Flip or Flop? – Disclosure Rules for Real Estate Sellers & Their Attorneys

California’s legislature has recently passed several new laws that will impact residential real estate transactions in 2024 and beyond. This article examines one specific law affecting the practice of real estate flipping:  buying a property with the intention of renovating and selling it quickly for a profit. As explained fully below, California Assembly Bill 968, codified into law as Civil Code §1102.6h, supplements existing residential transfer disclosure requirements, adding additional obligations for flippers for provide specific types of information related to repairs and renovations performed on properties prior to resale.

Existing Disclosure Obligations Prior to AB 968

Even prior to the passage of AB 968, residential flippers already had an obligation to disclose certain information related to repairs and renovations made to properties prior to reselling them. For example, under the existing transfer disclosure form pursuant to Civil Code §1102.6, flippers are obligated to disclose information about room additions, structural modifications, or other alterations made to residential properties which are not permitted and/or not building code-compliant.

More broadly, California courts have held that sellers of residential real estate have an affirmative duty to disclose all facts regarding conditions that materially affect the value or desirability of a property. See Shapiro v. Sutherland (1998) 64 Cal.App.4th 1534. This rule applies whether or not the condition falls within the categories set forth in the transfer disclosure statement.

New Disclosure Obligations Under AB 968

AB 968 was conceived by the legislature as a way to address a need for additional disclosure requirements caused by the growing popularity of real estate flipping in California over the past several years. The short timeline involved in flipping real estate frequently leads to house flippers cutting corners by not obtaining necessary permits and inspections for the renovations, and by hiring cheap, potentially unlicensed workers to perform the actual work. The results of this process can include low quality construction work, significant costs for new owners, and potentially increased risk of liability by the sellers if the new owners take legal action against them.

The Assembly comments on AB 968 explain the need for additional disclosure requirements as follows:

Existing disclosure requirements do not provide information about construction work recently completed on the property. Existing property sale disclosure requirements ask for a narrow set of information regarding work performed on the property: specifically, whether room additions, structural modifications, or other alterations or repairs were made without necessary permits. But the current disclosure requirements do not require the seller to provide information about permitted work, including the information for the licensed contractor who performed the work. Although permitting information for a property is publicly available, a homeowner looking at publicly-available permits might not know that permits are missing for work that was actually performed.

As noted above, AB 968 has been passed by the legislature and codified into law as Civil Code §1102.6h. The following is a summary of the most important and salient provisions of this new law:

• AB 968 applies to sales of residential property consisting of one to four dwelling units.
• It applies to residential property transactions where a seller accepts an offer of purchase within 18 months from the date that the seller took title to the property.
• The law goes into effect on July 1, 2024, meaning that it applies to all property sales in which the seller accepts an offer to purchase on or after that date.
• In residential transactions like those described above, AB 968 requires sellers to disclose any and all room additions, structural modifications, repairs, or other alterations to the property since the seller’s purchase of the property.
• Additionally, the seller must provide copies of all permits for the described work, if any were obtained. If the seller contracted with a third party and was not provided with a copy of any permits, the seller may inform the buyer that the permits may be obtained through the third party and provide their contact information
• Additionally, where the cost of labor and materials was $500 or greater, the seller must disclose the name and contact information for each contractor who worked on the property.

The new requirements of AB 968 are meant to supplement existing disclosure requirements rather than replace them, meaning that existing requirements remain in effect if applicable to specific transactions.

Advice for Home Flippers and Buyers Purchasing From Home Flippers

The purchase and sale of residential real estate is a complicated and daunting process, and this is especially the case when dealing with recently-renovated, or “flipped,” homes. I have practiced real estate litigation in the Bay Area for 15 years and handled many disclosure lawsuits during that time. Some of the main drivers of these kinds of cases are issues related to nondisclosure of defective and/or poor quality construction work performed by sellers on residential properties. Based on my experience handling these types of cases, the following is basic advice for real estate flippers and for those purchasing from flippers, in order to hopefully avoid becoming involved in disclosure disputes subsequent to a real property transaction.

Advice for flippers (and real estate professionals representing them):

• USE LICENSED CONTRACTORS FOR MAJOR CONSTRUCTION WORK: In California, anyone who contracts to perform construction work on a project that is valued at $500 or more for combined labor and materials costs must hold a current, valid license from Contractors State License Board. If you anticipate having major renovation work done on a property prior to resale, hire a licensed, reputable contractor to perform the work. This may lead to some added cost, but it will result in higher quality work on the home, and it will insulate you against potential liability in any future litigation or other disputes arising out of the work after the property is sold.
• OBTAIN ALL REQUIRED PERMITS FOR RENOVATION WORK: To the extent applicable and feasible, work with your local city government to obtain all applicable permits for the work you intend to perform on the property prior to resale. As explained above, this may result in some additional time and costs, but it will ultimately benefit you by lowering the risk of future disputes related to unpermitted work at a property after it is sold.
• WHEN IN DOUBT, DISCLOSE: Even with the enhanced disclosure requirements of AB 968, many “gray areas” remain in terms of what must be disclosed during a real property transaction. Recall that, even if something may not technically fall within one of the categories listed on the transfer disclosure statement, you still may have a duty to disclose it if it constitutes a known condition which materially affects the value or desirability of a property. When in doubt, it is usually a good idea to “over-disclose” when selling a residential property, so that all parties enter into the transaction with clear eyes and with the same information in terms of all relevant information related to the property.

Advice for those purchasing from flippers (and real estate professionals representing them):

• USE A LICENSED REALTOR: There are several different categories of real estate professionals you can hire to represent you when purchasing a home. As a real estate litigator who deals with situations where something has gone wrong during or after the purchase process, I always recommend that prospective purchasers engage a professional to assist them in that process, and to the extent possible, they hire a licensed Realtor. Realtors undergo additional training, and are held to a higher ethical standard than other real estate professionals in terms of their representation of their clients, and this results in a higher quality of service in general, and specifically related to discussion of disclosure issues.
• AVOID “DUAL AGENCY”: Dual agency occurs when a real estate agent represents both the buyer and the seller in a single real estate transaction. While dual agency is legal in California, it requires strict adherence to specific rules and regulations outlined in the California Civil Code. Despite these additional rules and regulations, it is my personal experience that dual agency in a real estate transaction tends to lead to an increased likelihood of disclosure issues arising after the transaction is complete, and it can limit a buyer’s legal options if and when those issues do arise. I always recommend that buyers engage their own agent who represents them and only them during a transaction.
• DO NOT WAIVE YOUR RIGHT TO HOME INSPECTION AND WALKTHROUGH: As a prospective home buyer, you have a right to a walkthrough of the property, and you also have a right to hire a home inspector to inspect the property and prepare a report prior to completing the purchase. In some cases, purchasers may feel compelled to waive these rights in order to save time and money, or to gain an advantage over other potential purchasers of a property. Do not be tempted to waive these rights. Hire your own home inspector to prepare a report for you, read that report carefully, and ask the inspector questions about anything you do not understand. If the home inspector recommends that you hire some kind of specialist to inspect a specific area of the property (foundation, roof, etc.), consider getting that additional report as well. This process is meant to help you gain as much information as possible about a property before you decide to purchase, and doing so will help you make an informed decision.