December 2, 2012 in Business

House flipping adds an upscale twist

Lauren Beale Los Angeles Times
 

Morgan Brown poses at a luxury home she bought in Los Angeles. She fixed it up and is trying to flip it.
(Full-size photo)

Fed up with severe water damage to her home and embroiled in litigation with contractors and real estate agents, superstar singer Rihanna put her Los Angeles mansion up for sale last year for $4.5 million.

That was roughly half what she paid for it. A local buyer pounced. He repaired the structure, gave the pool a face-lift and re-landscaped the property. A few months ago the 8,500-square-foot contemporary-style home was back on the market with a new price tag: $9.95 million.

Home flipping is back – and it’s going upscale.

The rapid-fire buying, fixing and reselling of houses played out on a mass scale during the bubble years, when prices were soaring. Back then, flippers could reap fat profits by adding little more than a fresh coat of paint. The practice all but vanished in the mortgage meltdown as values plummeted.

Now with prices on the rise in many areas and top-quality homes in short supply, home flippers are flooding back into the market. Nearly 100,000 homes flipped nationwide in the first half of the year, up 25 percent from the same period last year, according to real estate information firm RealtyTrac, which defines a flip as a house resold within six months of purchase.

Multimillion-dollar home flipping, which isn’t tracked separately, can take much longer to complete – up to two years in some instances. But luxury home flipping is heating up in affluent neighborhoods, according to real estate experts. They said there’s pent-up demand from well-heeled move-up buyers looking for turn-key homes.

“They are stepping off the sidelines because the housing market is doing better and interest rates are still very low,” said Paul Habibi, who teaches real estate at the University of California-Los Angeles Anderson School of Management.

Flips in the $1-million-and-up price range may involve foreclosures, or outdated or damaged homes. Some simply need sprucing up.

Flippers include local builders as well as investors seeking better returns than they can get from bonds and savings accounts that are paying next to nothing. Habibi said flippers are more confident than they were a year ago that they can resell quickly without ending up with a house languishing for sale.

“There’s a sentiment now that you don’t really want to miss the boat,” Habibi said, “that the days of price decreases are behind us.”

Multimillion-dollar home flippers have the potential to make hefty profits.

“It’s not uncommon to see returns north of 20 percent in the luxury flipping market,” said Max Nelson, a founding partner at Deasy/Penner & Partners in Southern California. The real estate broker estimates about a quarter of his transactions this year involve flipped properties. Last year, it was about 10 percent.

Rehabilitating historic houses can be a particularly lengthy process because aged homes can hold lots of surprises, meaning more expense – and risk.

Flipper Morgan Brown found that out recently when she took on a house in Los Angeles’ Hancock Park neighborhood that was more than a century old. It took nine months of cosmetic work, systems upgrades and floor plan reconfiguration before the home was ready to return to the marketplace.

It is the third and largest project locally for Brown, who comes from a family of builders and has real estate interests in other states. Brown bought the time-worn Tudor in December for $2.75 million. She estimated she has put close to $1 million into the 6,080-square-foot house, now listed for almost $4.5 million.

Among other projects, Brown re-stained the floors, put in a new kitchen, bathrooms and gas lines and took out a bedroom to create a master closet. Skimping was not an option.

“In a luxury flip, you have to buy the right materials,” Brown said. “I’ve put a pretty penny into it.”

No matter a home’s vintage, well-heeled buyers want convenience and the latest features. Flippers can’t just pick out granite for the counters, add a stainless-steel refrigerator and try to hide flaws with paint.

Elevators are in high demand in big houses, as are land, privacy and views. Must-have amenities include dual bathrooms off the master bedroom, spa tubs and showers with rain heads and multiple body sprays.

The trick to flipping for this crowd is to create a top-of-the-line house “that people are blown away with,” said Paul Esajian, the owner and chief financial officer of San Diego-based FortuneBuilders, which flips houses in select metropolitan areas nationwide.

His buyers include East Coast hedge-fund and Wall Street managers looking for second and third homes in Southern California.

As “house hobbyists,” he said, “they want something that nobody else has.”


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