Investors Raise the Stakes in Home-Flipping Game

(Star Tribune/MCT) —

Home-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 now 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, rehabilitated 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 now listings and pending sales for million- dollar-plus homes in the western suburbs are up, and short sales and foreclosures in that category are now 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 of 2012 and the same period this year.

“That’s definitely what we’re seeing,” said broker Ryan O’Neill,  of the 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.”

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 fewer people with those deeper pockets, to be able to put $100,000, $200,000, or  $300,000 into a house and not be overwhelmed 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. That’s still less than comparable new construction, he said. “I don’t do teardowns – you’re paying for something you’re destroying.”

Even with higher prices and increased competition, rehabbing houses for resale can be lucrative.

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.”

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