Flipping houses in Washington State can be a lucrative business. But there are a few Laws that you need to be aware of and abide by.
Substitute House Bill 1843, and the resulting law (RCW 18.27) states that if a person or entity purchases a property and intends to rehab it and sell it for a profit, then that person or entity MUST be licensed and bonded as a general contractor. If you or your entity (LLC, corporation, etc) intends to resell a particular property within 12 months, and if you spend more than $500 on rehabbing the property you, or your entity will need to be licensed and bonded.
$500 you say? Yes, I know. It is crazy. That means that if you intend to paint the inside of a house, something that any person could do, you need to be a general contractor that is licensed and bonded in the state of Washington.
A common question is: “Can’t I just hire a general contractor that is licensed and bonded?” The answer to that is NO. The person or entity that takes title to the property needs to be the one that is licensed and bonded.
This Bill was supposedly put in place to protect the consumers from people, or “flippers” who do poor quality renovations, or hire unskilled labor. It gives the consumer or end buyer the option of getting monetary relief for this poor workmanship by going after the contractors bond.
In a way I am in favor of this because it does weed out some of the bad apples. But the fact is, anyone can get a contractor’s license in the state of Washington. There are not any classes or tests. So someone with ZERO knowledge of construction can become a contractor! Again, CRAZY. But these are the rules that we play by.
For more information on this, I suggest you study up on RCW 18.27 Registration of Contractors.
You can also read what the Washington State Department of Labor and Industries has to say about it HERE.
If you need some assistance in setting up your business as a GC please feel free to CONTACT US and we can put you in touch with the person that set up our GC Company.
EPA Lead Based Paint Activities
Contractors who perform renovations, repairs and painting jobs on homes that were built prior to 1978 must be certified and trained in the use of lead-safe work practices. You can read more about the requirements and certification process at http://www.epa.gov/lead/pubs/renovation.htm
So once you become a contractor, if you plan on renovating homes built before 1978, you have to get certified by the EPA.
Distressed Property Conveyances. (RCW 61.34)
This one is a biggie. The legislative findings of RCW 61.34 are as follows:
“The legislature finds that persons are engaging in patterns of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owner’s residence but which is in fact a device to convert the owner’s equity interest or other value in the residence to an equity skimmer, who fails to make payments, diverts the equity or other value to the skimmer’s benefit, and leaves the innocent homeowner with a resulting financial loss or debt.”
From what I understand this law was originally targeting those investors who marketed to people in pre-foreclosure and promised to “save” the homeowner from losing their home, or to “stop foreclosure”. It involved bailing a distressed homeowner out by purchasing their property at a discount and then selling it back to them on a lease option or something similar. The “shady” investor would promise the homeowner that they can save them from foreclosure and they can even KEEP their house. Then, if the homeowner missed a payment or was late, the investor would take the property back, evict the homeowner and walk away with the profits. I have researched examples of this actually happening and wasn’t able to come up with a single situation where this actually occurred, but that is neither here nor there.
Even though the law was specifically put in place to eliminate these types of “lease-back” transactions, it made it almost impossible for the HONEST investors out there to market to people in distressed situations. Even if you have no intention of leasing the property back to them!
In my opinion this law is absolutely ridiculous and it actually hurts a lot of people in this situation! For some people, selling to an investor for cash is the only way out! I have had people call me in foreclosure and BEG me to buy their home and I have to tell them that I cannot work with them because you are facing foreclosure, thanks to our government.
You can read more about this at http://apps.leg.wa.gov/RCW/default.aspx?cite=61.34&full=true#61.34.010
The bottom line is this: For now, don’t market to people in distressed situations. Read the law and understand it. There are other types of deals out there that we can go after and this is a perfect example of playing with the hand that we are dealt. If you are a Realtor, then there may be some hope because there are some loopholes, but make sure that you understand this law before you begin your investing career in Washington State.
On a final note:
The preceding article is only meant to make you aware of SOME of the rules that we need to play by. Make sure you educate yourself on the issues and as always, make sure you have a real estate attorney on your team to advise you. It’s up to you to make sure that you are conducting your business in an honest and ethical way and abiding by all of the laws. We also advise that you get involved with your local REIA so you can stay up on current laws and events!
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