I have a question about flipping houses on the side.

First let me say that I know some of you are against it from previous post on this subject, so I'm not looking for feed back on whether it's ethical or not.

I would not engage in anything that I felt was unethical and risk my reputation that I have worked extremely hard to build.

I was asked about going into business with someone (I will refer to them as the investor from here on), and flip house on the side.

First, I would locate a property and if it looked promising, I would inspect it.

Then the investor would purchase the property.

Then I would do all of the repairs and renovating that I could do, and hire out the rest. The investor would cover material and any subing out I had to hire.

The property would go on the market and if all went well, would sell at a profit. The cost of the property, material, and sub fees (not mine) would come off of the top and be paid first, then the profit would be left.

My question is how should I handle my side.

Should I get paid for inspecting the property and for my time doing the repairs, and then get a small percentage of the profits, or should I not get paid for anything and receive a little more of the profits?

Or is there another way to handle it?

I don't know what would normally be done so I thought that maybe some of you have done, seen, or heard something like this that may give me an idea of what to do.

Thanks.

__________________
"I reject your reality and substitute my own!" - A. S.

Absolute Home Inspections, LLC

Wes,
First and most important thing. Get it all worked out in advance IN WRITING. Also have an exit plan for when it goes south.

I'm not sure if you belong to ASHI or any other HI organization, or if you are licensed. ASHI's code of ethics actually prohibits inspecting a house that you have, or expect to have, a financial interest.

There also may be regulations about doing work on a home you have inspected, or ethics issues too.

What I have done for inspector friends (that are purchasing a home), is to be the inspector of record, and they just follow me around. It's my report, he is the client, and I get paid. You should probably take off the inspector hat for homes you are going to partner and work on.

I work with several investors, and I have seen a bunch of the partnerships break up over the years. It has always been because they didn't have a clear understanding of who was going to do what, and how the money was going to be handled.

Hope it works out for you
JF

I took ASHI's code

"Inspectors shall not inspect properties for compensation in which they have, or expect to have, a financial interest."

to mean that I cannot inspect a property for a client that I have a financial interest in. In my case, I am the client.

That would also mean that I can't work on a property for another client for 12 months.

But if I am the client, then the code would be irrelevant.
Right?

Thats how I interpreted it anyway.

I may be wrong.

__________________
"I reject your reality and substitute my own!" - A. S.

Absolute Home Inspections, LLC

I see a couple of problems with what you are proposing. If you plan on going back to the seller for corrections or consideration for some unacceptable condition with the house. Then, it would be a conflict of interest. If you are inspecting the building to determine if it is economically feasible, the it seems to me that there is no conflict.

However, more importantly, as an inspector, you may be held to a higher standard (lawsuit wise) than a non-inspector, if something is incorrectly repaired or missed during construction. Be really careful.

__________________
The apostrophe troll.

Gunnar,

It would only be to determine if it is economically feasible because according to the investor, foreclosures is what their interested in.

There wouldn't be a seller to go back to.

So, what would be the norm for my side of the business?

__________________
"I reject your reality and substitute my own!" - A. S.

Absolute Home Inspections, LLC

"Should I get paid for inspecting the property and for my time doing the repairs, and then get a small percentage of the profits, or should I not get paid for anything and receive a little more of the profits?"

I don't think there is a problem with conflict of interest. The main questions I see was the one above. If it was me, I would certainly do the first one by getting paid for the work and inspection, and taking a smaller percentage of the profits. There may not be any profit, or it may take a lot longer to flip than you were hoping, which could leave you on the short end. If it works out great after the first one, readjust your percentages and go for it.

__________________
Jim Robinson
New Mexico, USA

Wes, If your the skill, labor and contractor and he is only the money then you should be intitled to at least half, even if you don't do any work but contracting. Your like 2 sides of a coin one side worthless with out the other. Don't sell your self short.

The ethical considerations aside (if that's entirely possible), the biggest hurdle you will have to jump is the issue of quality. "Flipping" is a euphemistic term synonymous with "whitewashing", if it is used in the context of buying distressed properties, putting as little money into them as possible to make the aesthetically appealing, and selling them to unsuspecting buyers at a profit. How do you, as a competent (assumed) inspector see that you will get beyond this with any degree of grace?

Aaron

As others mentioned, whatever you do get it in writing. I've seen several deals start out good and go south in a hurry when people don't agree on things.

As for the ehtical side of things, the SOP's I've seen just address inspecting a house for someone else that you might have an interest in. I've always thought this is to stop you from talking some buyers out of buying just so you (or someone else you know) could.

It seems like most of the rules and laws surrounding this stuff are about disclosure of some type. I've just always been up front with sellers and/or their agents about what I do for a living so nobody can say I was being deceptive.

Even the best of intentions can lead to the worst of outcomes. The idea that one organization or the other has a corner on the ethics market or that any one of them can even realistically pretend that legislating ethics is a possibility is absolutely absurd. The best approach is not only to avoid a conflict of interests, but to avoid even the possible appearance of a conflict of interests. Regardless what one says or what one writes, when the lawsuits begin, memories become unclear and so do contractual agreements.

Aaron

To me, the ASHI Code of Ethics is VERY clear.
1A) "Inspectors shall not inspect properties for compensation in which they have, or expect to have, a financial interest."

The way I see it, you are going to have, AND do EXPECT to have a financial interest. You plan on getting paid to do construction work, AND you plan on sharing the profits from the sale.

IF you get paid for the inspection, AND get paid for the rehab work, you will probably be ahead of the potential profit line, unless the property is purchased at a steal.

You need to look at who is bringing what to the table.

You have the inspection skill. Can the investor get the same job for the same amount of money from someone else? Probably. Cost involved - probably $250 - 500.

Running the job. Assuming you have the proper licenses (could be a big problem if you don't) and skills AND experience (bigger problem if you don't). Can he get this same service somewhere else at less cost? Maybe yes, maybe no. If there are a lot of tasks that you have to hire out, then your worth (to the investor) is less. If you can't get the job done in a timely manner, your worth is less. Cost unknown.

The bottom line to flipping is getting the job done as quickly as possible and getting the property sold. Nowhere in here have I said anything about shoddy work, or whitewashing. True, that's what a lot of flippers do, but is not always the case, and never should be. But a delay in the work can affect the bottom line, because for every day the house is not sold, the bank clock keeps ticking, and the "profit" just slips away.

I guess if the investor is bringing ALL of the money, your share of the "profits" should probably be much lower, since you are being paid for you time and work and didn't bring anything to the table (money wise). He could find another inspector, and another GC to handle the job - he really doesn't need you.

You come from a stronger position of getting paid for what you are doing and walk away. There may not be a profit. The other side is: if the project loses money, will you share in the loss? I can see maybe getting a bonus for bringing the project in on time and under budget. An incentive for getting it done prior to the deadline. But share of the profits? I guess a lot would depend on what you were bringing in.

Hope it works out for you.
JF

Jack:

I guess we are speaking from different experience pools here. I was a general contract for over 20 years building and remodeling hundreds of houses. In addition, I have been inspecting homes for 11 years now. In my travels I have seen maybe one "flipper" that attempted to do the right thing. He is no longer in that business. Guess why.

In the comfort of the hypothetical assumption that flipping can be profitably accomplished without becoming whitewashing, one might wax confident. From the front lines I must report that your castle in the clouds was likely not one acquired through flipping.

Aaron

"Should I get paid for inspecting the property and for my time doing the repairs, and then get a small percentage of the profits, or should I not get paid for anything and receive a little more of the profits?"

If you are paid for the Inspection and then do the repairs and profit from the sale then you are, in my opinion, in violation of the COEs of most of the HI Associations.

If you are inspecting the home for the purpose of investment, either as an individual or with a partner(s), then there should be no fee seeing as you are inspecting for yourself to determining if the home is suitable for "flipping" then you are doing so as an investor. Be upfront with the seller and listing agent and do the inspection your self, don't worry too much about SOP's, if you find problems that you want a deeper look at, notify the seller and realtor that you demand a more invasive and technical inspection of those conditions than a normal HI would allow.

I was doing this before I became a Home Inspector and it has been keeping me busy for the past year, I'm waiting for 3 o4 feet of snow to melt to finish my latest project. I've also inspected Homes for Investors, but not as a Home Inspector but as a General Contractor where I've brought in Electricians, Plumbers, and other pros for estimates of repairs or renovations. Then I put everything together and submit it to the Investor/Buyer so they can determine if they want to purchase the home and have me perform and supervise the repairs. If they don't then I don't get paid for my "Inspection".

If a buyer or investor pays me to Inspect, then I don't do the work or prepare any estimates. Flipping and Home Inspection are two different businesses, keep them separate.

Wes, So far Lewis has given you the best advice, and as a flipper myself I know from experience that this board is hostile when it comes to flippers. There is a LOT of money to be made from flipping houses and if you can get a money man that is willing to split the profits I don't think you can go wrong. As home inspectors we have a Great advantage over the average guy flipping houses. We can tell if a property is worth investing in and if it will sale once the flip is complete. There is truth in spending as little money as possible in order to make the most profit. That does NOT mean that the final flip is dangerous or something for the buyer to beware. Most builders do the same thing in new construction which is known as lesser quality, but the price reflects what you pay for. The bottom line is flip your houses with safety and the knowledge that you are a home inspector and know what is correct and what is not. Most of the posters on this board would love to make the money you can make flipping houses but believe that only top quality materials, and repairs to the highest standards are acceptable. The mere thought of putting a 20 year shingle, low end appliances or a lesser quality carpet in a flip house screams rip off to the consumer. That is NOT reality in any consumer product made in this country including houses. How many products do you pay top prices for just to have it break due to a plastic part that the manufacture put in it to save money. Lesser quality is the norm in this country rather you like it or not. Wes, I think you have a good opportunity to make a lot of money and that is what makes this the GREATEST COUNTRY IN THE WORLD so go for it. I'm stepping down from my soap box now. Good Luck. Tony the diamond wearing flipper

Really? THAT'S what make this the greatest country in the world?

John, it's either that or the fact that TM can proudly boast about his home inspection/precious stones business.

Addressing this from a different point of view as your other issue has already been addressed.

IF (the big "if") SC is like FL, you are only legally allowed to do those repairs if you are a licensed contractor for that trade.

I.e., you can only do plumbing if you are a licensed plumbing contractor, you can only the the electrical if you are a licensed electrical contractor, etc.

To find out, look up the licensing laws for contractors and see what is covered and what exceptions/exclusions there are. If like Florida, that will be homeowner acting as an owner/contractor ... BUT ... that exception does NOT apply when the house is offered for sale or lease within one year - note: not 'sold or leased' within one year, but "offered" for sale or lease within one year from the date of purchase.

Otherwise, you are considered an unlicensed contractor.

__________________
Jerry Peck, Construction / Litigation Consultant
Construction Litigation Consultants, LLC ( www.ConstructionLitigationConsultants.com )

I think it's pretty simple...

You can do one or the other but not both; inspection or be the general contractor.

If you inspect the home for a fee... you are obligated to step out of the general contractor roll due to having a monetary interest (think-- the more you find, the more the contractor would get to fix. That's certainly a conflict of interest).

If you are going to be the GC, then you should quote the job with your company's profit margin already built into the quote--without expectations of splitting the profits. Additionally, there should be some incentives of bringing the job in on-time. The sellers budget is nothing, as a general contractor, that you should be involved with. The quot you provided and eventually agreed upon with the investor has your payment built-into it.

Rich

__________________
"If con is the opposite of pro, is Congress the opposite of progress?"
Richard Rushing, HCRI
Duncanville, Tx.

Aaron,
I was also a General Contractor in a previous life, and was raised in a family of contractors (in Southern CA). I started working in the family business in the summer of 1964 when I got my drivers license. I've been an inspector since 1989 by the way. While my main career path took me in the direction of a "real job", I always was involved in the family business, and got my own GC license too.

I have been involved in many renovation projects, and several "flips" if you will, and I can honestly say that we NEVER tried to cover up something, or hide a known defect - or whitewash. Not all of them made the profit we had hoped, and I remember one or two that were on the verge of getting us in the red. We not only built regular homes in the SF Valley, but built many movie stars homes in the Hollywood Hills, as well as commercial buildings.

Not all of the flips I inspect in Knoxville are pieces of crap either. I guess you are right, we are coming from different experience pools.

I agree that a lot of the flippers, especially ones that got into it in the last few years, are more geared to the cover it with paint and caulk and move on and hope no one finds out before the check clears - but not everyone.

Richard is right, Wes has a ethical issue to deal with.
JF