What to do if you’ve been swindled by a house flipper

If you buy a house and later discover hidden problems, there is a good chance that you have been duped by a real estate flipper. Not all real estate investors are crooks. But predatory remodeling is the most common type of real estate fraud today. Often, there aren’t many options for recourse. Here are some things you can do to find answers.

How to find out if you’ve bought a flipped house

There are some telltale signs you’ve bought a house from a flipper.

• Look at your closing paperwork. The Seller should be listed as a person’s name. If the Seller is a company or an LLC they are likely a flipper.
• A flipper is likely to defer taxes using a 1031-Exchange. This is also found in your closing paperwork.
• Look at the sales history of your property. You can often find recent sales of your property on websites like Zillow.com. If the house has two sales less than 8 months apart (or was purchased less than 8 months before you bought it) it has been flipped. There will also be a significant price difference between the two sales.

Buying and reselling a property at a higher price is usually not illegal. But flipping a property can be much more profitable when the investor makes the property appear more valuable than it really is. Concealing known problems with a property is unethical and illegal.

How to find out if your house has illegal remodeling

Every time a house is significantly changed, the change needs to be documented, approved, and inspected. Look at your property records. These are available at your city hall.

• The description of your property lists the number of bedrooms, bathrooms, and finished square footage. If any of those numbers don’t match your house, the records are not correct. This could be a clerical error. However, it is more likely that construction work has gone undocumented.
• The building permit history shows all of the construction permits filed with the city. When your house has been remodeled to include additional rooms or more features (such as a deck, pool, fireplace, etc) there is a record every permit and inspection for those projects. If no records exist, it means that the project was done illegally without permits or inspections. Someone who does not get a building permit is trying to do work that is a lower quality than the building code. They are trying to avoid inspection.
• You can ask for contractor receipts as part of your purchase agreement. If you did this, those contractors will match up with the permit history. A licensed contractor must follow building code. If there is no contractor associated with a construction project, the work may have been done by a previous home owner or an unlicensed contractor.

A flipper who practices predatory remodeling makes fast changes to a property to make it appear more attractive. They might add more bedrooms or bathrooms, or even remove walls to make existing rooms look bigger. Without permits, these “improvements” are illegal. Flippers use unlicensed contractors to subvert building code and avoid inspections.

How to recover from predatory remodeling

Buying a house is a one-way transaction. Real estate laws are set up to protect that transaction. After you close on a property, that transaction is finished. In very rare cases, a judge can reverse the sale if there is a problem with the title or the mortgage. Once you sign the closing paperwork on a property, it is yours permanently. Any problems that are discovered on that property are legally your problems to correct.

Unfortunately, there are very few options for recourse if you are a real estate fraud victim.

• Time is your enemy. Closely examine the terms of your closing documents. It is likely that you only have a limited amount of time to challenge the Seller. You probably have 24 months or less.
• If your purchase included a home warranty, file claims immediately. This is not common in the United States. In some countries, home warranties are required for many years.
• If you can afford a litigator, you can try to sue the Seller for individual damages. The burden of proof is on you to implicate the Seller. This is very costly, extremely difficult, and a favorable outcome is not likely.
• In order to avoid repeated law suits, a Seller may require arbitration as part of the purchase agreement. Arbitration is a way to settle a dispute without going to court. However, arbitration between you and the Seller is only allowed once, and the settlement becomes legally binding. If more problems with the property are discovered after the settlement, you may not enter arbitration again. You may want an attorney to help you through arbitration.
• Sometimes, the damages are too expensive compared to the property value. When none of the above options are available, a Buyer will typically abandon the property. This means you are breaking your mortgage agreement and letting the house get foreclosed. You will have to find housing somewhere else. Your lender will claim the property and deal with it. A foreclosure will remain on your credit history for 7-8 years, making it very difficult for you to buy another house.

How to protect yourself against real estate fraud

When you are buying a home there are some important steps you should take to avoid becoming a fraud victim.

• Take a first time home buyer class. Never allow yourself to be pressured during the home buying process.
• Investigate a property’s building permit history. Avoid properties that don’t account for additional bedrooms, bathrooms, or other construction projects.
• Investigate a property’s sale history. Avoid properties that have been flipped in a short period of time.
• Hire experienced individual trades inspectors, not a real estate inspectors. Never use any inspector suggested by a realtor.
• Never agree to a Seller’s Disclosure Alternatives waiver.
• Walk away from any property that is owned by an LLC instead of a person.
• Walk away from any transaction that is filing a 1031-Exchange, or one where the owner gives power of attorney to another signer.
• Require contractor receipts as part of your purchase agreement.
• Require a home warranty as part of your purchase agreement.

Always assume that the Seller is trying to trick you. If you see any signs of deception from a Seller, discontinue the sale.

---