CNBC - Investors are flipping houses like it's 2006 again.
This time it's not easy mortgages fueling the movement but fast-rising prices, hungry buyers, record profits and a panoply of home-flipping reality TV shows that make it look fun and easy.
Some flippers are turning historic homes into modern, hybrid treasures, but others are slapping cosmetic fixes on truly troubled properties, ignoring mechanical and structural issues. For more unsuspecting buyers, that move-in-ready dream home can quickly flip into a nightmare.
Cameron McGuire and his wife thought they'd be living the dream. The downsizing baby boomers moved out of their large suburban home three years ago and purchased a three-bedroom, three-bathroom condo in a historic Washington, D.C., row house. The home had been fully renovated and enlarged by a local developer-flipper.
"And that was actually part of the appeal — to have something that was completely finished that from top to bottom had been redone. All new electric. All new everything in it. High-end appliances. All of those things were part of the appeal for us," McGuire said.
For the first six months, everything was fine, but then they got a call from a D.C. housing inspector, who was investigating claims against the developer by other buyers. The inspector walked through the McGuire's home, and it was as if demons suddenly seeped out of the walls.
"They gave us list after list after list of things that were either not permitted or violations or weren't zoned correctly here in the property," said McGuire, pointing all around him. "Receptacles are not permitted the way that they're installed here. The canned lighting up in the ceiling is not permitted the way that it is supposed to be in here. Even looking at them I still can't even tell they're out of compliance. It was an unending list of things."
Worst of all, the developer never filed permits for the back addition, which houses two bedrooms and two bathrooms. The McGuires were shocked to learn that the city has the legal right to make them tear off the back of the house.
"So, we right now have a legal one-bedroom/one-bath, even though we paid for three bedrooms and three bathrooms," he added.
McGuire is working with the city and will likely not have to remove the addition, but he estimates that bringing it up to code — which will include ripping up the new wood floors, among many other things — will cost well over $100,000. He initially paid $630,000 for the home, a premium for the transitional neighborhood, but based on the high-end amenities and like-new condition.
"It's literally putting lipstick on a pig," said Stephen Carpenter-Israel, president of Buyer's Edge, a brokerage that only represents buyers. "They're just doing cosmetic stuff and actually covering up problems, and that's scary because it's very difficult to figure it out."
Carpenter-Israel is a member of the National Association of Exclusive Buyer Agents which just last month warned of the potential pitfalls associated with purchasing a flipped property. He specializes in finding the hidden dangers behind all the sparkly new fixtures and urges all buyers to go beyond a home inspection when buying a flip.
"Really it's that they'll cover up structural problems instead of fixing them. And a lot of times we'll see where there's termite damage or water damage in a house, and it literally just gets slapstick, you know, right over the top of it," he said.
Top tips when buying a flip:
- Make sure the flipper used a licensed contractor.
- Request an updated disclosure statement from the seller.
- Request a list of work done, including receipts and warranty information (water heaters, plumbing, electrical, HVAC).
- Check for all permits on the property and the upgrades.
- Make sure all upgrades passed full inspection.
- Make sure the property has a certificate of occupancy.
- Have a professional termite and mold inspection.
- Look for water damage and old wiring in the attic and basement.
It's homes like the McGuires' that are in high demand today. This spring's housing market is so tight, with a near record-low supply of homes for sale, that buyers who find a move-in ready home are ready to pounce. The better the finishings, the higher the price sellers can command.
Flippers, in fact, saw record profits in 2016, with a gross flipping return on investment of 49 percent, according to Attom Data Solutions, a real estate listing and analytics company. Both the gross flipping dollar amount and return on investment were the highest going back to 2000, when the company began tracking flips.
Just more than 193,000 single-family homes and condos were flipped last year, with a flip defined as a home bought and sold again within a 12-month period. That is the most since 2006, the height of the housing boom, which recorded more than 276,000 flipped homes.
"Investors in search of flipping returns are increasingly willing to move to secondary and tertiary housing markets, and neighborhoods with older, smaller properties that are available at a deeper discount," said Daren Blomquist, senior vice president at Attom.
Properties in those neighborhoods, however, likely need more work, and that is why more potential buyers could be at risk of shoddy flips. As more amateur flippers get in the game, it's more likely there will be more violations.
"The flippers — the bad ones — won't pull permits. And at that point you have a huge issue because no one's looked at this, no professional has come in, none of the city people have come in and said, 'Did they do it right? Did they review all of this stuff before they closed up the walls,' you know?
"And if the answer is no, then it's almost always just a turnaround and walk away," said Buyer's Edge's Carpenter-Israel.
For the McGuires, it's too late to walk away. They love the neighborhood and the house, but they face a long road of repair and frustration ahead. The city fined the developer, and it's possible the McGuires could get some of that money. Otherwise, they would have to sue, which would be even more expensive.
"I would like it just to be the done place from top to bottom that we bought. So, we'd actually like to stay," McGuire said. "In a historic home. In a great neighborhood. All of those things. In the brownstone. For us, that was really part of the dream — that we didn't have to lift or fix or do anything. We thought we were in the clear for decades."