Law against flipping

This may seem extreme, but the legislature in Washington may have passed just such a law!  The Department of Labor and Industries proposed some changes to the section of law that defines ‘contractors’ – this is RCW 18.27.010.  The changed legislation is described as 1843-S.SL. 

I heard about this issue at the Flipping seminar that I attended on Thursday (see notes on that seminar).  A lawyer was brought in to discuss the law and the implications of the changes.  He pointed out that the text is very vague on several issues that will make it much harder for property owners (not to mention investors) to stay legal.  One example of this is Section 1, which defines ‘contractor’ and is modified in several ways – including the following:

“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.

So, by this definition, the lawyer gave some examples of people who will inadvertantly violate this law. 

• Suppose a teacher inherits a house from their parent.  The teacher does not want to keep the house and it is need of repair to bring it up to market condition.  With the above definition, the teacher (licensed by the state) will need to register as a ‘contractor’ with bonding and insurance to repair and sell the property.  The list of professions licensed by the state is quite long and all of them have the same exposure to this kind of violation.
• Even if the teacher hires a contractor to do the work, they will still violate the law if they do not THEMSELVES register as a contractor.  The definition (and later paragraphs) do not give exemption to the owner when a contractor is hired to do the work.
• If an investor buys a house for flip and forms an LLC / partnership with a general contractor to accomplish the work, then the LLC / partnership will also have to registrer as a ‘contractor’.  The definition does not allow entities which contain a ‘contractor’ member to use that registration.
• A landlord evicts a tenant who damaged the property – this is their last straw and they want to stop landlording and sell the property.  However, if they fix it up prior to selling, then they need to be registered as a contractor or they have violated the law.  They might be able to fix it up and hold it for another year before selling, but that means they have a vacant house that must be insured at higher rates and they must still pay the mortgage and upkeep.  Also, the property is more likely to be vandalized when vacant

The law also changes the Exemptions section (RCW 18.27.090) – here are two of the sections affected:

(11) An owner who contracts for a project with a registered contractor, except that this exemption shall not deprive the owner of the protections of this chapter against registered and unregistered contractors. The exemption prescribed in this subsection does not apply to a person who performs the activities of a contractor for the purpose of leasing or selling improved property he or she has owned for less than twelve months;

(12) Any person working on his or her own property, whether occupied by him or her or not, and any person working on his or her personal residence, whether owned by him or her or not but this exemption shall not apply to any person ((otherwise covered by this chapter who constructs an improvement)) who performs the activities of a contractor on his or her own property ((with the intention and)) for the purpose of selling, demolishing, or leasing the ((improved)) property;

So, with these changes, the teacher above has to own the property they inheritted for at least 12 months and the repairs performed cannot be for the intention of selling the property.  This intention issue is a hard one to judge – most houses need some touch up or repair before selling. 

The law went into effect on July 22nd, but the Department of Labor and Industries will be holding meetings in November to draft rules for this ‘proposed legislation’

Sandy Nelson has also written a article on this issue on her blog.  I completely agree with her comments that the elected officials have let us down by unanimously passing this lousy law.

I am surprised that the various lobbies did not oppose this more strongly (if at all).  The Realtor lobby should have opposed this on the grounds that it adds barriers to keeping neighborhoods in good repair.  The contractor lobby (Master Builders Association, etal) should have realized that if every flipper needs to get registered as a ‘contractor’, there is less incentive to actually hire those who currently have contractor licenses.

I can understand the desire to protect the public from shoddy work by novice flippers.  However, this is a bad solution that is going to hurt everybody.