Flipped Homes: Tips for Appraisers and Inspectors
According to Freddie Mac, fraudulent property flipping schemes is an emerging trend and it raises serious red flags for appraisers and home inspectors. While there are plenty of legitimate and credible property flippers in the market, the rise of flipping schemes puts real estate professionals at high risk of litigation.
When in the field, use these tips to help safeguard yourself against potential claims and lawsuits associated with quick and dirty flips.
Precautions for Appraisers
Appraisers have been caught in the crossfire of mortgage lending controversy for decades. Fraudulent flipping puts appraisers even more in the spotlight; as history shows, they’re the most likely scapegoat when there is an error somewhere in the sales transaction or after. Here are several things you should watch out for when placing a value on a flipped home.
Incorrect Sales Comps
When determining a home’s value, any comparables provided by home flippers should not be relied on. Regardless of the property type, all data included in the appraisal report must be verified for accuracy. Always conduct your own investigative work to find proper comps from similar properties in the neighborhood, and note any differences between the subject property’s sale price and other recently sold homes in the area.
Fake Second Mortgages
With this scam, the buyer and seller work together to obtain a “soft” or “silent” second mortgage, unbeknownst to the mortgage holder. To help move along the sales transaction, the seller will place a down payment on the home, which is later repaid by the buyer with funds from the inflated mortgage.
When reviewing sales comps, appraisers should be on the lookout for one of two things: how well the comps support the purchase price, or whether the purchase price is significantly higher than the original listing price. Either of these clues will show sales price discrepancies and help determine the authenticity of the second mortgage.
Dubious Business Practices
Google the name of the current owner, especially if it is an LLC or other entity. Flippers like to use LLCs and other entities so they can collapse them after the sale. Buyers and others will have nowhere to turn if something goes bad later on.
Failure to Disclose Sales History
If you’re an appraiser, you likely carry errors and omissions insurance. However, if you knowingly omit proper documentation to support how you arrived at an estimated value, there’s little your policyholder can do for you if a lawsuit is brought against you. Take extra care to review the sales history of the flipped property and include this in your appraisal report.
Precautions for Home Inspectors
Home flippers tend to focus on cosmetic updates that punch up the home’s visual appeal, like granite countertops, stainless steel appliances, new light fixtures and repainted walls and cabinets. What deceptive flippers neglect to do is any major repair work required in the home, leaving buyers to fit the bill down the road.
When inspecting these properties, it’s unlikely you’ll catch every well-disguised deficiency. Here are several areas to look at in order to ensure buyers are getting more than lipstick on a pig.
HVAC: Check the age, condition and safety of heating and cooling units. Regardless of season, ensure they’re functioning properly. They’re a major expense for the buyer post-sale, and it’s unlikely the house flipper invested in repairing these components, as they won’t necessarily add value to the home or increase the return.
Plumbing: Take note of leaky faucets, clogged drains and toilet flushing issues. Check that hot water runs hot and cold water runs cold; it not, it could signal a cross-connection issue somewhere in the pipes. And while you have the water running, check any sinks in lower levels and basements to see if drains fill up while plumbing is used in upper levels.
Roofing: Look for poor roofing conditions, such as missing or deteriorated shingles. Inside the home there will also be clues, such as water damage where the walls meet the ceiling. Estimate the remaining life expectancy of the roof, which is another expensive replacement that’s unlikely to be repaired due to lack of ROI.
Insulation: Determine whether there is enough insulation. If the house is older, it may need more added, which can get pricey.
Windows: Assess the condition of the windows, even if they have been replaced. The wood trim and surrounding casings may be rotting, which can be strategically covered up by a fresh coat of paint.
Now It’s Your Turn
Have you ever appraised or inspected a flipped home? Share your experience in the comments below.