Calling all flipsters: How to keep your flip from becoming a flop
Many young professionals are becoming real estate investors by devoting their time and money into flipping properties, hoping to sell them to other young professionals. The Los Angeles Times has even coined a new term for these young professional home flippers: “flipsters.”
So, let’s assume that you, a flipster, have done your due diligence and found that ideal fixer upper in that picture-perfect neighborhood. Your bid has knocked out the competition, and now you’re ready to tear down walls and install those French doors (Joanna Gaines, anyone?). So, what are some things you can do to help align the real estate profit gods in your flipster favor?
I’m sure it’s no surprise to most, but flips, whether residential or commercial, require substantial work in terms of rehab. But before you go swinging that hammer, make sure you’ve checked in with your local building department to determine which permits are necessary for your project. Yes, most localities do require permits for residential projects. You may need a permit to install that new white picket fence or for any changes to electrical, plumbing, HVAC, or mechanical systems.
Even if you hire skilled contractors, be clear who is responsible for obtaining the permits. Check with your local building department to determine who is ultimately responsible for procuring the permits. Some localities require the owner to apply, while others will only work with contractors who are certified to perform work in that locality. Keep this in mind when you’re picking a contractor.
Any time you’re taking on a project, expect that you will have to pass an inspection by your local building official. Trying to hide work or thinking you can get away without getting the required permits is a mistake. If work is done without a permit, the building department can put a hold on any occupancy or rental permits, charge a 300% markup on permit fees, or even require that the unpermitted work be removed. Setbacks such as these can be the difference between a successful flip and a flop.
While it can be tempting to have your brother’s friend’s uncle work the rehab job on a handshake deal, entering into any type of construction project without a written contract can be a recipe for disaster. Construction contracts are vital to keeping the project on schedule, on budget, and to hedge some of your risks. Construction contracts may seem like an easy item to skip over, but if your contractor leaves you high and dry with half a flip to go, you’ll be glad you protected your interests, in writing.
A construction contract can save you from every flipster’s nightmare: a contractor taking your hard earned money and skipping out on the project. Your construction contract can save you by scheduling payments that coincide with the progress of the project. For example, your contractor will get 10% to start, then when the project is 30% complete, they get another 20% payment, and so on. Your construction contract can also require retainage. Retainage is when a percentage of the total project price is retained by the owner until the project is 100% complete to the owner’s standards. This can help deter a contractor from rushing through the project, taking the full payment, and then never returning your calls about that shoddy paint job that needs touched up.
In sum, flipsters can take these simple steps to help ensure they have the best chances at a successful flip and to avoid a flop. Research your locality and understand what permits must be acquired before you start the work and get a construction contract in writing to protect your interests. Once you have these items completed, you’ll be well on your way to a successful flip.
Happy flipping, flipsters!
Tara J. Rose is an associate real estate and construction attorney with Buckingham, Doolittle & Burroughs in Akron.
Published at Fri, 18 Aug 2017 09:00:00 +0000