House-flippers moving uptown
House-flipping has gone high-end.
Instead of snapping up low-priced foreclosures and sprucing them up with paint and new carpet for a quick profit, a growing subset of investors is turning to million-dollar properties — such as the house that broker Greg Lawrence dubbed “The Big Flip,” a 7,750-square-foot Minnetonka, Minn., home with indoor and outdoor pools, a brand-new luxury kitchen and a list price of $1.495 million.
It's a much higher risk than the 40 or so starter houses that Lawrence, owner of Home Avenue, has bought, rehabbed and sold in recent years, he said. But he believes the time is right.
“Five years ago, nothing was selling in the upper bracket,” he said. But listings and pending sales for million-plus homes in the western suburbs are up, and short sales and foreclosures in that category are rare. “That's a big change. I'm encouraged.”
Home-flipping soared during the recession. But because of increased competition for low-priced makeover candidates, investors with deep pockets are focusing on higher-end houses. Many reject the term “flipping.” Instead of quickly selling, they're often holding and renting the property, waiting for the right market conditions. And when they renovate, they're not just slapping on a coat of paint but investing in major remodeling.
The number of single-family home flips fell 13 percent from 2012 to 2013, with a steep 35 percent drop in the third quarter, according to a recent report from RealtyTrac. Meanwhile, high-end flipping (homes priced at $750,000 or more) rose 34 percent between third-quarter 2012 and the same period this year.
“That's definitely what we're seeing,” said broker Ryan O'Neill, Minnesota Real Estate Team, ReMax Advantage Plus. “Early on, as the market really crashed, a lot of people were gobbling up bank-owned inventory. But there's only so much of that. A lot of those have gone through the pipeline.”
Small-timers pushed out
With higher prices, some small investors have been pushed out of the market, O'Neill said, leaving it to seasoned rehabbers with greater buying power. “There's less competition at the upper end because there are less people with those deeper pockets, to be able to put $100,000, $200,000, $300,000 into a house and not be freaked out by those numbers. It's certainly not for the faint of heart.”
Interior designer Mary Rossi of Mary Rossi Designs and MRDwellings, who buys, rehabs and sells homes in the $250,000 price range, is having a harder time finding houses.
“It's more challenging because more people are doing it,” she said. “People watch HGTV and think, ‘I could do that.' It's gone to another level. There are multiple offers. Home flipper companies are coming in and doing seminars. It has become big business.”
Al Theisen, owner of Al Theisen Renovations, seeks out smaller houses in Edina, Minn., and southwest Minneapolis that he can update and expand with an addition or a second story and sell for $500,000 to $700,000, which is less than comparable new construction, he said.
“I don't do teardowns — you're paying for something you're destroying.”
Most high-end makeovers to sell take place in high-demand neighborhoods. “What's happening now, in communities like Edina, a lot of people want that location and are willing to pay a premium for that location,” O'Neill said.
Location is a strong selling point for Lawrence's listing. The house sits on a wooded half-acre overlooking a pond, on a winding road near Wayzata, Minn. Lawrence's father, a retired Cargill executive who now lives in Arizona, first spotted the property on the Internet and kept his eye on it as the price dropped and it went into foreclosure.
The house, built in 1989 by Bruce Bren, boasts dramatic cathedral ceilings and a 1,000-square-foot master suite. But it was “terribly outdated — everything was 1989,” Greg Lawrence said, including midnight-blue kitchen cabinets, a black “bat cave” powder room and shiny brass stair railings. After his father bought the house, Greg cleaned it up and rented it out for a couple of years before deciding the time was right to overhaul it and put it back on the market.
He did some of the work himself, such as refacing the brick fireplaces with cut stone. His wife, Janet, who owns a staging company, Set to Show, oversaw the design and staging.
The Lawrences updated the look of the gray marble master bath by buffing its shiny gold-plated fixtures down to the subtler chrome underneath.
“My mom took that project on,” Greg Lawrence said, while bigger projects, such as gutting the kitchen, a bathroom and removing 4,000 square feet of popcorn ceilings, were hired out to contractors. “You can't sell a house for $1.5 million with popcorn ceilings.”
Even with higher prices and increased competition, rehabbing houses for resale can be lucrative.
Average gain: $55K
Real estate investors made an average gross profit of $54,927 on single-family home flips in the third quarter, up 12 percent from 2012, according to RealtyTrac.
“The sharp rise in high-end flipping indicates there is still good money to be made for flippers willing and able to take on the additional risk of buying and rehabbing more expensive homes,” said Daren Blomquist, vice president at RealtyTrac, in a release.
But upper-bracket flips are risky because upper-bracket buyers can afford to be picky, said O'Neill.
“When people are buying that kind of property, a lot of them say, ‘I'd like new construction, to pick it out myself.' ”
O'Neill, who teaches classes on flipping, said investors need to arm themselves with data and seek unvarnished advice from a real estate professional.
“It can be a losing proposition if a person doesn't understand the three rules,” he said.
“No. 1: Buy it right. No. 2: Know how much you need to put into it. And No. 3: Know what it will sell for.”
The last rule is especially tricky because sale price is a moving target.
“The market is continually shifting,” O'Neill said.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Experts say economic edge at stake with R&D tax credits
- Regional airlines in tough position
- Risk and compliance specialists in demand
- Theme parks add premium events
- Has Apple’s watch missed the party?
- RBS would leave Scotland in case of independence
- General Motors preps cars with auto-pilot