Jodi Faulkner

House flipping now can draw hefty fines

Parker Howell Staff writer May 29, 2008

Flipping houses (the practice of buying homes, fixing them up and quickly selling them for a profit) gained notoriety during the housing boom as the subject of popular cable TV shows.

Under a recently revised Washington state law, however, would-be flippers in Washington might not land a fat check but a hefty fine.

The law requires flippers planning to make $500 or more in home improvements to either be a registered contractor, which requires thousands of dollars in collateral, or to own a property for more than a year before selling. It places the same requirement on people who build new houses speculatively, or without a specific buyer in mind.

Real estate investors are still coming to grips with the law, which took effect last year. They say many people don't even know the law exists.

The state Department of Labor and Industries, which pressed for the law change, says the revision protects consumers and helps fight the "underground economy."

"You have to be a registered contractor if you're buying property with the intention of fixing it up and selling it," said Elaine Fischer, a department spokeswoman.

But some real estate investors contend it unduly affects their business.

Chris McIntosh, president of Spokane real estate investment club NextGen REI, said he doesn't have the time or energy to register as a contractor.

"With this new law, if I go in to do any work on the house to maybe make it a little bit better, I can't sell it right away or I can't do any work on it, so I can't give anybody else a great deal," McIntosh said.

The reality show "Flip That House," which originally aired on Discovery Home Channel and now plays on The Learning Channel, follows people who buy rundown houses to renovate, offering flipping tips. Now in its fourth season, the A&E show "Flip This House" has a similar premise.

Budget-conscious flippers sometimes do work themselves to save money, which could still require building permits, or hire contractors. Experts warn about potential pitfalls of flipping for would-be investors.

But it was protecting customers from potentially substandard craftsmanship that prompted the Washington Legislature to change the law last year.

The change was meant to close loopholes for house-flippers and people building houses to sell under the guise of being resident homeowners, Fischer said. It expands the scope of who needs to register as a contractor, including any person or firm who offers to sell property without occupying it or using it for more than a year from the time the project was "substantially completed or abandoned."

For flippers, that time frame is key.

"The longer you hold onto the property, the more it eats into your profit margins, because you have the overhead," said Tyler Vinson, membership chairman for NextGen REI.

The four-year-old club, which has a code of ethics, counts about 140 members, Vinson said.

"There's definitely a large portion of flippers, and it's going to change their industry, there's no question," Vinson said.

Registering as a general contractor requires a security bond of $12,000 and property damage and liability insurance of $250,000. Homeowners who dispute the work of registered contractors can file suit against their bonds in county court for up to two years.Catching unregistered house-flippers is tricky, Fischer said. One strategy: Officials can look at building permits to try to spot repeat requests, she said.

First-time offenders may be fined $1,000 for being an unregistered contractor, or $1,000 per day, per job site, Fischer said. Egregious violations might be turned over to county prosecutors as gross misdemeanors, which can carry larger fines or jail time.

This year, the department has issued at least 50 infractions in Eastern Washington for people advertising or performing work as contractors without valid registrations, Fischer said. It wasn't unclear if any were flippers.

But it appears flipping still occurs locally. One man, for instance, bought a four-bedroom north-central Spokane house in December for $61,000 and installed new floors, painted inside and out, and added new vinyl windows, according to county property records and a sales listing. It's listed for sale at $139,900. The seller posted "before" and "after" videos on the Web site YouTube that have been removed.

The homeowner could not be reached for comment, but he's not listed as a registered contractor.

When contractors aren't registered, "The person who buys it has no recourse if there's a problem," Fischer said.

In a letter in March, the head of the Real Estate Investors Association of Washington called for members to write legislators to urge changes to the law. The association worries that buyers will think members forced to register as contractors have an expertise when there are no tests or minimum skill levels to become contractors, and that retirement accounts used to purchase properties as investments cannot be registered as contractors.

McIntosh, of NextGen REI, called the law "poorly written."

"I've heard from real estate investors that the margins, especially in a downward economy ¡K are already so tight," he said. "Now this is just another additional cost and process that they have to go through."

But while Vinson said he's flipped houses in the past, he no longer uses that technique and sees the change as a "good thing."

"You do have to protect the end consumer," Vinson said. "There's novice flippers who go out there and don't do a good job, and they can cause more problems than it's worth."

While the law makes it more difficult to enter the market, "people currently investing will be able to adapt," said Vinson, also an associate broker with Windermere Real Estate in Spokane Valley. But novices "probably don't know about it, so it's a little bit of buyer beware there still."

The law also means fairness for contractors, who supported the legislation, Fischer said. There are roughly 60,000 registered contractors in the state, and the department estimates an additional 7 percent to 12 percent of that number act as unregistered contractors, she said.

"In fairness to the contractor community, you can't have these loopholes where other people are out there doing the exact same thing as a contractor, but saying, "I'm not a contractor," Fischer said.

"We feel that we're on the right track with it, and haven't heard anything otherwise."

Reach Parker Howell at (509) 459-5491 or at parkerh@spokesman.com This article reprinted from the www.spokesmanreview.com

From Jodi:

This is just a reminder that we must remain vigilant to what is going on in our local communities and at the state level. One way to do this is to belong to your local REIA or other landlord or investment group. This is a very draconian, prohibitive law that greatly affects many people. While their intention may have been good (to prevent shady practices), as usual, government goes too far and paints with a large brush that affects many more honest people.

Be sure to know your local and state laws before getting too involved in a rehab.