'Flip Artists' Must Heed State Contracting Laws

"Flip Artists" by Carol Tice (Feb. 24) prompts me to add a few cautions on some important local and state regulations and tax considerations that may apply.

If you do structural improvements that require building department approvals, you may run afoul of California's contractor licensing laws. The state requires that people who "make improvements to real property" be licensed as contractors; a contractor's license is necessary to obtain building permits except for homeowners acting as "owner-builders."

If you're an "owner-builder," the licensing exemption has very specific limits regarding the buy-improve-resell activity that the flip artist engages in. Here's how it works:

1--If you hire a licensed general contractor to do the work (or become one yourself), you are not an owner-builder. You may "flip" as many houses as fast as you like.

2--If you act as owner-builder (a declaration you must sign on the permit) and hire only licensed contractors as subcontractors to do the work, you are limited to four flips in one year.

3--If you act as owner-builder and hire anyone who is not a licensed contractor to do the work, or even if you do all the work personally, you may do one house, which you must live in for one year prior to sale.

If you do improvements illegally (that is, without necessary permits) you face the additional risks of liability to subsequent owners of the house.

You must keep in mind that the recent "full-disclosure" requirements for selling real estate do not void any liability the owner may incur. Disclosure statements such as "bathroom remodeled without permit" are designed to get the realty agents out of the line of fire, not to absolve the owner (or contractor) who did the work.

If you hire workers who are not licensed contractors, they are considered to be your employees by both the state and federal governments. There is no middle ground in California: If they have a license, they're contractors; if they don't, they're employees.

This means you are subject to all the applicable labor, health and safety codes as well as all the tax withholding and reporting requirements and the workers compensation insurance requirements, just the same as any other employer.

I admire the imagination and hard work of people who can make a living improving and reselling homes, but if you're doing it or planning on doing it, remember--you're bound by the same rules that govern those of us who improve other people's homes for a living.


Los Angeles The writer is a contractor

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