Buying a flip in Bed-Sty
I am a professional home and building inspector and lately there seems to be a growing number of buildings in “up and coming” neighborhoods such as Bed-Sty or Bushwick that are flips — buildings purchased by an investor, substantially renovated (often with new plumbing, heating and electrical), and flipped (resold in short order). This does not only apply to these neighborhoods; such flips can be found throughout the five boroughs of New York City. Since I keep running into the same script over and over again, I thought it would be helpful to share my thoughts on the subject for any readers who happen to be considering buying one. For some people, the prospect of purchasing a renovated flip is probably better than purchasing a row house that needs a lot of work, because of time and resource constraints. By and large, it may end up being a better deal in the long run. But you should still set some money aside for repairing stuff that the seller has no interest or ability to repair. Perhaps it’s useful to outline the real estate investing business for those who are not familiar with it. The seller is often a general contractor or an investor who oversees a general contractor (GC). It is the job of the GC to coordinate the various trades that do work in the building. Trades are fairly specialized and as many as 10 to 20 different trades may be involved in any project, such as heating technicians, plumbers, electricians, tile setters, flooring installers, roofers…to name a few. The GC hires each of these trades to do their part and they are known as collectively as subcontractors, or subs. Since profit is the main motivating factor, subs are often hired based upon the lowest bid, and as we know, the guy who charges the lowest price knows how to cut the most corners. Never mind that the construction field is rife with unlicensed amateurs – the people who inhabit the lowest rungs of the bidding ladder. In flips, the most attention to detail will usually go into bathrooms, kitchens, and floors — areas that catch the eye of most buyers immediately, and less attention to detail goes into other areas, especially areas to which many laypeople are oblivious, such as roofing, plumbing, electrical, chimneys, heating, and insulation. The main thing I have observed in these flips is that they are far from perfect, but they are being sold as perfect. I routinely find water leakage, electrical problems, heating problems, amateur work, and the list goes on. So who is responsible for rectifying elements that were installed incompetently or deficiently? Of course, in my opinion, and in the opinion of most buyers, it would be the seller. But some sellers have been known to disagree with that position. Ultimately, buyers and sellers arrive at the table voluntarily, so it’s a negotiation. In other words, you don’t have to buy the building and the seller doesn’t have to sell it to you. And in a hot real estate market, buyers tend to be less discriminating. A Certificate of Occupancy (C/O) essentially states that a finished building complies with prevailing building codes and is legally habitable. The main thing I see over and over again is that the seller is trying to sell a substantially renovated building without a C/O, by standing on the idea that because it’s a 100+ year-old building, it doesn’t require a C/O. This could not be farther from the truth. Building codes provide a minimum standard for building occupant safety. If an investor is replacing the electrical system in a building, for example, it MUST conform to modern-day building codes and be verified as such through visits by City building inspectors. The same holds true for new plumbing and HVAC systems, as well as structural modifications, additions to the rear or top of the building, and changes in number of families. The certification process most importantly includes inspections prior to finished walls being installed. Post-construction, pre-purchase inspections that are provided by people like me cannot verify full adherence to building codes because the walls conceal too much. Therefore, if the construction is largely finished and no City inspections have been done, there is a problem. Verification of building code compliance could involve opening up walls. You can see for yourself what, if any, permits and violations are on file for any building by entering the address into the NYC Department of Buildings website: [http://www.nyc.gov/html/dob/html/home/home.shtml](http://www.nyc.gov/html/dob/html/home/home.shtml “NYC DOB”) In these types of purchases, I often hear that the seller will discount the house if the buyer agrees to purchase without a C/O. Purchase of the building without the C/O involves considerable risk, because it is often impossible to determine what the City will need (i.e. what it will cost) to confer a final Certificate on that building. Let’s say that the seller offers a $20,000 discount, but what if it costs $50,000 to bring the house into compliance? Most (but not all) attorneys will strongly advise against a buyer client closing on a building without a C/O. I once saw a new 6-family apartment building in the Bronx many years ago that the buyer had purchased without a C/O, due to poor advice from her attorney. The building had serious problems and 6 families living there, technically illegally. I was retained after the closing, so the buyer was in a greatly weakened negotiating position. Of course, your ability to negotiate is strongest prior to signing a sales contract. This is usually what unfolds: As part of my inspection report (aside from recommending the seller provide a final C/O), I provide a list of items that, in my very humble opinion, the seller might be responsible for correcting, i.e. anything they replaced. The list could contain anything from a sticking door or window to roof leaks or non-functional heating equipment. If my list contains 30 items (not uncommon), the seller might agree to correct 10 or 15\. When I am sometimes hired to return to the property after “repairs” are rendered, I often find that only half the items on the agreed list were actually addressed. The thing to consider is, if the GC or his subs couldn’t do something correctly to begin with, is there wisdom in having them perform the fixes? It depends upon the thing being fixed. A sticking door should be no problem, but maybe not so much with improper electrical wiring. So there are cases where it is probably better for you to hire your own people (licensed professionals) to render these repairs and corrections. In these cases, some of the sale proceeds could be left in an escrow account to pay your own contractors directly. Once the work has been completed, the remaining funds go to the seller. This way the seller only pays exactly what repairs cost. Of course, the seller’s own cost for doing repairs himself would always be substantially lower to him because he already has subs on call. Therefore, this arrangement would be highly subject to negotiation. Seller corrections to items that were done wrong to begin with would then absolutely have to be verified as correct by a third party if you as a buyer did not have the expertise to assure that work was performed correctly. In closing, it should go without saying that no old building, whether in vintage condition, new, or newly renovated, should be purchased without a thorough building inspection prior to signing a sales contract. Matthew Wynne, Owner [Aberdeen Building Consulting](http://Aberdeen Building Consulting.com)
aninspector
in Inspection 11 years and 5 months ago
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20 replies
iammattlevy | 11 years and 2 months ago
wonderful post and very helpful replies. having an inspector check out a gorgeous reno job, and now i have a million+ more things to worry about…
mwr | 11 years and 5 months ago
Just a quick note to state that we worked with Matthew when buying our home. We were looking in Bed-Stuy and in Bushwick. He inspected 3 homes for us in the end, and I couldn’t recommend him strongly enough.
brucef | 11 years and 5 months ago
Unlicensed plumbing dovetails neatly with flippers’ strategy. They are un-interested in the expense and bother of installing new waste lines for a more useful location for, let’s say, a bath. You are allowed to replace fixtures on existing waste line locations without a permit. So they figure who’s going to remember exactly where the toilet was, have “Raul” put a new one. When Raul gets to the job, he hasn’t brought the necessary parts, so he chops the beam to make the parts he did bring fit. The carpenter then puts in an unsupported subfloor, and then Willie does the tile job rihgt over that mess, and the un-knowing buyer learns about this when the tile job fails or the lines leak. It’s easy. No “imperial entanglements”.
aninspector | 11 years and 5 months ago
Unlicensed work appears to be common. Enforcement is a whole other very complex topic…
cate | 11 years and 5 months ago
This is all very helpful and interesting. I have the vague impression that a lot of professional flippers working at the low end of the market redo the plumbing and electrical without a license. Is this true and if so, how is it possible? Wouldn’t they get caught?
brucef | 11 years and 5 months ago
One more note regarding self-certify versus city inspector. Plumbing inspection is solely concerned with waste lines. Gas lines aside, conventional plumbing would be feeds – hot and cold pressure lines, and waste and vents – the gravity based flow of water and waste down and out to sewer. Typically, any amount of sweat (copper) feeds are ignored by city inspectors, and if they show up at all (licensed plumber can achieve passing after 30 minutes), they glance at waste lines only. So back to flipped reno’s. A licensed plumber lays out feeds the right way, because it’s not really harder than botching the job. Leaks and other flaws that will eventually fail when performed by untrained handy men are the rule, not the exception.
arch007 | 11 years and 5 months ago
Some (most?) GC’s are really good at lying, rather than good at their trades. I would **never** buy a house that was recently renovated. It’s all bubble gum and BS holding it together.
aninspector | 11 years and 5 months ago
slopefarm wrote: “Licensed and filed is not perfect protection, but it is protection. better yet to have an architect who is independent of the GC.” That is an excellent point. Independent architect is propbably too much to hope for, though…
slopefarm | 11 years and 5 months ago
“Perfect example is cutting beams to install waste line.” Yes, been there. I’ve seen both an unlicensed flipper reno and a licensed but underbid GC reno on our house. Big diff. Licensed reno had some corners cut, no question, and we’ve had to spend a little money re-doing work. Flip job had cut joists; rotten beeams and studs concealed; hazardous electrical work; missing insulation; wood siding hammered straight onto old rotten studs with no plywood or weatherproofing; the list goes on. Licensed and filed is not perfect protection, but it is protection. better yet to have an architect who is independent of the GC.
brucef | 11 years and 5 months ago
Licensed trades self-certifying is a red herring. While abuse is possible in any venue, this is highly unlikely. The licensed guy knows how it “should” be done, whereas the “handyman” hasn’t a clue. The handyman might not have harmful intent, he just doesn’t know any better. Perfect example is cutting beams to install waste line. That particular worker’s problem is over, in that his toilet flange is installed. The chain of hidden, unfortunate events flows afterwards, usually after the hopeful new owner has purchased. The tile jo fails because of settlement, and the ensuing leak slowly destroys the area below. The GC is supposed to arbitrate the “civil war” that the various trades with blinders on often skirmish. Yes it solve their immediate problem, but the cascade begins.
aninspector | 11 years and 5 months ago
To the question above, yes there are cases where a **licensed contractor** can self-certify, but they still have to file with the City and their name is on the job. Unlicensed “contractors”, however, are more the problem… What others above have said about contractors and subs, I have seen as well. And concealed leaking pipes are one of the things I encounter over and over again…
nalusurf | 11 years and 5 months ago
Matt, the timing of this post is uncanny. The morning of your post I made a brief response to an OP about the importance of a good and thorough home inspection and then that afternoon your very helpful and detailed post appeared! Thank you. BTW, to all readers of this post, I hired Matt last year to perform our home inspection on the house we wound up purchasing in Bed Stuy. It was his thorough job that prompted my response to the post I mentioned above. I still frequently refer to the document Matt provided me with as I move forward with work on our home, it is a great reference tool and, for me, went beyond a typical home inspection. Thanks again, Matt.
greenmountain | 11 years and 5 months ago
Yea but its worse than that… The bathrooms and kitchens may get attention, but only superficially. When I get there, after the new owner thinks they bought a renovated house, I see the leaks from the 2nd fl baths destroying the 1st floor kitchens. Gobs of silicone caulk, gallons of tile “sealer,” and armies of “handymen” won’t save these bathrooms and kitchens. What “subs” in all those “specialized trades”? These are all the same underpaid guys running wires, slinging mud, patching, covering and coating with layers over layers. I watch from my client’s house across the street or next door, and as I tear out just one “newly renovated” bathroom and actually renovate it for the first time, I see the whole flip: an entire house being prepped for resale. What I don’t see is a GC, who’s name appears on a permit. What I don’t see are many skilled, licensed, subcontractors, who’s names appear on insurance certificates. What I do see are few guys with tools doing everything themselves. Recently, I was audited by the NYS Dept of Labor. The first contact was a subpoena. I asked Senior Conjurer, Anthony Gorman, who signed my audit, what bookkeeping entry prompted him to charge me for “unreported payroll?” he said: “Mr. Gruenberg, we didn’t examine your records. We know everyone in your industry is cheating. We just discuss it among ourselves. My boss actually wanted to charge you more…” The amount in dispute was only $246 plus interest. I was expected to pay it without complaining because it was a tiny fraction of what I would have paid, had I deducted payroll taxes from the paychecks of all my presumed, but unreported, employees. NYS is complicit in this flipping nonsense. And we know about the banks… Many flipped houses are purchased by people with an urgent need to to raise their kids in their desired neighborhood, but the inventory is low. A lot of buyers know these are not the houses of their dreams, but they hope to turn a profit themselves, some day… This is not Greece or Ohio; welcome to Brooklyn.
cate | 11 years and 5 months ago
Matt, thank you for this most interesting post. I have a question: Do you find that licensed plumbers and electricians sometimes “self certify” their work — that is, the city does not inspect, just trusts them to do it right — and does sometimes lead to problems, in your opinion? Anything we as homeowners can do about this? Thanks!
brucef | 11 years and 5 months ago
Thank you for your post. I do not remember a posting as useful and timely as your treatise. Readers, please read this article and take it to heart. As a contractor, I am frustrated by the care and expense we extend to “hidden” features, that no one will ever see. I guess I have to be satisfied knowing that inside and out, we have done everything right. Bruce
mykonos | 11 years and 5 months ago
Thanks again Matt. Thank you!!
aninspector | 11 years and 5 months ago
If the builder is allowing inspections from the begining and throughtout construction, then there should be no problem making sure the City is on board from the outset. However, even if all permits are in place, I still tyipcally produce a laundry list like I mentioned above. Depending upon whom you hire and the building features/location, pricing for row house inspections in Brooklyn can vary from $700 to $1200\. Revisits would oftentimes be a few hundred dollars, depending upon the scope of work.
mykonos | 11 years and 5 months ago
Hi Matt…question please: The home I’m buying is being totally gut renovated….down to the brick/studs. Do you think it’s a good idea to hire a home inspector/engineer ( such as yourself) to inspect the home in phases ( beginning,middle, end ) so the GC cannot hide any poor workmanship/shortcuts behind newly installed Sheetrock? What would you estimate cost of said inspection? Thanks again very much. All my $ is in this home….M
mykonos | 11 years and 5 months ago
Thanks Matt. Great stuff!