Tuesday, November 15, 2016

Should You Buy A Flipped House?

Buying a house that was "bought and flipped" can be problematic.  Be sure to look critically at the details of any work done.

On the TeeVee, people like to watch programs about "house flippers" and I guess people find that interesting to watch.  It is far less interesting to actually experience, either as a flipper or as a purchaser.

As I noted in an earlier posting, we were in a hotel a few weeks back and they had cable TV and we watched one of these "house flipping" shows.  I was appalled.  It was typical "reality" TeeVee which means it wasn't real.   They just happened to mention the names of some products that were showcased, such as a foam roofing company.  Sort of like This Old House.  They played this fake game where the wife was buying expensive upgrades and saying, "Don't tell my husband!  Tee-hee!"" and then they staged a fake argument because that is what people want to watch, apparently.

The sad thing was, the house backed up to a junkyard, and their "fix" was to put up a chain link fence with green fabric on it.   In Real Estate, location is key, and being next to a junkyard is more important than fancy tile in the bathroom ("Don't tell my husband!  Tee-hee!").

We never bought into the "buy and flip" mentality as it usually made no sense.   Unless you can buy a house for far below market value and "improve" it for far less than retail costs, you can't make any money.  And usually fixer-upper houses don't sell for far less than market value, unless you find a desperate fool.  And the costs of "re-habbing" a house are always far more than you estimate.

Rather, we bought properties that sometimes needed work and we did the work, often ourselves, and then rented them out for a number of years and then sold them when they had appreciated in value.   Appreciation is more of a factor of time than of condition.   The value of a property is determined more by the location than the kind of kitchen cabinets it has.   If you pay a lot extra for fancy accessories, you are often paying too much.

We've bought two houses that were owned by someone who "bought and flipped" them so to speak, although not like it is on television.  We also bought a couple of condos as well.  The experience was mixed.

Our first home (that we bought together) was owned by the previous owner for two years.  So he was not really a "buy and flip" guy, but someone who owned a home and did a lot of cosmetic work on it.  He bought it fairly cheaply from an estate and lived there while he worked on it.   He tore off a rotted wooden screen porch, painted the house grey, put on a deck on the back, landscaped it, painted the interior, put trendy tile in the bathroom and put sealer on the driveway and rebuilt the garage.

We probably paid a little too much for the house in 1988, particularly since the market crashed in 1989.  But we made out in the long haul.  But over the 18 years we lived there, we tore and and re-did all the "renovations" he performed.   Most of what he did was torn out and thrown away after five years or so.

And he cut a lot of corners.  The basement door was rotted out and I discovered this after trying to close it.  Out of frustration, I kicked it and a 12" chunk of sheet-rocking compound flew out of the bottom of the door.  The door was shot, but rather than spend $99 on a new door (which is what they cost back then) he spent hours - days even - slowly building up layers of sheet-rocking compound in the large hole.  That should have been a tip-off of things to come.

The landscaping was nice and it looked good.  But one willow tree he "planted" died within a year.   I was not looking forward to digging out the root ball to replace the tree.  We were examining it and I pulled on the trunk and the entire tree fell over.  It was still in its original burlap bag root-ball, strings and all, and was just set on the ground with mulch piled up around it.   It was not planted, but set down.   The good news was, it was a simple matter to carry the dead tree to the curb.  The stupid thing was, if they had just cut the plastic strings on the root ball it might have actually lived, as they ended up girdling the tree.  If they had bothered to dig a hole, it might have actually flourished.  Spending all that money on a tree and then not bothering to plant it properly seems kind of odd.

While a lot of cosmetic things were "fixed" on the house, really major things were neglected - the hot water heater, furnace, windows, bathroom, kitchen, roof, driveway, etc.   We ended up replacing all of these at considerable expense.

Now to be fair, as I have noted in this blog, most of these household components last about 15 years.   Appliances, HVAC systems, roofs, and whatnot have a design life of about 15 years, although some roofs can last 30 and some metal roofs even longer than that.   But eventually all this stuff needs to be replaced, and that is part and parcel of home ownership.   The problem is, the previous owner did nothing substantial, just cosmetic.  The furnace was over 15 years old when we moved in and by clever nursing and repair I made it last another 10 (it helped we had a dual-fuel system with heat pump).

The house also had foundation problems which really were not easy to repair.  When you are living on marine clay, the only option is to dig a huge trench around the house, waterproof the foundation ("reparging") and then install a new French drain and sump pump system.   As it was, the six sump pumps on the property kept the place floating.

We also discovered that the "garage" was built on an old carport using scrap lumber (apparently) with the messy details nicely covered up with sheet rock on the inside.  It was only when I tried to hang things up in there did I discover that the "studs" were oddly placed and spaced.   It was also below grade, so water was always coming in until I devised a coffer dam.   It really should have been torn down and a new slab poured, but that was way too much money and hassle for the value of the home.

When a developer offered to buy it and knock it down for twice market value, we took him up on his offer!

Our present home was a rental property for many years and the landlord decided to sell it.  He and another fellow remodeled the house, raising ceilings, applying "knock-down", installing engineered hardwood floors and installing a look-at-me bathroom with travertine marble.   They also put in a new kitchen and hot water heater, as well as a new roof and HVAC system.   Here, the remodeling was more substantial, but they did cut a few corners.

Instead of installing new windows, they paid a laborer to scrape and paint all the old ones.  They looked good, but could barely open in the Georgia humidity.  We finally replaced them with vinyl replacement windows, which are quieter, cleaner, and save a lot of energy (our utility bills have plummeted as a result).

There were also some plumbing issues we've had to deal with - and will have to deal with.  Eventually, I will have to replace the cast-iron drain pipe in the laundry room, which may involve jackhammering up some cement outside.   Not looking forward to that.  The wiring is mostly original as well, with a Federal Pacific circuit breaker panel.  That will have to be replaced someday as well.

But all-in-all, we are happy with this house.   It does have better "bones" than our old house, and fewer corners were cut in the remodeling probably because, we are told, one of the partners was planning on living in the house at one time.

Did we pay too much for the house?  Well, as with our first house, we bought at near the height of the bubble.  But based on recent sales, we could sell the house for about what we paid for it, although after ten years, that is kind of disappointing.   Unless there is another housing crash, home prices here should start appreciating again over the next five years.

We also bought two condos in Florida that had been "rehabbed" by a developer who took an old apartment building and turned it into condos.  They put in tile floors and repainted the walls and installed new but economical kitchens.   They also gave the place a makeover on the outside with new brick walkways and pool deck.   It looked great, but once the developer handed over control to the condo association, we found it needed a few things that were kind of costly.  The monthly condo fee started to go up, and the roof was one of the big items we needed to fix.

We rented the units for a few years and then sold them at the height of the market.   I was told that a pipe burst in the building shortly after we left, so I guess we dodged a bullet.  While the units looked new and shiny, the plumbing and wiring was all from the 1960's with everything that entails.

So, should you buy a "flipped" house?  Based on my experience, the answer is a solid "maybe".  The thing to bear in mind is that cosmetic repairs, including interior repairs, wall coverings, tile, floor coverings, and whatnot, are really cosmetic and not structural.   Even kitchens and baths can be redone to look like new, but be attached to the same rotting plumbing underneath.

But that is also true for a non-flipped house.   Homeowners are loathe (as I am) to dig into walls and floors to replace pipes and wiring so long as the existing infrastructure "works".   So what if you have to snake the drain twice a year.  It still drains, right?   Kinda slowly, but it drains.   And if the foundation leaks water, but your sump pumps are staying on top of it, well, is it worth spending tens of thousands of dollars on repairs?

I had a friend who had a house with a huge crack in the foundation - the basement wall was buckled in almost a foot.  Marine clay was pushing the foundation in.  He bought the house that way, knowing it had that problem.   He sold it the same way.   As the home inspector said, "you could spend a lot of money fixing this, but it might not be necessary.   Just monitor it and make sure it isn't settling further" - which is what they did.   The alternative would have been to jackhammer up a rear concrete deck, excavate about 10 feet down and 10 feet wide and then backfill with gravel.   A real mess and an expensive mess as well.

The difference is, of course, was that he was aware of the problem and also disclosed it to the next owners.

For this reason, it is often a good idea to order a home inspection, for older properties, remodeled properties, and even new construction.   A home inspector isn't going to be wowed by glass tile and stainless steel appliances.  He isn't going to be emotionally involved in the transaction and will point out the real "bones" of the property along with possible problems and what to expect down the road.

If a house as ten year old appliances, it is not realistic to expect the seller to replace them.   But you should budget for replacements in five to ten years, as that is about their working life.

Similarly, if a house has two layers of shingles on it, and the upper layer is moss-covered and starting to curl, you can expect to need a new roof within a few years.   You should budget for this.

The main thing is, don't let emotions dictate a buying decision.   In some of these other "home" shows on Cable, they show buyers going from house to house (I am told this is all staged - that they already have picked out the home they buy before the show is even filmed) and commenting on the most superficial things, like paint colors or carpet.   But sadly, that is a "reality" for a lot of people who are caught up in the smell of new paint and carpet and forget that a house is a pretty complex and expensive machine that can break down with regularity.