Investors in residential house flipping have made a big come back the last few years. Much of the popularity of this can be attributed to the many TV shows dedicated to renovation, repair, investment and flipping. I’ve written on this topic before (see post HERE). However, I did not focus on the other side of the transaction, the end buyer. There is risk that buyers of this type of property should be aware of and look for. These issues were prevalent in the foreclosure crisis and the bursting of the housing bubble in 2008-10. This is not to say that investors haven’t learned their lesson. But, some people are dishonest and greedy. Pay attention to these 6 potential risks.

  1. Financing – yours and your seller’s. Make sure that you are solely responsible for selecting your lender, completing your loan application and providing the lender with all requested documentation. The foreclosure crisis was caused, in part, by unscrupulous investors who falsified buyers’ loan applications without buyers’ knowledge, thus committing mortgage fraud. Also, look at the seller’s existing mortgage. This will show on your title commitment/report. Is it in the same name as the entity selling you the property? Is there only one mortgage? Is the mortgage for less than the purchase price? Any of these can be indicators of an earlier fraud. If you are paying cash, get an appraisal to assure that you aren’t over paying.
  2. Title – Review the title commitment carefully. Make sure that the seller owns the property. Look at the 24-month chain of title. Has there been an unusual amount of conveyances prior to the conveyance to the seller? Has the seller made other conveyances prior to your closing? Have all prior mortgages been satisfied? Do not allow the seller or the seller’s title company handling the title for you to close without allowing you AND your attorney to review before closing.
  3. Seasoning – Some Fannie Mae, Freddie Mac and FHA loans prohibit the sale of a property for a period of time (60-180 days) following the date of the mortgage. This would be in the seller’s existing mortgage. Make sure that all such provisions have expired.
  4. Redemption Rights – if seller purchased the property at foreclosure, make sure prior owners’ right of redemption has expired. In Florida, the right of redemption expires on sale, so if a certificate of title has been issued, there is no right of redemption.
  5. Permitting – make sure that all improvements made by the seller have been properly permitted and all permits have been properly closed and certificates of occupancy issued. This holds true for improvements made by prior owners.
  6. Other Issues Regarding Improvements – Inspect, inspect, inspect. Make sure all of seller’s improvements and repairs have been properly made. Although this goes with number 5 above, just because the work has been permitted and a certificate of occupancy issued (hopefully), you should assure the quality of the work. Warranties should be assigned and where possible, get warranties from the seller.

 

If all house flippers were like the ones on TV, none of this would be necessary and every house bought from a flipper would look like a celebrity’s mansion. But that is not the case. There are many good, even great flippers. But there are many poor and dishonest ones as well. Beware.

Close-up of silver pen on contract. Selective focus on top of pen.

        I was recently browsing through an in-box full of blogs and articles and came across a great article on Inman.com by Cara Ameer, a Coldwell broker-associate in Ponte Vedra Beach, Florida, 10 Reasons You Never Buy or Sell Without an Agent. Cara is right; you should absolutely use an agent when buying or selling a home. Her 10 reasons just scratch the surface. But considering that I just posted Is Your Real Estate Agent On Your Side? last week, I had to respond to Cara. Many agents, at least here in South Florida, encourage or “suggest” to their clients that there is no need to get an attorney involved in a house closing. Attorneys just muck things up. These agents say that the title company can handle every thing.

             Before I give you my 5 reasons, let me tell you a story about a client, a husband and wife, I am currently helping, whose agent told them exactly that. They were purchasing a home in Coral Springs about a year ago. The inspection revealed that the roof, over 20-years old, needed to be replaced. It could not be repaired. The roof was a shingle roof. This is unusual these days as most South Florida roofs are tile. The cost of a new shingle roof would be about $7,500 and the client asked their agent and the seller’s agent if they could still put up a new shingle roof. Without hesitation, both agents assured the client that shingle was permitted and the client’s agent skillfully negotiated a $7,500 credit from the seller for a new roof.

             In addition, the title company, recommended by client’s agent, did a lien and open permit search on the property. The search disclosed that when the roof was put on the house over 20-years ago, the permit was never closed. Both the client and the agent directed the title company to take the necessary steps with the seller to have the permit closed prior to closing.

             Sometime after closing, the client engaged a contractor to install a new shingle roof. The contractor went to pull a permit for the new roof and was denied because 1) there was an open roof permit on the house and 2) shingle roofs are not permitted in this neighborhood in Coral Springs. Only tile roofs are allowed. The agents and the title company clearly dropped the ball. An attorney would not have. A tile roof will cost almost $30,000. Client would not have closed had they known the cost would be so high and had Seller not agreed to pay it. In this case, while agent did a fine job negotiating a roof credit, he did no due diligence to determine what was allowed in the neighborhood. Consequently, the credit was insufficient and his client, my new client, would not have purchased the house. He exasperated the problem by not assuring that the open roof permit was closed prior to closing.

             My top 5 reasons to use an attorney in closings:

 

  1. An attorney always represents you first and foremost. An agent is likely a transaction broker and owes you no fiduciary obligation.

 

  1. An attorney can and will solve problems that arise during the closing process. My case above is an example. Other examples include title issues or issues with the lender. Brokers can’t deal with these issues and title companies are simply closers. They only follow instructions and won’t point out title exceptions that could be harmful to the buyer or might not be relevant and, I illustrated above, won’t always follow up. In Florida, many attorneys act as agents for title companies. But as your legal representative, attorneys actually read the documents and understand the meaning. Attorneys will work to remove exceptions that don’t apply and will work with underwriters on complicated issues.

 

  1. Where negotiations get heated, an attorney has skills to resolve problems. Agents do as well, but an attorney understands and addresses legal implications and can protect your interests. An agent can’t go this far.

 

  1. Attorneys understand and are up to date on TRID, the “Know Before you Owe” Rule. They can help you navigate loan complexities.

 

  1. Attorneys read and understand the fine print. I have to say here that I am often presented with contracts from agents that are on outdated forms. Current forms address current rules, laws and regulations such as TRID. Agents should be aware of this, but some aren’t.

 

            These are just my top 5 reasons to use an attorney; there are many more. Don’t exclude an agent. But a good agent working with a good attorney make a great team for anyone buying or selling a house.

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