Update on Flipping Law – notes from REIAWA meeting

I attended the Real Estate Investors Association of Washington (REIAWA) monthly meeting tonight.  The subject was an update about the flipping law 1843.  Robert Penfield, or Kelly Penfield PLLC, is licensed in Washington and Oregon.  He has expertise in Real Estate litigation, entity formation, and foreclosure litagation.

Robert indicated that this law change has given quite a bit more power to the Director of Labor and Industries.  The Director nows has subpeona power (to review business records to determine intent and details of the deals done) and can request search warrants.

Robert, Shirley and Fox Henderson, and Sue Schindler (all representing REIAWA) attended a meeting with Pete Schmidt and Sally Elliot (from Dept of Labor and Industries) to discuss this law change.  Pete Schmidt is the Chief of Contactor Compliance.  I did not catch Sally’s title.  Sue had compiled a list of 100′s of questions which they left with L&I for answers.  Pete and Sally indicated taht they thought most of the questions could be answered by applying some rules of thumb

Intentions

• L&I charter is to protect the consumer – in this case, that would be the eventual homeowner.
• L&I supposedly had intention to close loophole in the law that allowed a homeowner to do work without being required to be a general contractor.  They had the idea that a homeowner that does this kind of work, and then sells, is leaving the eventual homeowner ‘unprotected’ – and this needed correction.
• They wanted to pursue independent business people who should have been licensed but were not (unlicensed contractors)
• They indicated that they were not primarily targetting flippers but that they knew that they were going to catch up some of the flippers in their changes.
• They wanted to pursue the underground economy

Rules of Thumb

If your answers are no to all of these, then you probably don’t need a contractor’s license.  If yes to any of them, you probably do.

• Are you keeping the property for less than 12 months?
• Are you pursuing an independent business venture without living in the property?
• Are you renting?  L&I considers leases less than 12 months of duration as ‘rental leases’ and leases over 12 months as ‘permanent leases’
• Is your intent to sell the property within 12 months of completion of the work?

If you have a particular question or situation, you can post it on the L&I website.

Violations of this law result in a charge of gross misdemeanor and a fine for each day of infraction.  The fine is $1000 for the 1st day, $2000 for the 2nd day, $3000 for the 3rd, and so on.  So, this will very expensive very fast.  There was some discussion that the fine will grow at a different rate.

Applying for a contractor’s license rquires the following:

• UBI # – either as a sole proprietorship or licensed entity ($175 fee)
• Bond or proof of deposit of $12,000
• Insurance for the contracting business
• Must list previous businesses with which you have been involved – to insure that they are in good standing
• $113.43 fee for the application

One of the major benefits of asset protection is anonimity – isolating the things you own into groups that don’t interact.  unfortunately, this new law will require us to reveal a lot of information that will ties our entities together.  This information is then available to a wide range of individuals through the clerks at L&I and bonding agent and insurance carrier.

The session was openned up to questions from the audience. 

A question was asked if a partnership had a member that was a contractor, would that cover the requirement for the partnership.  Robert indicated that it probably would – though there was some dispute whether the name of the contractor has to be on title to the property. 

A question was asked about the other side of this law – if a new homeowner is to be protected with this new law, how does the new homeowner attach to the bond of the flipper.  For example, if I bought a house, fixed it up legally (permits and I am a contractor) and sell it – and the new owner has a problem, how does the new owner attach to my bond.  The bond is only attached through a breach of contract – but I have no contract with the new owner.  The purchase and sale contract would only have been for me to transer title for the agreed compensation and that has not been breached.  Robert will research this and get back to us.