Concerns When Your Flip is Ready to Sell

There are a few things that you must be aware of and concerned with when your flip (house) is ready to sell.  When you “think” you have completed rehabbing a house and are ready to put it on the market be aware of some possible pitfalls and snags. 

First, you should have a punch list.  Go through the house to be sure everything is complete.  I have found that there is a tendency for many contractors to not be concerned with the small stuff.  For example, be sure that everything is painted and touched up.  Be sure all the doors close properly and all the door knobs are on correctly.  Is all the trim completed? 

In addition to the punch list being completed, you must get lien waivers from all the contractors who worked on the job.  You should do this before you hand them their final check.  This is a very important step for you so that you don’t unexpectedly have any legal issues with liens just before closing.

Two things to deal with once you have an offer on the house.  One is the inspection, and the other is the appraisal.  Many people will leave something obvious for an inspector to find just so he can justify his fee.  You should be sure that you have checked all of the mechanicals to be sure things are hooked up properly and working.  The boiler or furnace, hot water heater, all plumbing is working properly and there are no leaks, the electrical upgrade is done and the panel is properly labeled.  Smoke alarms and carbon monoxide detectors are hard-wired and have been tested.  Any fire prevention requirements have been completed as well.

When the appraisal is being done try to have your realtor on the premises or you be on the premises.  Be sure not to get in the appraiser’s way and do not annoy them.  You should be ready to answer questions and you may want to be sure that you and your realtor are prepared with comps to offer the appraiser in the event that he does not see a value as high as you have determined.

Paying attention to these things will help to prevent issues that may hold up the closing.  Do what you can to help the process run smoothly and get it done as quickly as possible.

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IRC Section 1031 Like-Kind Exchange For Real Estate Investing

Real estate investors should be somewhat familiar with the IRC Section 1031 like-kind exchange rules.  It is important to talk to your tax professional if you are considering selling investment property and getting (replacing it) with another property. The IRC Section 1031 rules allow favorable tax treatment when a like-kind exchange of certain assets occurs.  You are allowed to defer gains on the sale of an asset if it is replaced with like-kind property.  It is a tax deferral, not a tax free exchange.

This exchange must be done within prescribed time periods.  Basically, there are two time periods you must follow.  The first requires you to identify a replacement property within 45 days of disposing of the first property.  Identifying means a written agreement that should be delivered to the seller.  The second time element is the requirement that you must acquire the replacement property within 180 days of disposing of the initial investment property.  There is a bit of a catch to the 180 days.  It must be acquired within the 180 days or before you tax return for that year is due, whichever is less.

Depending on the way the exchange is done, your transaction may require a third party intermediary or facilitator. Per an IRS release,  “It cannot be someone that you have used within the past 2 years.  You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator. ”

When you do qualify for the IRC Section 1031 like-kind exchange you must report that on your tax return using IRS Form 8824.

I am attaching a link to an IRS document which provides clarification and publications references pertaining to this issue.