House flip or flop: the pitfalls of restored homes

Updated: Nov. 16, 2016 at 7:05 PM EST
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WILMINGTON, NC (WECT) - As the housing market has improved and home remodeling shows gain popularity, interest in renovating and reselling homes has never been higher.

People want in on what appears to be a get-rich-quick idea but Wilmington is quickly becoming home to a lot more flops, than quality flips.

There are different levels of renovations. Some houses only require cosmetic polish: new paint and appliances, but for this report, we're specifically talking about older and historic homes.

These structures, some having already hit or about to hit their 100th birthday, have the most charm, the most work needed and are most likely to get labeled as a "lipstick on a pig" house. That's the nickname given to any top-dollar renovated home given low-budget treatment.

For buyers, the first check they cash is an emotional one: Do I like this house?  But for renovated homes, that's just the beginning of a long road to investigating the quality of work done to it.

"A lot of times when it's a bunch of pretty stuff, you don't know what's going on behind the walls," said Delinda Harrelson, President of Home Solutions Group.

Harrelson, Steve Dutton, and Doug Witt have been rehabbing homes for years, well before it became trendy. It's always been hard work and will always be risky.

"Now it's like seagulls on a french fry," said Dutton, owner of Swan Song Properties. "Everybody is trying to do this."

Experienced renovators will usually do a complete remodel because of what's lurking underneath, above and behind every square inch of an older home.

At one of his properties in the Carolina Place neighborhood, Dutton showed us a wall stud that for decades had been hidden behind the original plaster. It was deeply perforated by termites. With little effort, Dutton was able to pull away the rotted wood.

Quality rehabbers often take these old houses "to the studs" for this exact reason. It reveals damaged studs that can then be replaced and provides an open platform for new electric, plumbing and HVAC to be run.

Not every house requires this level of work, but low-budget flippers will hide problems like this behind a fresh coat of paint and try to sell the house at the highest price. It's up to the buyer to investigate and not be dazzled by the look of new.

Plumbing, roofs, duct work and crawlspaces are the biggest problems and the most expensive. Investors who take pride in their work and name are going to address those issues but F-word houses use fancy fixtures and glossy surfaces for distraction.

Stunning pendant lights and high-tech showers aren't worth much if they're still connected to historic pipes and ancient electrical systems.

"It's really disappointing when I see the amount of shoddy, unprofessional work going on," said Witt, owner of Witt Renovations. "Band-Aid it and make it look good. Throw a coat of paint on it."

Not every bad flipper has unscrupulous intentions. Many just get in over their heads and have to cut corners. Given how much false information is out there, it's easy to see why.

Experienced rehabbers point to the "gurus" who make routine stops in the Port City to preach the get-rich-quick gospel. They advertise heavily on local radio and social media, often using the face or name of a flipping reality TV star to promote their product.

"Sometimes I'm really disgusted because these TV shows and seminars that blow through town, paint this as get rich quick," Harrelson said. "It's going to be work!"

Curious, we headed to a recent seminar with her.

The room quickly filled before a fast-talking speaker took the floor.

Most chairs were filled by retirees. Harrelson explained that with few people being able to live on their retirement anymore, they're looking for a way to make extra money without having to go back to a full-time job.

When Harrelson coaches new renovators, the younger generation usually recites the same reason for getting into flipping: I want to quit my day job. Little do they know how difficult real estate renovation is and how much of their livelihood is on the line.

After a slideshow of promises, the room was directed to the back where for a "discount deal" of $2,000 for the next training program. This money would buy them another seminar and access into an exclusive opportunity of hidden real estate opportunities and investor funding - all of which could conveniently be done from their laptop.

The speaker showed a picture of his own computer stationed on a tropical beach to prove his point.

Meanwhile, Harrelson was feverishly writing on her notepad, helping to point out all the discrepancies in the information given.

For instance, the speaker kept referring to the access participants would get to a database chock-full of pre-foreclosure homes in the Wilmington area. Was this some sort of secret treasure chest of information that only he had? Did that make the $2,000 training program worth it?

Harrelson clarified that some databases flag homes as "pre-foreclosures" when a homeowner misses a mortgage payment. However, a missed payment is hardly indicative of a pre-foreclosure. So the heavy numbers the speaker was selling were severely skewed.

"That's the most I've ever seen people jump up and hand out their credit card," said Harrelson after the seminar. "It's crazy to me!"

Some hopeful investors in our area have spent tens of thousands of dollars on these training programs and have yet to flip a single house. Yet now inspired, it's time for any first-time flipper to grab their first property.

House auctions are a tried-and-true source that have been around for ages.

Attending one in New Hanover County, we watched a mix of experienced investors and newbies go for two different properties.

An attorney stands on the steps of the Court House to read off legal documents before the bidding begins. It's not quite the level of excitement you'd expect with shouting bidders and a gavel, but after a hand is raised the house has a new owner.

Sort of.

Auction houses are bought sight unseen, meaning potential buyers cannot tour or inspect the interior of the house before bidding. They have to pay cash and they get everything that comes with the property - including bad liens and old HOA fines.

Still, an auction offers discount property and if an investor wants to make money on the sale, he or she needs to buy it as cheaply as possible.

"It's such low-hanging fruit, if you will, for any Joe-six-pack or Sally-six-pack to go in and buy a house," said Dutton, who has given up auction buying due to the risk.

In a perfect real estate world, the new homeowner/investor would then head to the county offices to take out permits on any major system renovations they intend to do. This includes HVAC, plumbing, electrical, etc. Permits are not required for cosmetic changes or if you intend to live in the house for at least a year.

The permitting process allows county building code inspectors to scope out the work being done to ensure quality and safety. This protects the buyers.

So it's no surprise that permits aren't typically pulled for "lipstick/f-word" houses. These investors are trying to get the job done fast and cheap - and hoping the buyer won't notice.

The county building inspection office gets calls every week reporting un-permitted renovations. They send out an inspector who will order the work to cease until the proper paperwork is filed.

That's why it's up to you, the buyer, to ask what renovations were done to the home and by which state-licensed contractor. Then, head to the county offices where you can research which permits were pulled - if any.

Sure, you can still buy a home that did not have permits pulled or that's work was done by a group of buddies over a weekend, but getting insurance will be more than difficult and it will greatly impact the resale value since none of those enhancements will be on the appraised value of the home.

Reputable investors will have that information ready, and then you should be ready with a state-licensed home inspector of your own.

To be clear, home inspectors do not "pass" or "fail" homes. Their job is to tell you what the house is made of and what condition the systems and structure is in.

A home inspection is not required to get a mortgage, but highly recommended - even on new builds. They cost several hundreds of dollars but can save you several hundreds of thousands of dollars in the long run by preventing you from buying a bad flip.

Home inspectors have to stick to the State's Standards of Practice, which outlines what they are and are not required to inspect.

Your home inspector will red flag anything that looks like it may need additional work, but they are not fortune tellers.

Inspectors do not comment on cosmetic changes and they can not guess how much longer a roof will last or how soon you will need to upgrade the HVAC.

Moreover, old systems are not illegal and no flipper is required to update them if they're still working. Some houses downtown still have knob-and-tube wiring. Your home inspector will note that, but if it's still doing what it's intended to do - it's not considered to be a problem.

"You should go to the home inspection," advised John Pollard, Wilmington Inspection Group. "We're here to take an unbiased look at the facility and help you make an educated decision as to whether or not it's going to be a good purchase."

Keep in mind, inspectors can not be held responsible for anything they can't see. So if you have a crawlspace that is too low to get into, they're not liable for its inspection. That's also a good hint that no one else got into it and chances are, all the old plumbing is still down there.

A home inspector may be able to note signs of termite damage, but you really need a separate termite inspection to take a full look at any damage. A lot can be hidden behind a coat of fresh paint.

"You have to be willing to go the distance," cautioned Harrelson. "Do whatever it takes to figure out the rest of the puzzle when it unfolds in the inspection report."

Your inspector can't tell you whether or not the house is a good buy, instead, that's where a real estate agent experienced in older or remodeled homes comes in.

Agent Sean Skutnik has sold several flipped houses and says there's a big range in the level of renovation needed and the quality of work done at each level.

"I couldn't care less about the bells and whistles," said Skutnik. "I'm down on the ground looking at the baseboards - warning signals."

Skutnik says your senses are your first line of defense against a "lipstick" house. It's easy to see shoddy work, but the smell is critical. That musty "grandma's house" smell is typically indicative of crawl space problems.

An agent can also research the purchase history of a property. Anything being advertised as a "complete renovation" would have likely taken months to complete. If you see the investor purchased the home and had it back on the market in just a few weeks, you have a lot of questions to ask. Again, those five-day renovations are strictly TV magic.

Don't forget the neighbors! Neighbors see everything, they're a great resource about what shape the house was in, how long work went on and what kind of effort was made. Ask!

When F-word homes hit the market and don't sell it isn't just a problem for buyers, it's a problem for the entire community. Wilmington is known for its charm and historic properties. Credible investors keep that alive but shortcuts depreciate the structures, the neighboring property values and the integrity of the original craftsmanship.

"I feel you have a responsibility to do that house some service and not degrade it," said Witt. "We want it to be around another 100 years."

You have a lot of homework to do before you cash that emotional check but way before closing. When it comes to renovated homes you need to ask, inspect and double check - for good measure.

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