House Flipping for California Real Estate Investors: A Legal Checklist

kitchenAuthor: Staff

House flipping, which involves purchasing a residential property and refurbishing it for resale, has been a popular activity in the U.S. for some time. Numerous television programs depict various aspects of the house flipping process, often focusing on repairs and improvements to distressed properties. Real estate investors in San Diego and other parts of California may find house flipping to be a lucrative investment activity, but it requires careful research and planning. On top of that, successful house flipping requires commitment to the process—it is very often much more of an “active” investment than a “passive” one. Prospective house flippers in California need to be aware of the legal risks and pitfalls they could face.

Business Issues

Real estate investment is a business activity. Investors should take care to keep assets, debts, and expenses associated with real estate investments separate from their personal finances. Creating a business entity to hold investment assets and manage investments—before ever looking at potential properties to buy—is one way to accomplish this. For an individual investor, this establishes a clear divide between the investment and the person. If an investor is part of a group or team, forming a business entity helps protect each investor from not only the investment’s liabilities but also each other’s liabilities.

Title Issues

Once an investor—either an individual or a group—has identified a potential property, they must research the property’s present condition and its history. Title issues, if not discovered and addressed, can create near-countless difficulties affecting the future sale of the property. Mortgage lenders typically require borrowers to obtain title insurance, but investors should not rely solely on the title search performed by the title company.

Possible title issues may include liens filed in the public record, which continue to affect a property until they are expressly released by the lienholder. Defective or inaccurate deeds can create uncertainty about ownership. Even something seemingly as simple as two different versions of the same name—”John Smith” on one document and “Johnny Smith” on another—can cause serious problems.

Zoning and Permitting Issues

Residential properties are often bound by city or county land use regulations. Investors should research any and all permits issued during the time the seller owned the property, as well as the property’s specific zoning designation. The City of San Diego’s zoning regulations set specific limits on structures built on residential properties. Unpermitted improvements built by the seller could become a liability for the investor.

Potential Restrictions on Sale

The end goal of house flipping is to sell the property. Some properties, however, may be subject to legal restrictions on resale. Properties with mortgages issued through the Federal Housing Administration (FHA), for example, might be subject to resale restrictions for a defined period of time.

If an investor purchases a residential property at a foreclosure sale, their ability to re-sell the property might be subject to the previous owner’s rights, such as the right of redemption. A buyer may also have to evict the previous owner if they have not vacated the property. Investors should be aware of any potential legal challenges to the foreclosure.

Property Issues

When most people think of house flipping, they probably imagine the various repairs needed to increase a house’s value. Whether a real estate investor does these repairs themselves, like the house flippers on television, or hires contractors, the investor could be liable under certain circumstances for any physical defects or hazards. Prior to purchasing a property, an investor should conduct a thorough inspection. During and after the refurbishing process, they should identify any remaining hazards or defects and disclose them to prospective buyers.

More Blog Posts:

How to Prepare for an Open House: A Four-Step Plan, Titles and Deeds, April 26, 2018

Trends in San Diego Residential Real Estate Present Opportunities for Investors, Titles and Deeds, November 21, 2017

What San Diego Real Estate Investors Should Know About House Flipping, Titles and Deeds, November 13, 2017

Photo credit: kirkandmimi [CC0 1.0], via Pixabay.