Most Washington State real estate investors whose model is buying distressed, rehabbing and selling within twelve months almost always become a general contractor, hire a licensed contractor or enter into equity agreements wherein the investor buys the property inside of an limited liability company and then gives the general contractor a nominal interest in the limited liability company wherein (theoretically) the investor is now exempt from complying with the Act.
In particular, Washington House Bill SBH 1843 (amending RCW 18.27) provides, in part, that if a person or entity buys residential real property and intends to renovate it and sell it for a profit and further will be reselling it within 12 months of purchase and, finally, plans to spend more than $500 in renovations, the investor, or their entity, must be a licensed Washington general contractor. RCW 18.27.010. However, the Act does not say that you have to hire one…it says you have to be one. Thankfully for Washingtonian investors, becoming a general contractor is quite easy.
Further, all United States residential real estate investors may encounter problems exiting the residential property when the potential residential buyer is obtaining conventional bank financing as the federal government underwriting criteria is constantly evolving. The federal government routinely ‘moves the goalposts’ as to its so-called ‘anti-flipping’ rules. An investor must be aware of these issues when formulating their exit strategy for a property.
Lastly, Chapter 61.34 RCW provides that that conduct of buying Washington distressed residential real property purchased from a homeowner who is behind on mortgage payments (or unpaid property taxes) and facing bank foreclosure (or tax sale) may be construed as ‘equity skimming’ and therefore, may be illegal (both civilly and criminally). The consensus among many Washingtonian investors is to not engage in purchasing homes from people in pre-foreclosure status.
An instructive case involves a Seattle area real estate investor who ran afoul of RCW 61.34 and end up in a long and convoluted lawsuit. In Jametsky vs Olsen, 179 Wn.2d 756, 317 P.3d 1003 (Wash. 2014) (see below), a real estate investor tried to assist a distressed homeowner who was about to lose their residential home to the country treasurer due to unpaid property taxes. Through a series of transactions the homeowner deeded the property to the investor who then paid off the back property taxes, and then entered into a ‘lease-option’ agreement with the investor to potentially repurchase the property in 18 months. After the fact, the former homeowner sought to set aside the transaction and reacquire title to the property. Initially, the investor prevailed at both the trial court and court of appeals (at great expense, of course).
However, the Washington Supreme Court (February 6, 2014) reversed the lower courts and ruled that the transaction was a ‘distressed conveyance’ within the meaning of RCW 61.34, and to allow the former homeowner to return to the trial court to litigate the return of their former home. In particular, the court found the threat of a county tax foreclosure can be used by the trial court as evidence of a ‘distressed conveyance’ under RCW 61.34.
The lesson to be learned by Washington State real estate investors is that Washington courts will do whatever is necessary to find some excuse to protect a homeowner who the courts believe is being taken advantage of by the investor even if the parties at the time believed it was truly an arms length transaction.
Also, the result may have been different had the investor required the homeowner to see independent legal counsel regarding the initial transactions to prevent claims of ‘over reaching’ and ‘duress.’ The risk is the homeowner will not proceed with the transaction and the deal fails which though bad is not as bad as being ‘drug through the courts’ by a litigious former homeowner.
Investors be wary…..
The definitions in this section apply throughout this chapter unless the context clearly requires otherwise.
(1) “Contractor” includes any person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter. “Contractor” also includes a consultant acting as a general contractor. “Contractor” also includes any person, firm, corporation, or other entity covered by this subsection, whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned.