Protecting Your Flipping Fortune
February 26, 2019
Kristin E. Rosan
Partner, Madison & Rosan, LLP Attorneys at Law
Once you’ve made your fortune flipping, make sure you keep it. One of the greatest areas of liability for flippers are undisclosed defects with a property you’ve repaired and flipped. Although disclosure requirements vary from state to state, laws routinely protect buyers that are able to prove a flipper was aware of a material defect and failed to disclose the same to the buyers. Because the flipper is in a position to have a far better understanding of the condition of the property, they can be responsible for failure to disclose those items of which they have actual knowledge. If the defect is significant, the flipper could be on the hook for the cost of additional repairs and other damages the buyers incurred. Below are some tips for flippers to follow in making sure all defects are disclosed to buyers of flipped properties:
- Disclose every defect. Latent defects are those defects that cannot be discovered by a reasonably diligent inspection (i.e. they are hidden). Patent defects are those that are discoverable (i.e. in the open). A defect is material if it would have altered the buyers’ decision if the defect was disclosed. Generally flippers have a duty to disclose latent defects that are material. However, failure to disclose something because the flipper believes it is patent or not material, could still subject the flipper to lengthy litigation and unknown outcome. The safest course is to fully disclose every defect, without regard to whether a defect is latent, patent or material.
- Fully and accurately complete residential property disclosure forms. These forms ask a seller to disclose property conditions occurring within a specified period of time. Although the flipper may not have lived in the property, the flipper would be aware of conditions that resulted in repairs or improvements. Examples would include upgrades to electrical and plumbing. All defects of which the flipper has personal knowledge should be disclosed on the disclosure form. This disclosure puts buyers on notice to conduct whatever inspections/tests they deem appropriate concerning the condition of the property.
- Provide copies of reports and warranties. If the flipper obtained any inspections or tests during the renovation process, those should be disclosed to the buyers. This disclosure should occur even of the condition has been resolved, as the disclosure permits the buyers to conduct their own inspections to confirm the sufficiency of the repairs. For example, if the flipper obtained a structural report, a copy of the report along with the invoice showing the scope of repairs completed should be provided to the buyers.
- Encourage inspections. Permit the buyers to have a full and unimpeded opportunity to inspect the property. If buyers are given the opportunity to conduct whatever inspections and tests they deem appropriate, they can independently satisfy themselves as to the true condition of the property.
The goal in making the recommended disclosures is to put the buyers in a position to know as much about the property as the flipper. If the buyers were fully informed and given a full and unimpeded opportunity to inspect the property, it will be difficult for them to later argue that they suffered damages from non-disclosure of a defect with the property. Although it may be tempting to resist fully disclosing the condition of the property, such disclosures will serve to help protect your flipping fortunes.