Buying a property for the purpose of repairing, remodeling, or repositioning it to be put back on the market in a short period to be resold to make a profit is commonly referred to as flipping.
It is not as easy as it may seem. Some people are good at it and others are not. People are making a living at it and plenty have failed. You must buy it right. Have a vision of what needs to be done to make the property more appealing. Most of all, you must have a solid plan and be able to execute it on time. There is risk involved.
Now there is a new law in California that will make it a little harder for some property flippers. However, it will bring more transparency and peace of mind to buyers of these newly renovated homes. This new law is officially called AB-968 but many know it as the “Flipper” Disclosure Law.
Starting July 1st, 2024, any seller entering a contract to sell a single-family residential property they have owned for less than 18 months must do the following:
- Disclose any room additions, structural modifications, other alterations, or repairs made to the property since the title to the property was transferred to the seller.
- Provide the buyer copies of any permits obtained, or at least make them available to the buyer. a third party who may have obtained them.
- Provide the names and contact information of all contractors performing any work, including labor and materials, over the dollar amount named in Section 7027.2 of the Business and Professions Code which at the time of the law going into effect is $500.
Disclosing modifications and providing permits is pretty much business as usual for home sellers. Where it gets interesting is the requirement to provide contact information for all the contractors for modifications done over the Section 7027.2 amount. This alone could have some meaningful implications.
To begin with, some flippers can be very protective of their vendor network and consider these contacts as more or less a trade secret. They built their team through years of trial and error, which naturally may make some flippers reluctant to share their contacts.
However, requiring the seller to provide the “contractor’s” contact information for work performed over Section 7027.2, which is the dollar amount requiring a contractor’s license, gives the expectation that the work be performed by licensed contractors.
Home flippers are in the business of turning homes around quickly and economically so they can make a profit. There are a lot of people flipping homes using unlicensed contractors and independent laborers who they pay directly. Having the requirement for sellers to name and provide contact information will bring extra scrutiny to who worked on the home and if they are qualified to do so.
Some sellers may try to flip using the Owner-Builder Exemption to get around the contractor license requirements. This exemption has very specific requirements like being your principal residence for over 12 months before completion of the work. You should consult an attorney if this is your plan.
If you are an unlicensed contractor doing work on properties for resale, you should be aware that this new disclosure requirement could get you called into question. Even if you have a contractor’s license you should know that you might be contacted by the new homeowners regarding work you have performed.
AB-968 also applies to people who don’t see themselves as home flippers but for whatever reason sell property 18 months or less after they take title. If this could be you, you will want to be extra careful who you use to do home repairs. Let’s not forget that as of the time this law goes into effect, this amount is just $500. Even when this amount is eventually increased, it will still be low.
This extra level of transparency ultimately protects the buyer and is a good thing. Remember, there is a reason that this law was passed. Anyone who has been in real estate for a while has seen the downside of poorly done renovations by flippers where corners were cut resulting in lipstick on a pig at best and downright fraud at worst.
Bottom Line
There is a new law called AB-968 that affects single-family homes, including condos, and goes into effect July 1, 2024. It requires any seller who has owned a home for less than 18th months to disclose all additions, modifications, alterations, and repairs made to the property. The seller also needs to provide or make available all permits obtained. They must name and give contact information for all contractors doing over $500 work on the property, and this number includes labor and materials.
This new law puts an additional burden of disclosure on sellers specializing in renovating and “flipping” properties. It will put extra scrutiny on the changes made and the people doing them. However, it will bring some much-needed transparency and peace of mind for buyers of these properties.
Who knows, it may cause some less qualified property flippers to get out of the market and leave more properties for the good ones.
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