House flipping is a strategy in which an investor purchases real estate and improves it to sell it at a higher price, usually within a few months. Popular television shows often glamorize this profession and inflate the potential profits, leaving many people chasing unrealistic dreams. However, when done right, house flipping or “rehabbing” can be a lucrative business that also improves the local community.
Flipping houses in Florida may be a viable option for some investors, and plenty of opportunities exist. However, several legal issues can impact your investment. An experienced Florida real estate attorney can help identify potential problems so that your expectations align with reality.
Due Diligence
Because flipping is a business, it’s crucial that you conduct both legal and financial due diligence to make sure that the purchase is a good investment. You need to know all the potential costs involved in the project, which can be difficult if you purchase the property without warranties or at auction, or if the property is a distressed one.
The property may need extensive repairs or include unpermitted work that needs to be removed or remediated. Environmental concerns such as the presence of asbestos, radon gas, or mold could cause further issues, as can liens or code violations. Coastal properties may be subject to special environmental laws or zoning restrictions.
In the haste to find a good project to work on, you may overlook these critical considerations, which can consume some of your profits. Working with an experienced real estate attorney and title service can mitigate some of the risks and help uncover potential issues with properties you are considering investing in.
Ways to Take Title
Investors have various options to take title to their Florida investment property, including:
- Sole ownership or ownership in severalty, which is ownership held by one individual or entity, such as a trust, limited liability company, or corporation
- Tenants in common, in which multiple people invest in the property, but each owner owns a specified interest in the property and has the right to freely sell their portion of the property
- Joint tenants with rights of survivorship, in which multiple owners have an equal ownership interest and become joint owners with the same deed at the same time
- Tenants by the entirety, in which married couples own property together
- Limited liability companies or corporations – this is the ideal form for investors to take title to real estate.
With a limited liability company or corporation that is set up correctly, investors can shield their personal assets so that they are not at risk if the company gets involved in a lawsuit. It is important to also speak to a tax professional when you set up a corporate entity to ensure that the tax classification for the company is the most favorable possible.
Additionally, people may use various types of deeds when conveying property for real estate investments. For example, they may use quitclaim deeds, but buyers must be careful because the seller could be selling something they don’t have a right to, or there could be liens or other issues with the title. It’s critical for investors to obtain title insurance on any property they are purchasing to protect against title issues.
FHA Requirements
One of the most popular ways potential buyers can secure the funds to purchase a property is through mortgages from the Federal Housing Administration (FHA). Many flippable houses may eventually be purchased by a buyer who secures an FHA loan.
FHA provides insurance on loans made to approved lenders but also has strict restrictions on the mortgages it will insure. It will not insure a mortgage for a property that a seller has owned for less than 90 days. This rule aims to prevent mortgage fraud and prevent predatory property flips. If you plan to flip the house quickly, consider this rule because your buyer pool may be limited to non-FHA loan buyers.
Even if you have owned the property for more than 90 days, the mortgage provider may not approve a home purchase for a much higher price than was recently paid for it. Sales made within six months of your purchase may require a second appraisal, which can result in a professional determining that the property is not worth its list price. FHA lenders may require justifying a sale above 5% of the previous sales price if a sale is made within a year of purchasing the property.
Even if your flip is limited because of FHA requirements, there are other loan types that an end buyer can take advantage of, including conventional loans or private money financing.
Lien Mitigation and Resolution
When purchasing a distressed property, rehabbers may come across lien issues that have to be resolved. Compliance is often necessary before any fines can be mitigated. Working with an experienced real estate attorney is key to being able to efficiently navigate this process and reduce fines to the lowest amount possible.
Contact Us to Learn More
Protect your interests as a house flipper and rehabber by working with an experienced Florida real estate attorney. We provide real estate, title/closing, and probate assistance for properties throughout the State of Florida. Call (800) 604-1871 or email us to schedule a free consultation.