.
This article was written fairly negatively to illustrate what can, and sometimes does, go wrong. Often, a flipped house is done very well by a professional flipper who does this for a living. They have the materials and manpower to pull it off very efficiently and cost-effectively. This provides you an opportunity to secure your dream house quicker and cheaper than if you buy the run-down prior version yourself. You get a move-in ready house of your dreams, and avoid the 6 to 12 months of dust/debris and your home being torn apart and looking like a construction zone.
Buying a flipped house is a great opportunity, and armed with a strong and knowledgeable inspector you can really get a great value in the process. A STRONG line of defense in purchasing a flipped house is to ask for disclosures on the work done, which they likely do not have to provide. In the event this is not provided, an EVEN STRONGER line of defense is to check the permitting history versus prior Real Estate listing photos (you can find this online or you can ask your realtor to look into it for you). If you see items replaced that were not permitted, it warrants a requirement that permits be pulled/closed with the municipality to ensure proper installation. A lack of Permit History may mean that work was done by parties incapable of pulling permits, as most reputable businesses would be inclined to do things the right way. In this scenario, you may want to call in various tradesmen to inspect the components. Be aware, however, that tradesmen (just like your Home Inspectors) are limited to the items they can see/touch/feel and will not be able to inform you of hazards lurking within the walls and invisible.
Have You Purchased a Flipped Home?
In the Comments Below, tell us if you had a good or bad experience.