What you need to know before buying a flipped house

The business of house flipping looms large in the American public imagination. Between reality television shows about the practice to infomercials promoting it as a get-rich-quick scheme, nearly everyone is familiar with the concept of buying, renovating, and quickly reselling real estate at a profit.

Like many businesses in the pandemic, house flipping has slowed this year, representing 4.9% of all home sales nationally in the second quarter of 2021, compared with 6.8% in the same time period last year, according to Attom, a real estate data tracker. Even so, the median price of houses flipped in the second quarter reached an all-time high of $267,000 nationally.

Flipping has been popular — and profitable — in the Philadelphia region largely because of the availability of aging or distressed properties that can be purchased at a discount and sold for a premium. While the profit margin for flippers fell nationally to 33.5% in the second quarter, the return on investment in Philadelphia (100%) ranked among the largest for metro areas.

While house flipping can offer good prospects for the seller, what about the buyer?

“There is nothing wrong with buying a flipped house,” said Chris Egner, president of the National Association of the Remodeling Industry. “You can buy an old house and hire someone to remodel it, or you can buy one somebody else remodeled, and it’s already done and ready to move into. The caution is that, like any other endeavor, there are some people doing work that are not qualified to do it.”

So how do you figure out whether the pretty house with new paint and granite countertops is a great deal — or a lemon? Here are some strategies for home buyers.

“As a general rule, a flip usually is going to be vacant,” said Bruce Barker, a North Carolina-based home inspector and president of the American Society of Home Inspectors. “A flip is going to have fresh paint, at least on the inside. Probably new carpet, probably granite or quartz countertops and a new sink in the kitchen [but with] old cabinets. That’s almost a dead giveaway.”

Of course, not all vacant houses are flips. Another way to check is to see when the house was last sold through local government records or real estate websites such as Zillow and Redfin. If the house was sold less than six months ago, there’s a good chance it was flipped.

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Egner, who’s also a home remodeler based in New Berlin, Wis., warns consumers to watch out for shoddy work and corner-cutting. Often it’s the work that consumers don’t see — plumbing, wiring — that will cause trouble if a flip was done unprofessionally.

If it looks like renovation work was done on the home before it was put on the market, prospective buyers should always look for work permits, which can also be found through local government. If a flipped home doesn’t have permits, that may be a sign that the work was a do-it-yourself project. More important, it likely also means the work wasn’t professionally inspected.

“Many flipped houses are wonderfully done, with permits taken out, priced at fair market value, and representing a great deal for the buyer,” said Len Sarvela, an agent based in Duluth, Minn., with the National Association of Realtors. “But with the market we have now, with a shortage of inventory, buyers know what their money will get them.”

Sarvela advises comparing the sale price to what the house last sold for, which is usually a matter of public record, especially if it was last sold within a few months. Does the work done since that day justify the price hike?

“If the sales price doubles, there had better be a pretty good justification based on the materials and amenities that were put into the house,” Sarvela said.

Often, buyers can find older pictures of the house they’re considering online from when it was sold before the flip.

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“Ask the buyer’s agent if they have experience with homes that have been flipped,” Sarvela said. “And ask that early in the process.”

One of the biggest benefits of buying a renovated home is that it’s often move-in ready and won’t need any significant work done right away. The downside comes when that promise turns out to be false — if the buyer moves in only to find out, for instance, that the roof needs replacing.

“A lot of people don’t have time to buy a house, move in, and then spend the next six months redoing the kitchen, bathrooms and whatever else,” Egner said. “If you can buy something that’s move-in ready, that’s awesome. ... What better way to reuse and recycle than to take an old, rundown house and turn it into a brand-new, functional and usable property?”

Once you've decided you're serious about a house and ready to commit to buying it, one of the most important remaining steps is to get a professional home inspection.

Although this process can be pricey, inspections can ultimately save the buyer money by finding problems ahead of time and asking the seller to cover the cost of repairs. If enough problems are found, the inspection can even be the impetus for a prospective buyer to walk away.

“I inspected a house last week with new paint on the inside, new carpeting and kitchen countertops, but they hadn’t changed the bathrooms,” Barker said recently. “The water heater was older, the HVAC was older, the roof covering was at the end of its service life. Those are the kinds of things some flippers will do. They’ll do the cosmetic things to make it look good, but when you start digging into the details, that’s when you start finding things that are problematic.”

» READ MORE: Home inspections are a bargaining chip in Philly area’s hot real estate market

And the same level of scrutiny should be applied when finding the person who will inspect the home.

“When looking for an inspector, you definitely want to look for things like years of experience, certifications and a license if they’re in a jurisdiction that licenses inspectors,” Barker said. “Years of experience is about the only objective standard that you can go by. If you’ve done enough inspections you’ve seen most of what you’re going to see.”

Ideally, an inspection will be a simple process that finds only minor issues. Either way, it's better to know for sure than to find out after the fact.

“Essentially, what you’re buying with a home inspection is peace of mind,” Barker said.

A flipped house can become an issue when you go to obtain a mortgage. For buyers using a government-backed loan through the Federal Housing Administration or the Department of Veterans Affairs, houses can’t change hands again less than 90 days from the previous sale.

“If it’s a very quick flip, FHA will not be an option,” said Emanuel Santa-Donato, vice president of capital markets at Connecticut-based Better Mortgage. “That goes out to 180 days if the sale’s value doubles.”

For the 79,733 U.S. houses flipped in the second quarter this year, Attom found the lowest number of loans backed by the FHA since 2007.

» READ MORE: Loan preference is shutting some FHA-backed buyers out of Philly area’s hot housing market

For conventional loans there’s no set rule, as each lender will have its own criteria for what’s allowed. Santa-Donato said most banks do include a 90-day restriction, though not all.

And if the quality of work on a renovation is subpar, that can also affect a buyer's ability to secure a mortgage.

“If the kitchen is unfinished, you can’t lend on the house,” Santa-Donato said. “If you have exposed wires, you can’t lend on the house. It’s a fairly clear health-and-safety bar that comes from the appraisal process. If there are obvious things missing, a loan can’t be made.”

Staff writer Cynthia Henry contributed to this article.