Property “flipping” is a popular real estate topic with many popular TV shows based on the concept such as “Flip or Flop” and “First Time Flippers.” Often, those involved are real estate agents, investors or home improvement contractors. There are a number of issues in flipping that can affect the rights, obligations, and liabilities related to the property being flipped and future owners of such property.
NO. 1: CONTRACTOR LICENSING ISSUES.
Depending on who owns the property being flipped, it may be a different entity that does the work. If the work is done by a licensed contractor, there is less concern with how the work is being completed, if it is properly permitted, and inspected, and who is responsible for warranty obligations if there is a problem in the future. However, if the property is being flipped by a real estate investor or other individual, and the work is completed by that individual instead of a licensed contractor, there can be issues about who is liable for any problems resulting from that work. A DIY type person working on a home does not have the same protections as a licensed contractor if something goes wrong (insurance, licensing, etc.). That could limit a future buyer’s recourse for subsequent issues with the home.
NO. 2: DISCLOSURE REQUIREMENTS.
Minnesota law has certain requirements for disclosures that a seller must make when a residential property is being sold. Under Minn. Stat. §513.52, et. seq., a seller of a property must disclose all “material facts” of which he or she is aware that could affect the buyer’s use and enjoyment of the property. In this context, there is also a related requirement in Chapter 82 that requires the same disclosure obligations for a licensed real estate agent. A real estate agent acting as a flipper potentially has two potential areas of liability for failing to disclose material facts about the home.
In a flip, the issue is the knowledge of the seller/flipper of the property and what is disclosed to a buyer. Most of the time, that owner has only owned the home for a short time and any previous issues or concerns may not be known by that current owner. Therefore, it is important that the limited amount of ownership time be disclosed to buyers and the fact that work has been done on the property to upgrade it to be sold, along with any other facts that the flipping party becomes aware of.
In addition, depending on who completed the work, there may be additional disclosure requirements about the work completed. In particular, if a flipped property has been worked on by an unlicensed contractor, homeowner, or other party not licensed for construction work, it may be advisable for the seller to disclose that fact to any buyer. Certainly, if the individual owner does some of the work on the property him or herself, a buyer is likely to want to know that to make sure they take extra caution in inspecting or otherwise evaluating the property.
NO. 3: RESPONSIBILITY FOR STATUTORY WARRANTY OBLIGATIONS.
Related to the above, a “home improvement project” of significant nature may be required to comply with and provide the warranties set forth in Minn. Stat. Chap. 327A. That warranty scheme provides a one, two, and 10-year warranty “program” for any significant home improvement work project. The home improvement covered by that law is defined as “repairing, remodeling, altering, converting or modernizing of, or adding to a residential building”. The exact nature of what type of work is covered by the statutory warranty is somewhat open to interpretation. But, any owner attempting to flip a property needs to be aware of the potential responsibility under the statutory warranty and the obligations that entails.
If the property owner is a licensed contractor doing the work under license, taking out permits, and otherwise acting as a contractor for the work prior to sale, that contractor is likely required to provide the warranties set forth in Chapter 327A, to the extent they apply.
Alternatively, if the property owner is not a licensed contractor and the work has been done by that owner, a question may exist as to whom, if anyone may be responsible for statutory warranties.
NO. 4: LOAN REQUIREMENTS.
Depending on the nature of the rehab/flip project and the individual owner/company who is attempting to receive financing for such a project, there may be additional requirements by a lender, in order to obtain financing including a requirement that any work on the project be done only by a properly licensed contractor. When seeking financing from a lender for a flip, the property owner should be aware of the requirements of that lender and any funding that is received. If such restrictions in the loan documents are required, then the funding is likely to require some more creative financing or an influx of cash to complete the initial purchase of the property subsequent to it being rehabbed and flipped.