Flipper Investment Mistake Turns Into Disaster
2016 saw the highest percentage of all home sales from investors flipping houses since 2006 according to a recent Bloomberg article. Flippers often spend money on much needed improvements and bet on a price increase and short-term sale. Some investors cut corners in hopes of reaping a bigger margin of profit. Others are inexperienced or too confident in their “knowledge” of the real estate business, leading to costly mistakes. I shared the story of one such mistake in my article Dirty Deeds Not So Cheap. Another victim’s story reinforces the pervasiveness of the problem.
A Maryland couple purchased a property to flip in the Pittsburgh area. The sales agreement said “as-is, where is” subject to all liens, diseases, warts and infections. The price was right. No title search, no due diligence. After the deal closed, the flippers learned that the house had previously been placed on a list for demolition by the local municipality. They tried in vain to fix the place up, plowing an additional $10,000 into the property but it wasn’t enough to satisfy the city. The house was torn down.
This couple could have avoided all of these problems by hiring an attorney to do a title search and examination. The municipal violations would have been uncovered and they could have avoided the deal or negotiated in advance with the municipality. All at a negligible cost.
How did this turn out for our flippers? Well they’re understandably upset and their options aren’t great. Sue the seller for fraud? Good luck finding the Nevada LLC seller or collecting if successful. Sue the city for its decision to demolish? Expensive and even less likely to succeed. They are stuck with a vacant lot and a demolition bill. This deal was a total loss but it didn’t have to be that way.