Rehabbers May Be Liable for Defects Even When a House is Sold "As Is"

I ran across a Georgia Appellate Court opinion that is instructive for all flippers and rehabbers. In Georgian Fine Properties, LLC v. Lang (Case #A18A1295, Oct. 17, 2018), the rehabber added a second story to a one-story house, then sold that house pursuant to a purchase agreement that had a buyer's inspection contingency and disclaimers stating that the house was being sold "as is". The buyer's inspector noted that the floor on the first story had deflected, but that no immediate corrective action was necessary. Based on other elements in the inspector's report, the buyers requested 16 separate repairs, but made no requests pertaining to the floor.

After the buyers moved in, the floor buckled and a backsplash in the kitchen separated from a wall. The buyers sued the rehabber, alleging breach of contract and negligent construction. The rehabber moved for a verdict in its favor on the basis of a clause in the contract which stated that the house was being sold "as is", and that the buyers had an opportunity to request repairs following their inspector's analysis of the property. 

The discovery phase of the case turned up an engineering report that the rehabbers had received prior to selling the house. That report included a recommendation that the rehabber should install two support beams to handle the extra weight of the second story that the rehabber was adding. The rehabber added only one beam during the construction. A separate post mortem expert report revealed that the one additional beam had torqued and was unable to handle all of the extra weight.

The court's opinion stated that the "as is" clause in the contract only operated to disclaim warranties. It did not excuse the rehabber from exercising a reasonable amount of skill, care, and ability in its construction on the house. The court held the rehabber liable for damages and repairs to the house.

I have two takeaways from this situation. The first is that rehabbers need to tighten up contractual language in purchase agreements to better disclaim these types of liabilities to the extent that they can be disclaimed by the applicable laws of the state in which the sale is made. A purchaser may not be willing to buy a house if the rehabber/seller is disclaiming all liability for its own construction defects, and in any case a court may not be willing to give credence to that broad a disclaimer. Still, a better disclaimer can at least set up a defense for settlement negotiation purposes.

The second takeaway is as a rehabber, I can avoid these kinds of claims if do a rehab job correctly in the first instance. Fix-and-flips are a high-risk, high-reward gamble. If I run all my numbers and get a construction budget of $50,000, but later discover that I need $70,000 to do a job correctly, my profit may well disappear in that $20,000 overrun. I need to verify that my construction budget is as accurate as is possible, that I have a contingency built into that budget for costs that I have not considered, and that I do not cut any corners on a job solely to save or to make money. That's a tough temptation to resist, but the alternative is a potentially ruinous lawsuit, much as the rehabber in the Georgia case discovered.  

My bonus takeaway is that maybe I'll stick with wholesaling and buy-and-hold rentals, and leave the construction and rehab projects for somebody else who knows what they're doing. 

In my next post, I'll discuss the hows and whys of starting a business rather than working for somebody else.