Flip That House.....Or Maybe Not

Complaints by homeowners who purchased quickly remodeled and resold houses attracted the attention of our state's legislature. Unbeknownst to most, a change was made to Washington State's contractor registration statute that went into effect this past July requiring that many real estate investors and developers be licensed as a contractor. Furthermore, the requirement stands even if they do no work themselves rather hire licensed contractors to perform work on the property. Though in effect since July, the Department of Labor and Industries is working to complete the regulations necessary to enforce it. They are set to be complete in early this year.

Exerpted from a legal bulletin provided by our company's law firm, Demco Law Firm, P.S., the following describes how the legislature, rather than changing the requirements for contractors, revised the definition of who is a "contractor". The definition now includes:

• "Anyone who develops property as a business (even if a contractor is hired to do the work)"
• "Anyone who performs contractor services in the role of a 'consultant'"
• "Anyone who sells a property less than one year after acquiring it"

The language of the statute remains somewhat vague and will be better clarified once the regulations are issued. Regardless, its implications are best treated literally.

• Owners who have owned their home for more than twelve months and are intent on fixing it up for resale are exempt from the requirement.
• Buyers who obtain land to construct their own structure for the purposes of selling the improved property do have to be registered as a general contractor.
• Buyers investing in a residential property which they then remodel or make improvements to with the intention of renting it are exempt.
• "Flippers" acquiring a home for renovation and/or updating with the intention of selling it must be registered contractors.
• Buyers purchasing land on which they intend to build a primary personal residence do not need to be registered.

In what had been a frenzied climate of flipping, this statute revision may serve to put substantive breaks on those who would speculate in Washington State's housing market by purchasing and churning homes for quick profit. Requirements include obtaining a business license, bond and proof of insurance, all of which may run into thousands of dollars and take significant time to fulfill. Insurance companies are still adjusting to the statute. Furthermore, and to quote Demco Law Firm again, "Acting as a contractor without a license is a gross misdemeanor and punishable by up to a year in couty jail and a fine of $5,000. Each property is a separate offense. Violation of the Contractor Registration Act is also a violation of the Consumer Protection Act, which can result in punitive damages and liability for attorney fees. Most insurance policies will not cover misdemeanors or violations of the Consumer Protection Act."

Bottom line, if you are a property developer or "flipper" in Washington State, you may wish to take immediate steps to become a registered contractor. For those in other jurisdictions, know your state's laws and seek sound legal advice before embarking on your investment strategy. This may be a nationally trend-setting amendment. Real estate agents serve their clients best when advocating for expert legal advice as well.

This information is provided to assist readers in identifying potential legal problems, referencing Washinton State's Contractor Registration Act as an example, and should not be used as a substitute for obtaining the advice of an attorney in your state, or basing any important decisions without seeking first seeking legal counsel.