Fix and Flips: A Risk Reduction Perspective

Fixing and flipping (Fix n Flips) real property is a bustling part of the real estate market! Investors, buyers, and many real estate licensees, regularly engage in these opportunities. The key to a successful flip is speed and economic prudence. Savvy investors identify projects, make cost-efficient improvements, and resell quickly. Yet, it can often be a race to the finish and a recipe for problems with inherent risk for those involved. Consider the following:

Lack of Knowledge About a Property. An investor most likely will not have lived in the property and thus, have little historical data. In turn, the invistor often refuses to provide a Seller's Property Disclosure Statement ("SPDS"). This is not a wise position, or in the best interest of the investor and others involved. To explain:

• If the investor received a SPDS from the prior owner, the investor can provide it in the flip transaction. The investor should do so with a caveat that the SPDS was completed by the prior owner. Regardless, there is likely helpful information in the SPDS for the new buyer and an added layer of protection for all.
• Whether or not the investor lived in the property, they do have knowledge about it. For instance, the investor knows what work was performed as part of the fix process. The investor also knows what might have been discovered during that process and should be disclosed. Additionally, the investor is aware of basic information such as the address of the property, if it is in an HOA, if it is on septic or sewer and/or the like. These are disclosures that any investor can and should make.
• The investor is required under Arizona law to disclose the names and license numbers of all contractors performing services at the property. A.R.S. 32-1121(A)(6). This is to be disclosed in the Purchase Contract. Further, all work performed for the purposes of selling a property must be performed by licensed contractors if the cost of material and labor, in the aggregate, is $1,000 or more.

Practice Pointer. Licensees on both sides of the transaction should request copies of all contractor invoices. Further, licensees for the buyer should advise the buyer to review the licensing history of the contractors through the Arizona Registrar of Contractors ("ROC"). This advice should be given in writing and it should only be the buyer that conducts any research and due diligence with the ROC, not the licensee. This exercise allows the buyer to confirm that only licensed contractors performed work and said contractors are still in business and/or do not have a disciplinary history.

Licensee as a Principal. It has become common for some licensees to utilize their market expertise and participate in Fix n Flips as a principal. If choosing to do so, the following is important:

• The licensee should engage in the same disclosure practices noted above. Additionally, the licensee must be diligent regarding the separate duty imposed through the Arizona Administrative Code, R4-28-1101(B). That Code provision requires a licensee in a transaction (principal or not) to disclose anything that materially or adversely affects the consideration to be paid for a property. That disclosure must be in writing and is above and beyond the requirements of utlitzing the SPDS.
• A licensee must disclose in writing that they are principal in the transaction to a prospective buyer before entering into a contract.
• A licensee cannot act as a principal and as a dual agent. This is because the licensee will not be able to treat and represent all parties fairly.
• Finally, the sale of an Agent-Owned Property, if it is the individual's residence, is typically covered by their brokerage's Errors and Omissions Insurance Policy. Those policies don't extend to Agent-Owned investment properties, which is standard in the industry. In the event of a lawsuit, the licensee will be responsible for attorneys' fees incurred, for any settlement monies paid out and/or any judgment. 

Ultimately, with Fix n Flips it is always best practice to be well versed in the heightened level of risk that a licensee and their respective clients encounter with fix transactions.