Are Flipped Properties Always a Good Deal?

While many buyers these days have gained more knowledge about obtaining disclosures when buying a property, they don't always know what to ask for.

Walking in to a clean, newly painted home with brand new flooring and granite counters in the kitchen and bathrooms is often a time of easy decision-making, largely because of the assumptions made by buyers and oftentimes their agents. 

The buyer is urged however, to look more closely, because many flipped properties were bought out o foreclosure by an investor.  Investors are just that--they are looking for ways to maximize profit by buying homes they can realize a profit on, so if they buy a "fixer", they are usually experienced in knowing how much money to spend in that local market in order to come away with cash after the sale.

In some cases, property enhancements are reasonably good quality, after all, no one can expect an investor to fix up a property with the most expensive custom  features available.  However, buyers need to still take a careful look, and ask for as much information as possible from the seller.  Just because it's an investor doesn't mean he/she is exempt from disclosure.  One of the fastest ways to find the prior condition of the property is to look for the previous listing's photographs (but many times there is only one exterior photograph, the required minimum for the MLS) and property remarks, which may be revealing.

There is not necessarily a horror story behind every foreclosed property, but more commonly there may be prior deferred maintenance because the prior owner could not keep up a property due to long-term financial problems which led to the foreclosure.  And, the prior owner may have blown his/her budget and spent a lot of money upgrading the house, and then ran out of money.  Either way, the current buyer should go to some effort to find out as much history as possible on a flipped property.

Barbara Nichols, owner of a general contracting firm in Beverly Hills and an expert witness for real estate lawsuits, advises buyers to ask such questions as:

• What was the property's condition when it was taken back in foreclosure?
• Are there receipts from licensed contractors for work performed by seller?
• Is there written documentation on what was done to correct defective conditions?
• Were there unrepaired defects?
• What work was done by a handyman? 
• What work was done with permits, and what work was done without permits?

Finding out if work was done by a licensed contractor is significant, because if the seller is claiming that thousands of dollars of improvements were made, it should be done with permits and not by a handyman.

Will all flippers be able to answer these questions to the buyer's satisfaction? The buyer will have the chance to find out, and then decide if he/she wishes to go forward with the sale by the time their contract contingencies are acted upon.



See the story here.

Do You Own Income/Investment Property? Read This about Proposed 1031 Changes

I just received this in my e-mail this morning:

• "There are currently three different proposals that the federal government is weighing, which would significantly alter Section 1031:
•  Former Sen. Max Baucus (D-Montana), who became U.S. ambassador to China earlier this year, released a draft proposal when he was chairman of the Senate Finance Committee that would potentially eliminate 1031 exchanges. His proposal, which is still before the Senate Finance Committee for discussion, contains other provisions unfavorable to real estate investments, including lengthening depreciation schedules for commercial and residential properties from 39 and 27.5 years, respectively, to 43 years for both and characterizing gains from real estate sales as ordinary income, instead of capital gain.
•  U.S. Rep Dave Camp (R-Michigan), chairman of the House Ways and Means Committee, has released a proposed tax bill eliminating all Section 1031 exchanges beginning Jan. 1, 2015.
• President Obama, in his 2015 budget proposal, wants to limit the amount of capital gains deferred in a 1031 exchange to $1 million (indexed for inflation) per taxpayer per taxable year, beginning Jan. 1, 2015." 

As so often happens, legislators propose laws that probably won't accomplish what they intend, in this case, raise tax money.  Property owners benefit greatly from the 1031 tax exchange laws, and should changes occur which prevent or greatly affect the benefits which have been in existence since 1921, many owners just won't make a change.   Sizeable tax consequences can be faced by some investors, so they could very well hold onto their properties rather than sell.

Real estate transactions generate business for many professionals, ancillary businesses and services. The ripple effect from a change in investment and/or commercial sales will impact not only the brokers, but many other job holders, i.e., environmental companies, appraisers, title and escrow personnel, contractors who restore/rehabilitate such properties.

Currently, the company that sent me this email has just exanded their office space on the East Coast because they are currently doing much more business.   But curtailing 1031 exchange activity may curtail many jobs and other economic activity.

"What can you do to help preserve Section 1031 exchanges? Contact your representatives in Congress to express support for Section 1031 in its current form, and the economic activity and job-stimulating aspects of this powerful tax code section."

California Propositions 60 and 90, Still a Good Tax Tool

These propositions allow for the transfer of a property's tax base, meeting certain requirements, for persons over the age of 55.

Proposition 60 allows for the value of an existing residence to a replacement residence within the same county, for every county in California.  The replacement home must be of equal or lesser value, and must be acquired or constructed within two years (before or after) the sale of the original property.  Transfers between parents and children will probably not qualify, as the original property must be subject to an appraisal (or re-appraisal).

Equal or lesser value of the replacement property is determined at 100%, 105% or 110% of the original property depending on the timing of the purchase/construction: before the original property is sold, within the first year, or within the 2nd year, after the original property is sold.  The guidelines are definite, and the replacement property will not qualify for the tax base transfer if the criteria is not strictly met.

A change from the recent years is the increase in number of counties honoring intercounty transfers.  At one time there were only five counties, there are now nine: Alameda, Ventura, Santa Clara, Orange, Los Angeles, Riverside, San Mateo, San Diego and El Dorado Counties.  These nine counties have passed ordinances which all intercounty base year transfers.  These counties will accept a value transfer from any other county in California as long as all requirements are met.

For the seller thinking of relocating, this is an opportunity to move from, for example, the higher cost areas within Orange or Los Angeles Counties to a lower cost area in a county among the above group of nine. This can work well for someone leaving a condominium to purchase a house in a different area.


If you are considering such a move, I would be happy to provide a list of available properties from several of these counties! Please contact me via phone or e-mail for available properties in areas you might be considering, and also for an estimate of current home value of your current residence.