Full-Disclosure: The most common misconception among flippers, and the truth you need to know to save $100,000
March 31, 2021
One of the most dangerous legal mistakes a flipper can make is not understanding what it means to waive the SPDS. This one misconception can cost over $100,000 if you get it wrong. On the flip side, getting it right can save your business, protect your capital, and leave you free to pursue the project of your dreams.
Fix and flip buyers often expect the houses they’re purchasing to require significant work. In fact, that’s the key to their profits. By purchasing properties that most consumers wouldn’t want, they have the opportunity to add value before a prompt and profitable resale.
Given that expectation, it’s common to waive the SPDS in that kind of a transaction. Since they expect the physical condition of the property to be terrible anyway, many don’t see the point and want as little friction in the deal as possible.
As a lawyer representing this community, one of the most common misconceptions I’ve seen is that waiving SPDS obviates the disclosure obligation. It doesn’t. In Arizona, a seller has a duty to disclose any material known defects as a matter of common law. Meaning, even if the parties don’t use a contract with written disclosure obligations, the duty to disclose legally exists.
Contractual disclosure obligations, such as the requirement to complete SPDS in the standard Arizona Association of Realtors forms, create additional, related obligations. For instance, that contract creates an explicit deadline to give the disclosure and limits the buyer’s time to reject a property based on the disclosure.
Waiving that provision doesn’t waive Arizona’s common law disclosure requirement. So, a buyer purchasing a house to flip who waives the SPDS still benefits from a common law duty of disclosure.
Getting this right can save you over $100,000
In the flipping community, this issue gets most important when an undisclosed defect prevents the buyer from completing renovation on time or on budget. Disclosure requirements aren’t just limited to the physical condition of the building. They included title defects, boundary encroachments, and environmental issues. In addition, if the property is a multi-plex, some sellers fail to disclose that it isn’t zoned for the number of units that physically exists.
These types of disclosure issues can be a massive swing for a redeveloper. For example, if one of these defects prevents construction from going forward or delays a needed permit, a flip can get too expensive fast.
If a redeveloper is using hard money to finance the project, extra interest alone can eat up most of the renovation budget. On top of that, the delay in reselling the property limits profits no matter where the property came from. A flipper’s capital is stuck in a property until he can sell. So, if re-development bogs down, he’s losing the opportunity to do more flips. If the problem reduces profitability on the current deal and then ties up your capital to prevent you from doing another one, that’s easily a $100,000 loss.
Fortunately, flippers have a solution. The seller’s failure to disclose that condition was fraud. Under Arizona law, the developer has a right to recover for the fraud. And significantly, he has a right to rescind the transaction. By rescinding promptly, a flipper can save himself from one unprofitable deal and free his capital to pursue a new one. That’s easily a $100,000 benefit, just for properly understanding that you didn’t waive common law disclosure obligations when you waived the SPDS.
Samuel Doncaster is a trial lawyer who’s very active in real estate fraud cases. He routinely helps people get their money back when they’ve been cheated in real estate deals. If you have a client who needs help with a disclosure issue, you can help them set an appointment by calling 480-666-4054 for a strategy session. That strategy session comes with a risk-free, 100% money-back guarantee.