Flip or Flop: What to Know and Ask When Buying a House

by Hellmuth & Johnson PLLC

Hellmuth & Johnson PLLC

While the adage “What you don’t know can’t hurt you,” is typically more of a hope than a fact, it can be particularly wrong for home buyers and investors.

In recent years as the real estate market as gone up and down, there has been a cottage industry of investors purchasing residential property with the intent to rehab or upgrade it and sell it at a profit.  This concept became known as “flipping” and while it has received some negative connotations over the years, it is not necessarily a bad thing. In fact, many popular TV shows are based on the very same concept such as “Flip or Flop” and “First Time Flippers”.

Many times, those involved in such transactions are sophisticated real estate investors or home improvement contractors. On occasion, someone may try to tackle a project like this hoping to make a quick buck. Those parties may see the potential in a property to be profitable if they can purchase it at a lower price, hire out work or provide “sweat equity” to update it, and ultimately sell at a higher price with the hope that the proceeds resulting from the increased sale price outpace the costs of the labor and materials put into the property. 

However, there are a number of issues that those involved in that particular process should be aware of as it can affect their rights, obligations, and liabilities related to the property that is being flipped and to future owners of such property. In this scenario, there are a number of areas that both real estate investors, contractors, and home buyers should be aware of:

1. Contractor Licensing Issues.  Depending on who owns the property that is being flipped, there may be a different individual entity that undertakes the updating work in a particular property.  To the extent the work is done by a state-licensed residential contractor, there is less concern with how the work is being completed, whether it is being properly permitted, and inspected, and who is responsible for the warranty obligations for that license required work if there is a problem in the future.  However, if the property is being flipped by a real estate investor or other individual, and the work is completed by that individual instead of a licensed contractor, there can be issues about who is liable for any problems resulting from that work. A “weekend warrior” or DIY type person working on a home does not have the same potential protections as a licensed contractor is something goes wrong (insurance, licensing, etc). That could limit a future buyer’s recourse for subsequent issues with the home.

2. Disclosure Requirements.  As many real estate agents know, but possibly not many contractors, Minnesota law has certain requirements for disclosures that a seller must make when a residential property is being sold.  Minn. Stat. §513.52, et. seq. has disclosure obligations whereby a seller of a property must disclose all “material facts” of which he or she is aware that could affect the buyer’s use and enjoyment of the subject property.  In this context, there is also a related requirement in Chapter 82 that requires the same disclosure obligations for a licensed real estate agent. A real estate agent acting as a flipper potentially has two potential areas of liability for failing to disclose material facts about the home.  

In the context of a property flip, the issue becomes the knowledge that the seller/flipper of the property has and to what extent that is disclosed to a prospective buyer.  Most of the time, in a flipped property situation, the owner attempting to flip the property has only owned the home for relatively short amount of time.  Therefore, any previous issues or concerns that existed in the home may not be known by that current property owner.  Therefore, it is important that the fact of the limited amount of ownership time be disclosed to prospective buyers as well as, arguably, the fact that work has been done on the property to upgrade it to be sold, along with any other facts that the flipping party becomes aware of.

In addition, depending on who has completed the work on the property, there may be some additional disclosure requirements – or at least a strong suggestion – as to the nature of the work completed.  In particular, if a flipped property has been worked on by an unlicensed contractor, homeowner, (or other party not licensed for construction work), it may be advisable for the seller to disclose that fact to any prospective buyer.  Certainly, if the individual owner does some of the work on the property him or herself, a prospective buyer is likely to want to know that fact to make sure they take extra caution in inspecting or otherwise evaluating their purchase of the property. 

3. Responsibility for Statutory Warranty Obligations.  Related to the preceeding information, a “home improvement project” of any significant nature may be required to comply with and provide for the warranties set forth in Minn. Stat. Chap. 327A.  That warranty scheme provides a one, two, and ten year warranty “program” for any significant home improvement work project.  The home improvement covered by that law is defined as “repairing, remodeling, altering, converting or modernizing of, or adding to a residential building”. The exact nature of what type of work is covered by the statutory warranty is somewhat open to interpretation.  Therefore, any owner attempting to flip a property needs to be aware of the potential responsibility under the statutory warranty and the obligations that entails.

If the property owner is a licensed contractor doing the work under their license, taking out the permits, and otherwise acting as a contractor in completing the work on the property prior to sale, if the work meets the definition of home improvement project under the statute, that contractor is likely required to provide the warranties set forth in Chapter 327A, as to the extent they apply. 

Alternatively, if the property owner is not a licensed contractor and the work has been done by that owner, a question may exist as to whom, if anyone may be responsible for any statutory warranty that might cover that work. 

Recently, a Bill was introduced into the Minnesota Legislature that would theoretically hold an owner responsible for the warranty obligations if they complete the work themselves in this context (S.F. No. 3443).  That proposed legislative amendment appears to be directly aimed at the flip situation involving real estate investors, or parties attempting to flip a property who are not licensed contractors.  In the past, there has been a hole as to who may be responsible for any issues with the work that exists in that context, where the work is done by a “homeowner” rather than a licensed contractor. While that bill may not become law, it highlights an unresolved issue on the coverage of the Minnesota statutory home warranties in the context of a flip. 

4. Loan Requirements.   Depending on the nature of the rehab/flip project and the individual owner/company who is attempting to receive financing for such a project, there may be additional requirements set forth by a lender, which must be complied with in order to obtain financing including a requirement that any work on the project be done only by a properly licensed contractor.  When seeking financing from a lender for a flip of this nature, the property owner should be aware of the requirements of that lender and any funding that is received. If such restrictions in the loan documents are required, then the funding is likely to require some more creative financing or an influx of cash to complete the initial purchase of the property subsequent to it being rehabbed and flipped.

Recently, there was introduced into the Minnesota Legislature a legislative amendment intended to require that all loans being used to fund the construction of a new home or home improvement project require verification that the work is being completed by a licensed contractor (S.F. No. 3444).  Not only might this codify existing requirements of some lenders, it will essentially require that all lenders loaning money for a flip-type project require that work be completed by a licensed contractor thereby eliminating that source of funding for any owner who may seek to do the work themselves. 

While this brief article only touches the tip of the iceberg in regards to the issues of flipping property, it does provide some points for anybody involved in these types of projects to be aware of.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Hellmuth & Johnson PLLC | Attorney Advertising

Written by:

Hellmuth & Johnson PLLC

Hellmuth & Johnson PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.