Red flags when buying a flipped house

What are the red flags in a flipped house inspection?

When buying a flipped house, look for three things: rushed finish work, new cosmetics over old damage, and renovation work nobody permitted. Your inspector sees only what the flipper left visible. So check the permit record yourself, and send any structural, wiring or moisture finding to a licensed specialist before your inspection deadline.

Key takeaways

• A structural engineer's check of a load-bearing wall runs $150 to $300 nationally.
• If you sign 90 days or less after the flipper's own closing, the house isn't eligible for a Federal Housing Administration (FHA) loan.
• Ask who did the work, whether they were licensed, and whether contractor warranties come with the house.

Why is a flip harder to inspect?

One inspector quoted by InspectorPro Insurance, which insures home inspectors, calls a flip a rushed job on a tight budget. In his experience, the work goes only to what would obviously stop an offer.

InspectorPro's list of areas flips commonly neglect or hide: the roof, plumbing, heating and cooling, termite damage, wiring, and structural damage such as sagging ceilings after a load-bearing wall comes out. The same inspector says flippers rarely go into the attic or crawlspace, and may have the heating and cooling serviced so it seems to work during the inspection.

A general inspection has a hard limit here. Under the International Association of Certified Home Inspectors (InterNACHI) Standards of Practice, an inspection "will not identify concealed or latent defects." New drywall and paint can cover exactly what you need to see. Ask your inspector to note every area that looks recently renovated and to spend extra time in the attic and crawlspace.

Which red flags matter most?

Some red flags show on your walkthrough: loose outlets, drafty gaps at doors and windows, fixtures in strange places, finishes that don't match from room to room. Turn on every major system and appliance while you're there. The flags below, from Bluefield Realty Group's flip checklist and InspectorPro's list, can hide real damage.

If your inspector recommends a specialist, book one and get the findings in writing. See how to read a home inspection report for what the severity words mean.

How do you check whether the work was permitted?

Your inspector won't do it. InterNACHI's standards exclude "compliance with codes or regulations," and InspectorPro tells inspectors that checking permits is outside their scope.

Call or search your local building department for the permits issued at the address, and compare them with the work you can see. Then ask the seller, in writing through your agent:

• Who did the renovation, and were they licensed contractors?
• Were permits pulled, and for which work?
• Were major systems replaced, or only the finishes?
• Are contractor warranties available?
• Are there termite inspection or treatment records for the house?

This matters after closing. If the work was never permitted, getting permits is up to you once you own the house, which can take time and money. Permits can also help you claim any warranties the contractors offer.

What does it cost to check a flip properly?

Structural engineer inspections, national ranges from Fixr:

If the report flags a sagging ceiling and a cracked foundation wall, booking both checks runs $450 to $900, the first two rows added together. Ask whether one visit can cover both. The engineer's written report tells you what the repair is. A contractor's written bid tells you what it costs.

For the rest of the report, Kept prices every line of an inspection report for $79, usually under 4 hours, and marks the ones that need a professional quote.

Can you buy a flipped house with an FHA loan?

Yes, if the timing works. FHA's anti-flipping rule (24 CFR 203.37a) counts from the day the seller closed on the house to the day you sign your contract. At 90 days or less, "the property is not eligible for a mortgage to be insured by FHA."

Between 91 and 180 days, the house is "generally eligible." But if the resale price is 100 percent over what the seller paid, the lender must get "an appraisal from another appraiser." The time limits don't apply to some sellers, such as the Department of Housing and Urban Development selling homes it owns, state and local government agencies, banks, and people selling a house they inherited. Ask your loan officer to check the seller's purchase date before your financing deadline.

What should you ask the seller for, and what if they say no?

Ask for repairs by a licensed contractor with a permit and receipts, or a credit sized to a contractor's written bid. American Home Shield notes that flippers often want to sell fast and move on, so they may be more flexible on price. What to ask for after a home inspection covers which items are worth asking about.

If the seller refuses and the open questions are structural damage or unpermitted work, treat that as a possible deal breaker and decide before your contingency deadline whether to cancel. Your contract sets the exact dates, terms and what happens to your earnest money, so confirm them with your agent or attorney.

What is the 70% rule in flipping?

It's a flipper's rule of thumb: pay no more than 70% of the after-repair value (ARV) minus repair costs. On a house with a $200,000 ARV that needs $65,000 of work, that's $200,000 x 0.70 = $140,000, minus $65,000, for a $75,000 top offer. The rule protects the flipper's profit. It tells you nothing about what's behind the walls.

How often do buyers back out after an inspection?

In the National Association of Realtors' REALTORS Confidence Index, 7% of contracts were terminated in the last three months, for any reason. The same survey found 20% of buyers waived the inspection contingency. On a flip, keep yours. It gives you the time to get specialists in.

Is it a good idea to buy a flipped house?

It can be, if the work under the finishes is sound. Appearance alone does not guarantee quality. A good flip has permits that match the work, licensed contractors, warranties you can claim, and specialist reports that come back clean. The deciding number is what the specialist findings and the rest of the report cost to fix, set against the price.

If your flip's report is back and you want dollar figures before you answer the seller, upload your inspection report to Kept.

Sources

• InspectorPro Insurance, Flipped Home Inspections: More Than Meets the Eye
• InterNACHI, Standards of Practice for Performing a General Home Inspection
• American Home Shield, What to Consider Before Buying a Flipped House
• Bluefield Realty Group, What to Know Before Buying a Flipped House
• Fixr, Structural Engineer Cost
• Electronic Code of Federal Regulations, 24 CFR 203.37a, Sale of Property
• Lima One Capital, The 70% Rule in Real Estate
• National Association of Realtors, REALTORS Confidence Index