Washington state anti-flipping law (SHB 1843)
Question for Washington state flippers. I'm a beginning investor in the Seattle area. Just heard about Washington state's anti flipping law. It seems that only licensed contractors are legally allowed in Washington state to sell a house within 12 months of completing more than $500 worth of improvements.
Is that law still in effect? Under what circumstances is it enforced? Should I look into becoming a licensed contractor so that I can do my own flip deals?
It might still need to be signed by the governor but I can't see why it wouldn't with no one opposing it from either branch.
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Developer
- KDS Homebuyers
I can't imagine this kind of restrictive law being passed in California or any other state for that matter. What is wrong with the legislators in Washington State? Are they anti business?
There is another reason why one would embrace this type of law, which is common in my market and that is,as Professor Michael Porter of Harvard University would say that the profitability in a market is determined by the barriers to entry. The greater the barriers to entry in a market the greater the potential profitability available to be made. Having license requirements lifts the barrier to entry and would , over time, increase the profitability in that market. Those people with a license will be able to trade in a more profitable market. Those without can either break the law or stop trading and leave the profits for those that comply. It is not necessarily right or wrong, it just is!
If you want to trade in profitable markets then it may be wise to follow the rules.
House Bill 1749 passed unopposed in the House and Senate and was signed by the Governor on April 22nd.
Brief Summary of Bill:
The provision making an owner a "contractor" if he or she offers to sell improved property without occupying or using it for more than one year is modified. A person is not a contractor under this provision if the person contracts with a registered general contractor and does not superintend the work or undertakes only the installation of carpeting or other floor covering, or painting, or both.
The new modified law goes into effect July 24th.
Putting this to rest: http://lawfilesext.leg.wa.gov/biennium/2015-16/Pdf...
"A person, firm, corporation, or other entity is not a contractor under this subsection (1)(c) if the person, firm, corporation, or other entity contracts with a registered general contractor and does not superintend the work.
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First of all the law is not that the owner has to be a licensed contractor. The law says the work has to be done by a licensed contractor. It also does not say you have to be a licensed contractor if more than one year has passed since the work was done. I would think you would want to wait the year out anyway so you get taxed on long term capital gains rather than short term capital gains but to each his own . All I know is that the laws says the work has to be performed and managed my a licensed contractor not that the owner has to be a licensed contractor unless he or she perform the work directly and even then you can do it if you are willing to wait out one year.
By law a licensed contractor has to guarantee their work and carry both workman's comp insurance and be bonded. If a buyer comes into possession of that property they benefit from the guarantees. Most owners will not guarantee their work. Some structural issues have to be guaranteed for at least 10 years.
No matter how you look at it houses are not cheap and a buyer deserves some guarantees and protection.
Before everyone gets up in arm let me explain. You can also hire a General Building Contractor that works only in a consulting capacity. You can do work as long as you have the licensed General Building Contractor oversee your work to make sure you are doing everything to code and will pass inspection and you allow the General Contractor to hire a minimum of 2 sub contractors. A General Building Contractor can do us to four different trade tasks. You can negotiate with the General Building Contractor the work you want to perform yourself under his or her supervision and consultation. These type of General Building Contractors typically do not have anyone under their direct employment but you would be wise to purchase a workman's comp policy to cover anyone who might get hurt.
I have been both a licensed General Building Contractor with employees and without and I have done this kind of work for over 30 years.
As long as every task requiring a permit has a permit and passes inspection your insurance company should be good with it but then again check with your insurance company about their policies. You should also check every contractor's insurance policies to be sure they are current and what they cover.
Originally posted by @Gilbert Dominguez:
I would think you would want to wait the year out anyway so you get taxed on long term capital gains rather than short term capital gains but to each his own.
Holding a flip for more than a year doesn't qualify you for capital gains (short term OR long term). Flips are taxed as ordinary income at your marginal tax rate (plus potentially self-employment taxes), no different than any other business that buys and sells inventory. This is regardless of how long the project takes or the property was held.
J Scott,
Thank you for clarifying that for me. So if you are flipping it makes not difference whether you sell before 1 year or after 1 year you are still taxed the same. Ok.
It's actually worse in Washington State than this post discusses. The current attorney general has very loosely been interpreting the consumer protection act. Let's say you have a dispute regarding breach of contract between two private parties. Now a days, the plaintiff will try to also invoke the consumer protection act on any "unreasonable business activity" to attack your personally and circumvent your asset protections such as your LLC.
Also, this year the Washington Supreme Court ruled against an investor who purchased a home from a homeowner with learning disabilities. Under the statute of the Distressed Home Consultant law, the homeowner did not specifically qualify as a distressed home owner. The Washington Supreme Court ruled that they will interpret the law liberally. So basically if you get too much of a deal you could be liable for equity skimming if the homeowner may or have any expectations to be in distress. And the definitions of distress are being interpreted liberally.
I think the government here does not like business or capitalism. They do no see the value that flippers and developers have in rebuilding communities. The consumer is supposed protected while we lose our freedom and liberty for a free market.
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@Ryland Taniguchi it is for those reasons that I stopped doing pre foreclosures in Washington years ago... I got turned into the AG there one time .. nothing happened as I don't really think we did anything actionable. .but it was a witch hunt.. they wanted copies of every transaction I had ever done i Washington that was not bought at court house steps or from MLS.
Oregon has the same equity skimming rules as does CA... but that does not stop people from charging ahead on those in default.. I think most don't even know the laws exist until they get a love letter from the AG
Originally posted by @Jay Hinrichs:
@Bryan Chambers said "None of you know unless you have had experience flipping in Washington..........now let`s talk about state excise taxes coming And Going...........it`s profit destruction".
Sellers pay the excise tax... I guess if your a wholesaler and trying to buy far under market you would offer to pay the seller 's Excise tax so your giving them a net number but your going to figure that in just like you would any other costs.
But the state law is JUST the seller pays the excise tax... not both. But you don't have state income tax either.. And if your one of those that lives in or near the Oregon Border you simply drive over to Oregon and all your shopping and pay no SALES tax... With the exception of a car airplane or boat you can by any other items in Oregon and not pay tax.
when I was doing some work in Vancouver we could even walk into home depot and show our Oregon DL and they would waive the sales tax... Tried that in CA did not work !!
Jay, the "coming AND going" excise taxes means that, like you said, the Wholesaler agrees to pay the tax for the original Seller, but then has to pay them AGAIN because they become the next Seller to THEIR end-Buyer (because they have been forced to take Title if their Contract is not Assignable). See? coming AND going! Ouch!...
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@Brent Coombss correct also in the great state of WA.. you cannot take title subject too the property tax's .. prior to recording the deed.. the recorder requires proof that you paid excise and that ad valorum tax's have been paid current...
Originally posted by @Jay Hinrichs:
@Brent Coombss correct also in the great state of WA.. you cannot take title subject too the property tax's .. prior to recording the deed.. the recorder requires proof that you paid excise and that ad valorum tax's have been paid current...
Yes, I am ONLY referring to Washington State (per OP subject and this particular heinous double-dip-Excise-Tax which Wholesalers must pay, TWICE)!...
Originally posted by @Jay Hinrichs:
And its not a STUPID rule its a great rule.. it protects the industry gives it conformity and protects the buyers of the properties they know that their homes have been rehabbed our built by licensed companies not some Johnny lunch bucket white collar investor who wants to be a flipper and not follow the rules.... :)
What does it matter about a contractor license? Anyone can get one. The bond and insurance dont even give any protection or grant of quality of work to consumer. The license itself only means somebody had enough money to get it. Not that they have any knowledge or experience. This actually makes it easier for Johnny Lunch Bucket with enough money, and harder for Joe Contractor (for 13 years) to get in the game. That being said I'm on the side of STUPID, meaning it's just another to tax.
Also good info, I was unaware of this law.
Hey everyone in this thread - I really hope you can help me!
Does this law / do these flipping restrictions apply to mobile & manufactured homes? And I'm talking about the ones that are NOT attached to land, that DO NOT have the Title eliminated. (aka personal property, in mobile home parks).
Mobile/manufactured homes are personal property (not real property) and the Title is bought and sold like a car title in WA. Do these "anti-flipping" laws/restrictions apply to them?
I'm wanting to flip MH's in WA. Buying only for the purpose of reselling asap after improvements, definitely under 12 months. I don't want to get in trouble!
OR Do you know whom I would contact to clarify if this applies to me? Cheers and thanks for any help all!
Just want to follow this up with the recent changes to the Bill. It is now a thing of the past.
https://www.memberize.net/clubportal/ClubStatic.cf...
Good luck out there!
Hi.
The primary "point" of the law, is to give the consumer recourse if the house was a poorly renovated. If the consumer has a problem, they can attempt to get the house fixed via the surety bond. Or they can get monetary compensation via the insurance.
@Tony Wooldridge Thank you for replying. Though it still seems like a "everybody else is doing it, I guess I'll do it too" kind of thing with regards to paying to play. I'll get the GC license and bond which comes out to about 300 bucks total, assuming my credit score meets the criteria for the $12,000 bond. However, I found that the law that concerning contractor registration requirements for owners of property would wipe out the need for a license in WA is still on hold in legislation: http://app.leg.wa.gov/billsummary?BillNumber=1749&Year=2017
So this law you are talking about applies to someone that purchases a house to flip and is doing the work themselves? Or does this apply to anyone even if your have a GC that is doing the work on the project?