**Do You Have to Be a Licensed Contractor to Flip Houses?**

**What is House Flipping?**

House flipping is a real estate strategy that has traditional roots, but it is a growing trend in the modern economy, thanks to showing significant profit potential in the wake of the recession. House flipping refers to the practice in which an investor purchases a residential property, makes improvements, and then sells it for a higher price, making a significant profit.
Flipping houses has become an increasingly popular investment strategy as home values have increased at significant rates over the years following the recession. Through this process, investors buy real estate properties, such as single-family homes, multi-unit homes, and foreclosures, for a good price; often taking on homes that need major renovations . These investors then renovate the homes to increase their sale value, upgrading fixtures and features as needed. They then sell the homes at profit. The average flipper generates a gross return of 36 percent on the investment.
The goal in flipping a house is to buy when a home is below market value and then sell when the home is valued higher. Issues like foreclosures and short sales where home values are declining present prime opportunities for house flipping. The biggest decision will be determining what level of renovation is appropriate. Doing so can require a good deal of legal paperwork, which is another consideration for those already struggling to figure out how best get their investment off on the right foot.

**Contractor’s License Explained**

Contractor’s licenses are generally issued at the state level, although some cities and counties permit local-level licensing. And much like homebuying, there are many different types of contractor’s licenses issued by different states (perhaps the most simply understood method of classification is by general or specialty licenses); the requirements for your specific state need to be carefully reviewed to determine whether it is a requirement for you in your home-flipping endeavors. Generally, but not universally, contractor’s licenses require some combination of testing and apprenticeship (including a period of time required to be employed by a licensed contractor). Examples of commonly required tests would be the National Home Improvement Examination administered by the International Code Council (ICC) and the Residential General Building Contractor Exam administered by the National Association of State Contractors Licensing Boards (NASCLB). For example, NASCLB’s sample exam includes a math portion relating to, among other things, roofing and flooring estimates, safety references, plumbing and electrical calculations, code interpretation, terms and definitions, and general information on building materials (all items relevant to completing of a house flip project). NASCLB further advises that applicants typically need 4 to 8 years of experience in the specific area in which they are seeking licensure as a contractor. Deeper questions generally inquire into trade-specific labor laws, OSHA obligations, and the administrative requirements for contractor licensure (these typically concern bonding and insurance obligations, along with taxes, etc.). Of course, as with any generalities, there are exceptions. General contractors are not licensed in all states (or even all municipalities), and are called various other things in those states where they are licensed. Further, some states and local jurisdictions require one to pass an additional exam relating to business and law. Still others require a pre-application process for licensure that first determines your eligibility to take the tests. And, while some tests require only a passing grade, others require a fairly high grade of 75% or above.

**State Requirement for Contractors’ Licenses to Flip Houses**

While most people assume you do not need to be a licensed contractor to flip houses in their state (or at least they hope they do not), the fact is that regulations vary greatly by location. In Nevada, an investor can flip houses while holding real estate agent licensure (which does not require extensive education or the passing of a difficult exam) and does not need a general contractor’s license. Contrarily, in Alabama, you can flip houses only by obtaining a general (residential) contractor license, which involves almost two years of classes and apprenticeships and must be renewed every two to four years. There are exceptions for license exemption available in Alabama; however, because this variance is so location-specific, check your local laws with a qualified business attorney who can effectively determine whether such exemptions are available to you. Another state with contractor license exemptions (depending on where you are flipping) is California. In California, you may not need a licensed contractor’s services for a house flip if you are acting as the general contractor and performing any (or all) of the remodeling work yourself. Typically, the law only requires a general contractor license if you are involved in construction work where the cost of labor and materials is at least $500. For multifamily homes, however, a license may be necessary if they are four or more families in the project. Even in counties where the law does not require a contractor’s license in order to flip a house, check county and municipal regulations as well. Further, even if there is no law mandating the licensure of a contractor before flipping, it may be wise to consider licensure regardless of the law. A real estate developer’s license or general contractor license will make your business appear more legitimate in the eyes of investors, money lenders, and potential home buyers.

**Advantages of Holding a Contractors’ License**

While in many cities or states you are legally allowed to flip houses without holding a contractor’s license, it may be in your best interest to acquire one. There are a number of compelling reasons to obtain one, even if you are not required to by law. First, having a license can allow you to save on labor costs by hiring people to do the work instead of sub-contracting. Sub-contracting is not only costly, but sub-contractors may end up doing shoddy work that could result in cost overruns or repairs down the road. If you have your own contractors’ license, you will have the ability to hire skilled laborers and oversee the quality of their work.
Second, having a contractor’s license protects you from being taken advantage of by realtors and contractors. When you do hire a realtor or contractor, it will be to your benefit to have your own license because contractors and realtors would generally rather do business with their fellow licensed colleagues than with someone without a license. There are exceptions to this of course, and you may find a contractor or realtor who is willing to negotiate with you, but the general rule is that, without a license, you have less negotiating power in all of your financial dealings related to house flipping .
A third reason for getting a contractor’s license before you begin house flipping is to help protect your credibility in the marketplace and build up word-of-mouth. Good contractors generally do not like to work with flippers and buyers who are not credible or trustworthy. Having your own contractor’s license shows realtors, contractors, clients, and prospective clients that you are committed to the industry and that you have the skills necessary to do quality contracting work. This can generate more business opportunities and help you begin building your professional reputation in the industry.
If you do not have the skills needed to secure a contractor’s license in your state or city, you may also consider partnering with someone who does. That way, if you are still interested in bidding on contracts for a job, you will have someone who is able to do it. If you are serious about making house flipping your full-time career, getting your contractor’s license, or partnering with someone else who has one, is likely a worthwhile investment of time and money.

**Steps Before Obtaining a Contractors’ License**

Depending on the extent of the renovations or construction that you plan on taking on, you might be able to flip without a license. There are two main ways to pursue this path.
First, you can hire licensed general contractors or subcontractors to do all of the work. As a "flipper," you can function as an investor – that is, finding the property, purchasing it, and hiring professionals to flip it. This alternative is often the most preferred option because it allows you to capitalize on the real estate market, but not worry about any of the time-consuming or dangerous work associated with a house flip. In fact, many house flippers have very little to do with the renovations themselves, other than perhaps make decisions about the style, design, and general layout of the finished home.
Your other option is to only choose projects that you can perform without a license. Using the same example from above, under the California law, it might be possible for you to do some general demolition, preparation of the site, and cleanup, as long as someone with a general contractor’s license handles the majority of the project. Will this require some more work and investment on your part? Yes. Do it’s benefits – the ability to flip houses without a contractor’s license – far outweigh its challenges. And under California law, you would still need to hire a professional to complete the project if the value of that project is above $500.

**Things to Know Before Flipping Houses Without a License**

While it may be legal for you to flip houses without a contractor’s license, it doesn’t mean you should. There are practical issues such as limited scope projects and insurance limitations that you should consider before moving ahead with a deal. Below are some key factors to weigh carefully before you move forward without a contractor’s license.
You limit your scope of projects: When you lack a contractor’s license and want to remove a wall, put up a new ceiling or make similar changes you may face two consequences. The first is the impact on your project. Home improvement projects that do not require a permit may show up on an inspection report and slow down the process of selling the property. The second issue is liability. Without a license (and a certificate of insurance) you place yourself at risk if something goes wrong. Without coverage, you will need to rely on the real estate commission, lender, title/escrow company and/or courts to seek compensation for the damages . It is not an ideal position.
Insurance is a major consideration. Particularly if you are using leverage to finance the purchase of the property, you may need some interim financing to bridge the gap between the purchase price and the appraised value after upgrades. Until the appraisal post-upgrades is approved and finalized, you may have a window of time where you are not covered because the insurance policy does not cover damaged property that burned, blew down, flooded out, etc. before the upgrades.
INSURANCE CONSIDERATIONS: Before you attempt to flip a house without a license, consider the following: Limiting Scope of Work: If you still want to move forward without a license, another option is to exclude work that requires a license. For example, you might be able to exclude electrical and plumbing work but still perform a significant portion of the work in order to increase the market value.