top of mind
Be Cautious With Flips
Encourage buyers to scrutinize a quickly remodeled home.
Foreclosures can bring out the ugly in people. When a home owner from Mission Viejo, Calif., was foreclosed
upon by the second lien holder on his
mortgage, his response was to hammer
holes in the walls and fiberglass showers,
damage the pipes and plumbing, and let
water in the sinks and tubs overflow on
his way out of the door.
Facing more repairs than expected,
the individual who held the second
lien hired a handyman. The holes were
patched, the walls painted, new carpet
installed, and the landscaping spruced
up. The house looked beautiful and the
licensee who listed the property described it as having $50,000 in upgrades.
The house soon sold to buyers who,
concerned about possibly concealed
defects, had earlier told the real estate
practitioner representing them that they
didn’t want to buy a foreclosure or a short
sale. They made the purchase under the
impression it was neither of those.
Soon after the closing, problems
cropped up. Pipes were found leaking, and
mold was discovered when the owners
opened up the walls. They learned from
a neighbor that the seller had owned the
property for only six weeks and that it had,
indeed, been a trashed foreclosure.
The seller—again, the second lien
holder—had actually made only $20,000
in repairs, not $50,000, as receipts pro-
duced in pre-trial discovery would show.
The listing agent had made an affirmative
This case is an example of a growing
representation of an unverified mate-
rial fact. Upgrades of $50,000 require
permits and so do many of the items
the listing agent claimed the seller had
upgraded. Most of the work done by the
handyman required a licensed contractor
and was done incorrectly, according to
the local building inspector.
The buyers called their attorney. Both
licensees and the seller were sued. The
buyers recovered funds and had licensed
contractors make repairs with permits as
required, but it all came after much grief.
number of lawsuits in California and
elsewhere involving short sales and
foreclosures that are quickly fixed up and
What Your Client Should Know
Disclosure rules vary by state, but there
are steps you can take to avoid getting
caught up in a situation like this.
First, parties who flip foreclosed or
short-sale properties are not exempt
from making disclosures just because
they haven’t lived there, especially if
repair or remodeling work has been done
on the properties. All sellers are responsible for filling out disclosure forms, as
required by their states, as accurately
and completely as possible.
Second, if you know any material facts
concerning the property that a reason-
able and prudent buyer would want to
know, you must disclose those.
Third, it is reasonable for the listing
agent or the selling agent to educate the
buyers about questions they might ask
the seller. These include:
b What was the property’s condition
when it was taken back in foreclosure?
b Are there receipts from licensed con-
tractors to verify the amount of money
the seller spent?
b Is there a list of what was done to
correct each defective condition?
b Were there defects that were not
b What work was done by a handyman?
b Were permits available for the work
that was done, and what work was done
The answers to these questions will help
buyers make informed decisions about
properties they’re viewing. Buyers can
also check with local building departments
as to which projects require permits.
Meanwhile, avoid saying, “Wow,
doesn’t this look nice?” until the buyer
has the full story from the seller. Or that
“Wow” might be your reaction to a lawsuit
you didn’t see coming.
Barbara Nichols, broker-
owner of Nichols Real Estate
& General Contracting in
Beverly Hills, Calif., has served
as expert witness in more
than 200 real estate and general contracting
lawsuits. [ email@example.com]
Parties who flip foreclosures or short sales
aren’t exempt from making disclosures just
because they haven’t lived there.