By Ethan Roberts
Home flipping is the practice of buying a home, repairing and improving its features, and then putting it right back on the market for a quick, profitable sale. These homes are almost always purchased at a distress sale, simply because it would be difficult to buy a non-distressed home cheaply enough that you could make a profit by fixing it up and re-selling it. Auction.com, an online real estate marketplace, says that almost 60% of the people who register to bid on bank-owned properties say they plan to flip these homes after they buy them. (Note: A distress sale isn’t always a foreclosure or short sale. It could also be an estate sale where the heirs just want to be rid of a property that needs a lot of work, or it could be a home priced for a quick sale because the owners are divorcing.)
While it’s perfectly legal in all 50 states, home flipping gained a negative reputation in the media after the housing crisis of 2007, thanks to a few unscrupulous investors who committed fraud or operated unethically in their greedy attempts to make as much money as possible without regard for the buyer’s best interests.
But the wonderful thing about real estate investing—and home flipping in particular—is that it’s entirely possible to make good profits without breaking the law or acting unethically. Sure, we might lower our profit margin slightly on each project if we maintain high ethical standards, but in the long run, the good karma and reputation we’ll garner from being more ethical will reward us to a much greater degree.
Today I’d like to share several ways that investors can be successful property flippers while maintaining high ethical standards in how they run their real estate business.
Fix, Don’t Cover Up!
Sometimes when you’re working on a house, you’ll come across a hidden problem that’s not likely to be seen by either the potential buyer or a home inspector. It could be a bit of mold behind a wall, or an issue in an attic or basement that’s not readily apparent, such as water leakage, a crumbling foundation, broken trusses or evidence of a fire. The temptation to ignore it is great. But ask yourself, “If I were buying this house, wouldn’t I want the seller to tell me about this problem, or fix it?”
We’re in the business of selling a quality product. That means when you know a problem exists, your ethical responsibility is to remedy it, not cover it up and hope that nobody discovers it.
Recommend Home Inspections
When you’re flipping a home, you should budget for additional repairs that a home inspection might indicate after you go to contract. Home inspectors often find problems that even savvy investors miss. I recently sold a house where the home inspection revealed that there was a crack in the wall of the fireplace. It was an easy repair, but I had never opened the fireplace to look at the wall—it just didn’t occur to me. In another situation, an FHA appraiser found a gap in the attic wall of a house one of my customers was selling. My customer, who was flipping the house, wasn’t aware of the gap, even though she knows a lot about houses.
But not all buyers know about home inspections. If you’re selling your home to someone who doesn’t have a real estate agent, it’s your ethical responsibility to recommend that they get a home inspection so that they’re made aware of any and all problems with the home. Suggesting an inspection does not obligate you to make all of the repairs. You and the buyer can negotiate in advance how much you’re willing to spend to repair any problems that the inspection finds.
Use a Seller’s Disclosure
Many real estate transactions contain a seller’s disclosure, which asks the seller what they know about the house. Some examples of questions the form might ask you include:
- Has the home ever had a roof leak?
- Has the home ever had termites?
- Has the home ever had mold?
- Has the home ever had a fire?
Some states don’t require you to complete this form if you haven’t lived in the house within the previous six months. But the state may still require you to disclose any problems of which you’re aware. Buyers have filed lawsuits against sellers months after the sale when they discovered problems that the seller didn’t disclose.
Put Promises in Writing
In an effort to make the sale, some sellers will tell a potential buyer that they’ll make repairs or improvements to the house—and then not follow through. Don’t ever do this. Not only is it unethical, but you could also open yourself up to lawsuits.
Protect yourself. Put any promises you make in writing as part of the real estate contract, and keep them.
Use Only Quality Materials
When an investor flips a home, he or she needs to stay within a budget. After all, the whole idea of flipping a home is to make a profit. However, you should avoid trying to save a few bucks here or there by knowingly purchasing inferior products that won’t last very long. That $22 sink faucet may look as good as the $40 one to the buyer, but if you know that it will begin to leak within a year or two, do the ethical thing and purchase a higher-quality faucet, even if it costs you more.
I’ve had many service providers ask me if I’m flipping the home I’ve hired them to work on, with the implied assumption that I should put poorer-quality materials in it since it won’t be “my problem” after we close. I won’t do that, and neither should you.
Make Your Contracts Fair
Investors sometimes flip homes to people without either party using a real estate agent or Realtor®. Unfortunately, some investors have their attorneys draw up contracts that are heavily skewed in favor of the seller, with legal language that typical first-time homebuyers won’t understand, if they even bother to read the fine print.
In my opinion, while this may be “legal,” it’s hardly ethical. All contracts and forms that investors use should be equally weighted in advantages between the buyer and seller, and easy for the layman to understand.
Build a Good Reputation By Going the Extra Yard
Home flipping is a business like any other, and as such, the more you do for your customers, the stronger your business will become over the years. Happy buyers may refer their friends, families, or work colleagues to you. There’s no reason that you can’t make money and make people happy, creating a win-win arrangement for both parties. So go the extra yard whenever you can.
Remember that besides making money, your ultimate goal is to build a good reputation for yourself. If people feel your business practices are shoddy or unethical, they’ll tell others and it will eventually drag your business down.
In the end, home flipping is about the Golden Rule: Treat others as you would like them to treat you. By following the ethical principles outlined above, you’ll follow the Golden Rule while still making a lucrative living for yourself.
Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace, and his work has been featured on MSN Money and Reuters. He’s also written for Seeking Alpha, Investopedia, The Fiscal Times, ForSaleByOwner and Smarty Cents, and was one of five contributing editors to The Tycoon Report. He’s been investing in real estate since 1995 and has been a Realtor since 1998. He also teaches classes on investing in residential real estate.
