As of September 1, 2008, yesterday, the state of Texas has new contracts. The actual changes in the main "Single Family" contract are minuscule. However, there is a new addendum that must accompany each and every contract from now on.
This new addendum will kick Investors out of our market, and I believe that was the point of it. Not a very good move since we have tons of investors in our different markets across the state, but apparently the state of Texas thinks it's a strategic move. This should be featured and bookmarked in every way possible so the maximum amount of people can read about this who have never heard of it, since it's new.
I'm not an attorney, so I'll just be providing a summary of the interpretation my office manager provided us, so if you have a differing interpretation, I would love to hear it.
The new addendum basically has the homeowner sign a form stating that if they recently did over $10,000 in remodeling or repairs to their property, AND they have not lived in the house for at least 1 year since doing those repairs or remodeling, they have now been classified as a builder. Being classified as a Builder means the homeowner now MUST provide to the new home owner a 10 year structural warranty to the property, a two year mechanical warranty which includes plumbing, electrical, and AC/Heating systems, AND a one year warranty on all materials and workmanship.
Yes, this is the standard warranty a "regular" Builder must provide a homeowner upon buying a brand new home!
For example, a homeowner decides he wants maximum dollar upon resale of his home so he decides to update his kitchen and bathrooms. The work costs $15k, but he does it because he knows he'll get a good $25-30k higher sales price if he does. However, if he does those updates and sells right away, he is a builder and must provide warranties. If he does the updates and then lives there exactly 1 year or longer, he does NOT have to provide a warranty to the buyers whatsoever!
This means, if an investor comes in and buys a house, fixes it up, puts tenants in it for a few years to get some cash flow, and then decides to sell it, if he doesn't have tenants in the house for at least 10 years, he MUST provide the new homeowner with a warranty (the warranties' time periods start when the repairs are complete so if there is a tenant for 5 years, the investor must provide a foundation warranty for an additional 5 years to the new home owner).
It seems like the only way to get around this is to have your investors move into the house while they are making the repairs, and then live there the remainder of the year. This would also provide for a lower interest rate because they would be an owner occupied buyer instead of an "investor" ready to flip it. But then the investors could only buy one property a year, which means many investos must go back to their other professions in order to get a weekly paycheck in between house purchases.
I spent a good portion of this morning talking with some of my clients about this new addendum and about how we're going to approach it. The thing is, even though the new contracts are mandatory as of Sept 1, 2008, the new addendum as been approved as of 12/10/2007 so everything is retro back to that date. If you have investors who did repairs to properties before December of last year, you're probably ok (again, I'm not an attorney).
Also, as a buyers' agent, if you walk into a house that looks like it has been completely redone, don't promise your buyers that they're going to get these warranties because you shouldn't assume the investor/home owner spent more than $10k. These days, you can get cheap carpet, appliances, and paint for under $10k, but it might look like more was spent. I would ask the listing agent to supply their invoices and receipts to show how much they spent to make sure your buyers have protection.
From my understanding, this was put into place to stop investors from patching defects and then flipping the property, and then the new home owner have no where to go when everything starts falling apart. However, with a dollar limit like $10k, I can see investors doing exactly that!! They'll go buy some spackle, texture, and paint over the foundation cracks in the walls. They'll go buy some Killz and paint to cover up the water stains hiding a leak in the ceiling or the mold stains on the walls. They'll cut a lot of corners to keep their costs down, and then they'll be screwing the consumer in the process.
I don't see how this new addendum is a win/win for anyone. I had to call one of my sellers today to say, "Remember last week when I told you that you should gut the kitchen to update it from its original 1984 look? Well, forget I said all that and just slap on a fresh coat of paint throughout the house."
What do other Texas REALTORS® think of this new addendum? If you have this type of thing in your state, how is it handled? Has it taken the investors out of your market? Buyers and Sellers, if you're reading this, how do you feel about it? Do you think you'll be better protected because of this addendum?