Real Estate Flipping: 8 Disclosures You Must Make
Investors who flip homes are the unsung heroes of real estate. They take neglected, run-down and sometimes intentionally damaged properties and make them livable, even beautiful, again. If you want to flip properties, you probably already know about pitfalls such as hidden problems and cost overruns. But did you know that when you sell a property, you’re required to disclose information about its condition that might negatively affect its value? If you willfully conceal such information, you could be convicted of fraud in addition to being sued. Selling the property “as is” will not exempt you from these disclosures.
(For more information on buying a home, see: A Guide to Buying a House in the U.S.)
These rules affect anyone selling a home; however, they’re more likely to affect flippers, who are often dealing with properties in poor condition. Learn your state’s specific laws about required disclosures from your state real estate and local planning department. Some states are more lenient than others in their disclosure requirements. Here are some types of information you might be required to disclose – or might want to disclose, even if your state’s laws don't require it – so your buyer won’t have a reason to file a lawsuit against you.
1. Death in the Home
Some buyers may have concerns or superstitions about purchasing a home in which someone has died, so it’s important to know if your state requires sellers to disclose a previous death in the home.
“Each state will have slightly different requirements for disclosure,” says Jim Olenbush, a Texas real estate broker. “In Texas, for example, deaths from natural causes, suicides, or accidents unrelated to the property do not have to be disclosed."
“A seller is required to disclose deaths related to the condition of the property or violent crimes,” he says. For example, if a previous occupant’s child drowned in the swimming pool because it didn’t have the proper safety fence, the seller would need to disclose the death even after remedying the safety issue by installing a proper pool enclosure. There are, however, circumstances where sellers do not have to disclose a death on the property.
“There are no states in which there is an obligation to disclose the death of a person who has deceased under natural conditions,” says attorney Matthew Reischer, CEO of LegalAdvice.com. “However, some states impose a duty on a stigmatized home or apartment in which there has been a suicide or murder. Some states even go so far as to impose an affirmative duty on a seller if they have knowledge that their real estate is being haunted by the dead.”
Even when disclosure isn’t required – for example, Georgia does not require the disclosure of homicide or suicide – you may want to err on the side of giving the buyer notice of a death on the property. “If a seller is concerned about liability, the best advice is to go ahead and disclose everything upfront even if it is not required by law,” Olenbush says. “Buyers will always hear about things from the neighbors, and the surprise could cause them to back out of a purchase contract or wonder what else the seller is not telling them.”
2. Neighborhood Nuisances
A nuisance is a noise or odor from a source outside the property that could irritate the property’s occupants. North Carolina requires sellers to disclose noises, odors, smoke or other nuisances from commercial, industrial or military sources that affect the property. Michigan requires sellers to disclose farms, farm operations, landfills, airports, shooting ranges and other nuisances in the vicinity, but Pennsylvania leaves it up to the buyer to determine the presence of agricultural nuisances.
3. Environmental and Natural Hazards
If the home is at an increased risk of damage from a natural disaster or has known or potential environmental contamination, you may be required to disclose this information to the buyer.
Texas law requires sellers to disclose the presence of hazardous or toxic waste, asbestos, urea-formaldehyde insulation, radon gas, lead-based paint and previous use of the premises for the manufacture of methamphetamine.
New York’s Property Condition Disclosure Act requires sellers to notify buyers about whether the property is located in a flood plain, wetland or agricultural district; whether it has ever been a landfill site; if there have ever been fuel-storage tanks above or below ground on the property; if and where the structure contains asbestos; if there is lead plumbing; whether the home has been tested for radon; and whether any fuel, oil, hazardous or toxic substance has been spilled or leaked on the property.
States may also require disclosure of mine subsidence, underground pits, settlement, sliding, upheaval or other earth-stability defects. California’s Natural Hazards Disclosure Act requires sellers to disclose whether the property is in a seismic hazard zone and could therefore be subject to liquefaction or landslides after an earthquake.
While most disclosure requirements are governed by the states, the federal government mandates one: the disclosure that lead-based paint may be present on any property constructed before 1978.
4. Homeowners' Association Information
If the home is governed by a homeowners' association (HOA) you should disclose that fact. You also need to know about the HOA’s financial health and provide this information to the buyer so that he or she can make an informed purchasing decision.
“A buyer I know purchased a condominium, [and] the seller mistakenly forgot to give the buyer the last 12 months of meeting notes,” says Ed Kaminsky, president and CEO of SportStar relocation in Manhattan Beach, Calif. “Seven months later the buyer was assessed $30,000 for property improvements. The seller was subsequently sued by the buyer for not disclosing these important notes.”
What have you repaired and why? Buyers need to know the home’s repair history so they can have their home inspector pay extra attention to problem areas and be aware of probable future issues. Texas law, for example, requires sellers to disclose previous structural or roof repairs; landfill, settling, soil movement or fault lines; and defects or malfunctions in walls, the roof, fences, the foundation, floors, sidewalks and any other current or previous problems affecting the home’s structural integrity. You may also need to disclose electrical or plumbing repairs and any other problems you would want to know about if you were going to buy the home and live in it.
6. Water Damage
When water gets in where it shouldn’t, it can damage personal possessions, undermine the home’s structure and even create a health hazard if it encourages mold growth. Sellers should disclose past or present leaks or water damage. Michigan, for example, requires sellers to disclose evidence of water in a basement or crawl space, roof leaks, major damage from floods, the type of plumbing system (e.g., galvanized, copper, other) and any known plumbing problems. It can be difficult to know about water problems (and many other types of problems) if you’re flipping the home and only own it for a month or two.
“There are many risks for flippers or others involved in a house closing where some work is needed on the property that wasn't obvious on walk-through, particularly in winter or during a dry spell,” says Bill Price, an Illinois business lawyer. “With winter, a roof that leaks or has very old shingles may not be able to be inspected by the buyer or their home inspector. Similarly, a dry spell can conceal problems with a leaking basement.” In situations such as these, check to see how much protection your state’s laws offer from disclosing information you would have had no way of knowing.
7. Missing Items
Sometimes homebuyers have so much on their minds that they might not notice that a home is missing an essential component until after they move in. Some states’ disclosure laws attempt to prevent this problem. Texas and Michigan, for example, require sellers to disclose whether the property comes with a long list of items, including kitchen appliances, central air conditioning and heating, rain gutters, exhaust fans and water heaters.
8. Other Possible Disclosures
Buyers need to know if the home is in a special historic district because it will affect their ability to make repairs and alterations, and it might also increase the cost of those activities.
Texas law requires sellers to disclose active termites or other wood-destroying insects, termite or wood-rot damage in need of repair, previous termite damage and previous termite treatment. Michigan and North Carolina law also requires sellers to disclose any history of infestation. Consult your state’s laws to see if you must disclose information about any pests.
How to Disclose
Some states, such as Michigan and North Carolina, require sellers to use a specific disclosure form. If not, your state department or commission of real estate or state realtor’s association will usually have a recommended form you can use. The form may be more or less comprehensive than what state law requires. If the form isn’t comprehensive enough for your situation, supplement it with a list of the additional items you wish to disclose. The seller should make all disclosures to the buyer in writing, and both the buyer and seller should sign and date the document. Be sure you review what you need to disclose, and how it should be worded, with a real-estate attorney.
The Bottom Line
Even if a particular disclosure is not required in your area, if you have a piece of information about a house that might make a buyer unhappy, you might want to disclose it anyway. In addition to the moral reasons for being honest with prospective buyers – and the desire to avoid the expense and hassle of a lawsuit – you have a reputation to protect. If you have any concerns about whether you’ve disclosed the property’s condition correctly, contact a real estate attorney in your state.