What you should know before buying a returned home
The house flipping business occupies an important place in the American public imagination. Between the reality TV shows about the practice and the infomercials that promote it as a get-rich-quick scheme, almost everyone is familiar with the concept of buying, renovating and reselling real estate at a profit quickly.
Like many businesses during the pandemic, the home turnaround has slowed this year, accounting for 4.9% of all home sales nationwide in the second quarter of 2021, up from 6.8% in the same period last year, according to Attom, a real estate data tracker. Despite this, the median home price swung in the second quarter to an all-time high of $ 267,000 nationally.
The turnaround was popular – and profitable – in the Philadelphia area in large part due to the availability of aging or distressed properties that can be bought at a discount and sold at a higher price. While the palm profit margin fell to 33.5% nationally in the second quarter, the return on investment in Philadelphia (100%) ranked among the most important for metropolitan areas.
While home reversals can offer good prospects for the seller, what about the buyer?
“There is nothing wrong with buying a returned home,” said Chris Egner, president of the National Association of the Home Improvement Industry. “You can buy an old house and hire someone to renovate it, or you can buy someone else’s remodeled one, and it’s already done and ready to move in. The caveat is that, like any other business, there are people who are doing a job who are not qualified to do it. “
So how do you know if the pretty house with new paint and granite countertops is a bargain – or a lemon? Here are some strategies for home buyers.
“Typically, a flip will usually be vacant,” said Bruce Barker, home inspector and president of North Carolina. American Society of Home Inspectors. “A flip is going to have fresh paint, at least on the inside. Probably a new carpet, probably granite or quartz countertops and a new sink in the kitchen [but with] old wardrobes. It’s almost a dead gift.
Of course, not all vacant homes are flips. Another way to check is to see when the house was last sold through local government records or real estate websites such as Zillow and Redfin. If the house was sold less than six months ago, chances are it has been returned.
Egner, who is also a New Berlin, Wisconsin-based home renovator, is warning consumers to beware of shoddy work and corner cuts. Often times, it’s the job that consumers don’t see – plumbing, wiring – that will cause problems if a turnaround hasn’t been done professionally.
If it appears that renovations were done on the house before it was put on the market, potential buyers should still seek work permits, which can also be obtained from the local government. If a returned home doesn’t have a permit, it may be a sign that the work was a DIY project. More importantly, it probably also means that the job was not professionally inspected.
“Many returned homes are wonderfully made, with permits underwritten, priced at fair market value and adding up to a lot to the buyer,” said Len Sarvela, an agent based in Duluth, Minn., With the National Association of Real Estate Agents. “But with the market we have now, with a shortage of inventory, buyers know what their money is going to get them.”
Sarvela advises comparing the sale price to what the house was last sold for, which is usually a matter of common knowledge, especially if it was last sold in a few months. Does the work done since that day justify the price hike?
“If the sale price doubles, it would be better if there was a pretty good justification based on the materials and equipment that were put in the house,” Sarvela said.
Often times, buyers can find older photos of the home they plan to sell before the switchover online.
“Ask the buyer’s agent if he has experience with homes that have been returned,” Sarvela said. “And ask for it early in the process. “
One of the main advantages of buying a renovated home is that it is often ready to move in and will not require major work immediately. The downside arises when that promise turns out to be false – if the buyer only moves in to find out, for example, that the roof needs to be replaced.
“A lot of people don’t have the time to buy a house, move in and spend the next six months redoing the kitchen, bathrooms and everything,” Egner said. “If you can buy something that’s ready to move in, that’s great. … What better way to reuse and recycle than to take a run down old house and turn it into a brand new, functional and usable property? “
Once you’ve decided that you are serious about a home and are ready to commit to buying it, one of the most important remaining steps is getting a professional home inspection.
While this process can be costly, inspections can ultimately save the buyer money by detecting problems in advance and asking the seller to cover the cost of repairs. If enough issues are detected, the inspection may even cause a potential buyer to walk away.
“I inspected a house last week with new paint on the inside, new carpet, and kitchen countertops, but they hadn’t changed the bathrooms,” Barker said recently. “The water heater was older, the HVAC was older, the roof covering was at the end of its life. This is the kind of thing some fins do. They’ll do the cosmetic things to make it look good, but when you start digging into the details, that’s when you start to find things that are causing trouble.
And the same level of control should be applied when finding the person who will inspect the home.
“When looking for an inspector, you should definitely look for things like years of experience, certifications, and a license if they’re in a jurisdiction that allows inspectors,” Barker said. “Years of experience is about the only objective standard you can follow. If you’ve done enough inspections, you’ve seen most of what you’re going to see.
Ideally, an inspection will be a straightforward process that detects only minor issues. Either way, it’s better to be sure than to find out after the fact.
“Essentially, what you buy with a home inspection is peace of mind,” Barker said.
An overturned house can become a problem when you go to get a mortgage. For buyers using a loan guaranteed by the government through the Federal Housing Administration or the Department of Veterans Affairs, homes cannot change owners within 90 days of the previous sale.
“If this is a very quick turnaround, the FHA won’t be an option,” said Emanuel Santa-Donato, vice president of capital markets at Connecticut-based Better Mortgage. “It increases to 180 days if the value of the sale doubles.”
For the 79,733 U.S. homes knocked down in the second quarter of this year, Attom found the smallest number of secured loans by the FHA since 2007.
For conventional loans, there is no set rule, as each lender will have their own criteria for what is allowed. Santa-Donato said most banks include a 90-day restriction, but not all.
And if the quality of the renovations is poor, it can also affect a buyer’s ability to secure a mortgage.
“If the kitchen isn’t finished, you can’t lend on the house,” Santa-Donato said. “If you have bare wires, you can’t lend on the house. That’s a pretty clear health and safety bar that comes out of the assessment process. If obvious things are missing, a loan cannot be made.
Editor-in-chief Cynthia Henry contributed to this article.