Flipping Properties

By Outram J. Hussey

To the investor, Flipping Houses can be profitable, however, full disclosures, ensuring quality renovations and abiding by the laws are necessary prerequisites for long term success.

To the Buyer, proper due diligence is absolutely essential to not only protect your investment but also to ensure peace of mind and quiet enjoyment of your property.

Buying property as an investment and renovating it for sale to realize a good profit has always been with us. I have seen many investors, architects, realtors and building contractors working together to provide valuable  products, services  and who have developed great reputations as a result.  I have also encouraged people to invest in property, to buy, improve and resell at a profit. There are also many programs on Cable Television such as HGTV’s Flip or Flop, Masters of Flip, The Property Brothers and an old favorite of mine, This Old House that indeed  challenge’s us to take up the hammer and build . This can be very positive, rewarding and have acted as a catalyst in many community revitalization projects across the country.  There are times, however, when market forces create a perfect storm for flippers to flood the market.  Sadly for some, the incentive lies in pure profit and sometimes at any cost.

According to Realtytrac, 179,778 single family homes and condos were flipped in 2015 accounting for 5.5% of all such homes sold. In that same time period in Baltimore, Columbia and Towson, MD.  Gross Profit on flipping (per unit) was reported at $91,542 with a gross  ROI (return on investment) of 84.8%,  having  a  median purchase price of  $107,958 and which accounted for 6.8% of total sales.

During the same time period in Washington D.C., Arlington and Alexandria, Va. Gross Profit on flipping was reported at  $96,000 with a gross  ROI of 48%, having  a  median purchase price of  $200,000 and which accounted for 5.5% of total sales. With the type of returns posted for flipping properties it is not difficult to see why so many flippers flooded the market.

Regarding flippers, I have come across four  basic types as follows. Local operators trying to make quick profits via renovations, Out Of Town flippers converging on a region to extract quick profits, large companies  operating in multiple regions sometimes the entire eastern seaboard and  other operators buying , holding for a short period and selling during times of rapid appreciation, sometimes without doing anything to the property.  Smaller out of town flippers enter an area, buy depressed property, hire a contractor and renovate the property. This may also be without a permit if they can get away with it.  After the sale of the building many of these operators disappear. The larger more corporate types buy distressed properties and may or may not monitor closely the renovation process.  This can cause compromises in the construction especially if less than reputable contractors are used to execute the work.  I also want to state that there is nothing wrong with flipping properties per se, as long as there are proper disclosures, ethical practices, a regard for neighborhood and a system of accountability. I also want to state that there are times when bad contractors hurt flippers that want to do the right thing. Irrespective, buyers need to have the assurance that they are not buying a lemon and that their health, safety and welfare remains paramount throughout the transaction.

There are also times when a home owner decides to improve the property themselves in the hope of increasing property value only to end up with shoddy work by a less than reputable contractor.  I always recommend to home owners in these cases that they  a) Document their communications with the contractor, b) Institute regular weekly meetings to discuss the work and  c) To have a contract designed whereby the contractor can be fired if the work is being compromised. I also recommend to everyone doing renovation work to ensure they secure all the required building permits and to ensure that they are not renovating or buying a property where there is  work beyond that which is approved by the permit.

For those buying a flipped property, remember that they  are designed and staged to look great. Good paint with flashy accent colors, fancy kitchen equipment, granite counter top, nice flooring etc.  They have all the buzz that people are looking for. The “New Look”, “Curb Appeal”, A La Mode Finishes such that a buyer may even be tempted not to get a Home Inspection. As a buyer of a flipped property you will always want to do proper due diligence and to thoroughly inspect the property. Shoddy workmanship is a sure tip-off that there may be problems lurking.  Get copies of all issued permits. Ensure that all additions are covered in the permit as there are many reports of additions that had to be demolished as they contravened the zoning regulations.  Get a Home Inspection done and if there are any references to structural issues, get an engineer to check it and issue a corresponding report.  Watch for signs of mold and water penetration and remember to turn on all pipes and let run for a few minutes to ensure there are no blocked drains etc. Also try to secure warranties where possible and ensure that a Certificate Of Occupancy was issued for the building.  This is usually issued by the governing jurisdiction after all permit inspections have been signed-off.

In closing, I hope that this will be helpful to my clients that have engaged me on the subject as well as to the general public. I believe in most cases the motives are honorable, that is, wanting to do the right thing and being financially rewarded for the effort.  As in everything, we need to be vigilant.

 For those of you wanting to hire a contractors or a handyman, the FHA  recently issued a  “Guide To Hiring Good Contractors And Handymen”  that can be found at the following link:  http://fha203kstreamline.org/blog/

Title Considerations

Everyone rushes to buy property. Few question how it 

should be titled.

By Outram J. Hussey

A look at current trends in real estate shows an increase in properties being bought and sold not only by individuals or married couples, but also by three or four persons pooling their resources to buy property. I also see couples buying property with the hope of getting married only to separate (without a marriage) and this, after the purchase of the property. If this couple wanted to be prudent, for example, they may have considered taking title as Tenants in Common coupled with the provisions of a Will.  In addition, given that real estate transactions are being processed faster than ever before, many do not take the time to evaluate the type of title most appropriate for a particular transaction. Executing the right title can achieve significant benefits to the owner, co-owners, heirs and can eliminate the need for probate among other legal benefits. The wrong title can cause significant hardships as well as legal issues. In this blog post, I thought it important to share my perspective on the issue.

Before going any further, however, I want to state that given the importance of title and corresponding legal ramifications, purchasers shall consult legal counsel to avail themselves of the appropriate type of ownership and corresponding title for their particular situation and especially regarding how one may want ownership to pass should there be death, divorce or sale. Keep in mind that escrow and title service providers usually shy away from offering or recommending what type of title may be appropriate as they do not want to be guilty of practicing law. I reiterate, therefore, consult with an attorney knowledgeable in these matters.

When buying property in Maryland, Title can be held in two ways, namely, Sole Ownership or Co-Ownership.  Co-Owners may consist of two or more persons and can hold title in one of three ways. As Joint Tenants, Tenants in Common, and Tenants by the Entirety.

Sole Ownership or Ownership in Severalty is ownership by an individual or other legal entity having capacity to do so. It can be a single man or woman. It is also applicable to a married man or woman who want to own property as a sole owner (which excludes the spouse) however, the spouse not holding title must expressly consent to and disclaim their right to title, usually via a Quit Claim Deed. It is recommended that such an owner executes a Will to avoid problems upon death or incapacitation.

Regarding Co-Ownership. In Maryland, if a married couple buys property and do not specify the type of title desired, The State, by default, specify that the title automatically be given as Tenants by the Entirety. This is a very special title afforded only married couples. What makes it so special is that it has the Right of Survivorship, in that, title passes to the surviving spouse in the event of death. Also, and importantly, a creditor of one spouse do not have an attachable interest in the property unless the debt is uncured by both. Recognize also that in Tenants by the Entirety, a spouse cannot transfer their half of the property without the consent of the other. In the event of a divorce, Tenants by the Entirety is shattered and converted to Tenants in Common.

The other type of Co-Ownership is Tenants in Common which involves two or more owners. Each tenant in common secures an undivided interest or put another way, owns a part of the value of the property. 

This is a very important distinction in that although they may own an undivided interest they may also have unequal rights in the property. For example, one party may own 25% interest in the property while the other may own 75%.

Note that Tenants in Common have the right to sell or transfer property rights to anyone without the consent of the other.  There are no rights of survivorship afforded other tenants in common. Each tenant in common ownership interest passes to his/her heirs upon death.

The remaining type of Co-Ownership is Joint Tenants. Very different from tenants in common in that each Joint Tenant owns an equal share of the property that includes the right of survivorship. This is a most important provision in that if for example two people own a piece of property as joint tenants. If one dies and wills his/her interest in the property to another, the property would pass in its entirety to the surviving joint tenant irrespective of the provision of the will, because of the right of survivorship. Finally, in the event of a three way Joint Tenancy, the tenancy can be broken for a Co-Owner upon transfer his/her interest to a third party. Note that the other two co-owners who did not transfer interests to another remains in the Joint Tenancy with the right of survivorship. The co-owner that transferred property interest now holds a tenancy in common.

In conclusion property can also be deeded to Corporations, Partnerships or Trusts. Given the above, it is my sincere hope that this information will be helpful as you consider your next real estate transaction. Remember to hire a knowledgeable attorney to guide you through the legal requirements, the pros and cons as well as to advise on tax issues and consequences. By doing this you can invest with confidence and power.

At the top of this post I inserted a visual of a house and a Deed. Remember that a Title is a term that means ownership while a Deed is a legal document that transfers title from one party to another. Many of you will also remember that when you went to close on your home you had to sign a "Note". A Note also known as a Real Estate Lien is a promisory Note secured by the mortgage that state the loan amount, rate and time to fulfill the promise to repay.

In some jurisdictions Co-Owners that hold title to property but still paying on a Note may be able to enter into a TIC (Tenant in Common) structure with a third party  thus creating Fractional Ownership. In this scenario a mortgage company will want each of the TIC participants to sign the Note solely. In the event that one of the co-owners default on the loan, the mortgage company will only be able to foreclose on that owners share.