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If you've ever watched a home remodeling show, you know the basic premise: buy a house that needs repairs, spruce it up, and sell it at a profit. But in California, that process is about to become even more heavily regulated. California just recently enacted a law called the “Flipper Disclosure Act” (AB-968), which could make home flipping a much trickier business. Whether you're a buyer, seller, or simply someone who keeps an eye on the market, this new law is sure to have ripple effects throughout the housing industry, and possibly the entire country. Let's take a closer look at what's going on and why it matters.
Scalper Disclosure Laws Will Change Scaling
The Home Flipper Disclosure Act requires home flippers to disclose more information to potential buyers, adding a layer of transparency that many believe is missing in the fast-paced resale industry.
Under the new rules, home flippers must disclose in detail what work has been done on the property, including whether the proper permits were obtained. That means if a flipper replaces plumbing, rewires the house, or even just knocks down a wall, they must clearly explain that if they've owned the home for less than 18 months.
You should also list all the contractors who worked on the project (the contractors should have completed most of the work (sorry to nominees Chip and Joanna)) and the nature of the work they did.
“One of the reasons this bill was passed is because we often see people flipping homes and selling them quickly, and materials may be used that may look great but aren't the best or long-lasting quality, and for the buyer, that means things start to fall apart pretty quickly,” explains David Almaraz, an attorney with Grant Shenon LLP in Sherman Oaks, Calif. “I think these additional details give buyers a better idea of what they're walking into.”
Why is this important? It means that buyers have a clearer understanding of what they're getting into. No more worrying about whether your stylish new kitchen was installed by a licensed contractor or if there are some shortcuts hidden behind it. The purpose is to protect buyers from unexpected issues that could turn their dream home into a nightmare.
What this means for home flippers
For property flippers, this law is a game changer. It means they have to work harder and make sure everything is up to code and fully documented. This means hiring more qualified professionals, getting the proper permits, and meticulously recording every step of the renovation process.
This added layer of oversight can increase costs for flippers. They may have to budget for more expensive (but necessary) repairs, pay for the proper permits, and spend longer making sure all their paperwork is in order. In a business where time is money, these changes can reduce profit margins and make flipping less attractive to some investors.
But an analysis of the law suggests it's not just about cost. It could also change the types of properties that real estate agents target. Instead of snapping up homes that need extensive renovation, agents may start to focus on properties that only need cosmetic work. That could shift the market, resulting in fewer fully renovated homes and more “lightly renovated” properties for sale.
What this means for buyers
For home buyers, especially in California's competitive market, the new law will be a breather, or at least a breather. With stricter disclosure requirements, buyers should be more certain of what they're getting. Plus, some experts believe the law could drive underqualified resellers out of the market, improving the quality of resales overall.
But Almaraz doesn't think the new law will bring about any big changes to the buyer's payment process. “I honestly don't know if it's going to have that dramatic an impact,” he says. “From my experience, sellers will probably follow this law and provide disclosures, and buyers will ignore it and buy it anyway if they like it. It's like a contract that everyone scrolls past on a website.”
“In an ideal world, the seller's agent would have detailed discussions with the buyer to make sure everyone understands everything,” Almaraz added, “but in reality, I don't think that happens, because they know that the more inspections they do, the more snooping they do, the more likely it is that walls will open up and the deal will fall through.”
There's another flip side (pun intended): The extra costs and longer time frame for the reseller can drive up the price of a remodeled home. If a reseller spends a lot on remodeling and has to jump through a lot of hurdles to sell, they may pass those costs on to buyers. So while buying a remodeled home in California may give you peace of mind, it may also come at a higher price.
Will this law be rolled out nationwide?
California is famous for setting trends that the rest of the country follows, from environmental standards to consumer protections to vehicle regulations, with The New York Times even going so far as to say that California's laws are “the most widely imitated in the country.”
However, not all states have the same real estate dynamics as California. Places where the market is less active, where housing inventory is less of an issue, or where resales are less prevalent may have less urgency to enact such strict regulations. Additionally, each state's political climate — and lobbyists — will have a big impact on whether these kinds of laws catch on in other states.
Are you thinking about buying a home or want to learn more about the current market? Sign up here for Apartment Therapy's free real estate webinar on September 17th. The webinar will provide insights from Egypt Sherrod, HGTV host and CEO of Indigo Road Realty, Jose Prats, Director of Character Homes at Christie's International, and Jason Saft, Founder of Staged To Sell Home.