These days, it takes caution and savvy to find the right fixer and
then turn a profit.
IF buyers have felt lonely making the sole bids on houses these
days, it might be because home flippers, those who buy property
with the intention of renovating and reselling quickly, haven't
been as active in the last year.
"Flipped" houses, considered by analysts to be those
owned for six months or less, accounted for 3.2% of all home
resales statewide in 2006, down from 4.2% in 2005, according to http://www.homesmartreports.com
, a market-tracking website.
Flipping also proved less profitable last year as 24.9% of such
sales resulted in a loss for the seller, compared with 7.5% in
2005. In 2006, flippers sold for a median $45,000 more than they
paid (not factoring in improvement costs), down from $52,000 in
"The market where you could just go in, tidy something up and
make a lot of money is gone," said Jad Najjar, a longtime
flipper and real estate broker in Beverly Hills. The number of his
clients looking for houses to flip has declined 75% in the last
year, he said, in part because it's become a more rigorous and
less profitable business right now and less experienced buyers
fear a potential drop in the market. Najjar himself has had a 50%
drop in profits from flipping since 2005.
Those who've continued to turn a profit say that although the
margins are smaller and there's less low-lying fruit, money can
still be made with the right strategy. Investors have to look
harder for "deals" and be more conservative about buying
properties. Plus, they have to be savvier about the upgrades they
Charlotte Laws, a Prudential California, John Aaroe Realtor in the
San Fernando Valley who works almost exclusively with flippers,
said that suitable properties to flip have been harder to find
over the last 12 months in part because she has become more
conservative in what she might consider.
For a flip property in the $500,000 to $700,000 range, she said,
she would want the potential profit (after closing and improvement
costs) to be at least $80,000.
"Most of the properties I see now are not priced low enough
for that," Laws said. When estimating the post-renovation
resale price, she subtracts 10%, a cushion in case the market
falls by the time the property goes back on the market.
To find deals for clients, she said, she has been "focusing
on property that has been on the market longer — situations
where the seller might be desperate, and we might be able to
Michael Corbett, a veteran home flipper, author of "Find It,
Fix It and Flip It!" and host of the "Mansions &
Millionaires" segment on TV's "Extra," recommends
looking for property in historically low-priced areas that may be
on the upswing.
In the Los Angeles area, he named Echo Park, Atwater Village,
Culver City and Watts as neighborhoods with potential.
Although buyers can find lower prices in transitional
neighborhoods, said Michael Richards, an agent in the Prudential
California, John Aaroe office in Los Feliz who specializes in
finding flip properties, they shouldn't jump into new and
unfamiliar territory too quickly in a softening market.
"Transitional markets can lag behind the better markets, and
they are usually the areas that decline first" if the market
goes down, he said.
Toby Donnelly, a contractor who has flipped more than 50
properties in the last seven years, also has become a lot pickier
about what he will buy.
"All your profit is determined by how well you buy the
property," he said. He won't purchase a house now unless he
feels like he's "stealing" it.
To hedge her bets, Debra Klein, an investor who has flipped 19
houses and condominiums in Los Angeles over the last eight years,
always makes sure a property is rentable in the event it doesn't
resell quickly. "You have to make sure the rent you could get
would cover your costs," she said.
Many rental agencies and real estate brokers will provide free
estimates and surveys of comparable homes for potential clients,
services Klein used last year before she bought condominiums in
Palm Desert and Indio. She is currently renting out those condos
in addition to a house in Encino that she bought last year.
Although she's covering her costs and making a profit on renting,
she still plans to put all of the properties on the market in the
next 12 months.
Once a property is purchased, flippers have to be careful about
making the right kinds of upgrades for the neighborhood and for
their budget. Agent Najjar, who flips houses in upscale areas such
as Hancock Park, said that it's become more important in this
slower sales market to make high-caliber upgrades to appeal to
For example, Najjar said, he can't just upgrade the kitchen
counters without making sure that the cabinets are of the highest
quality and that the appliances have name brands such as Viking
You don't want a buyer to open the cabinet and "see cheap
material," Najjar said.
Corbett advises investors to estimate the profit they want and
work back from there in creating a renovation budget. But
flippers have to be careful when estimating their sales price,
making sure they don't expect more than the highest comp in the
"If you go over your renovation budget, a soft market will
not bail you out," he said.
Investors should know that when doing their taxes, they can add
any home improvements to the cost of the property, which is then
subtracted from the sales proceeds and thereby reduces the
amount taxable as capital gains, said Patrizia Copping, a
certified public accountant and tax partner at Green Hasson
& Janks LLP, a Westwood accounting firm.
Corbett concentrates on "lifestyle renovations" —
ones that can have big payoffs aesthetically. Increasing the
perceived living space by adding a patio and putting in French
doors to access the outside, for example, may help buyers
visualize living and entertaining in the space.
He also advises adding elements to make a house stand out to
Spending an extra $150 for an elegant gooseneck faucet in the
kitchen or an extra $200 on a fountain for the back patio are
features that might catch a buyer's eye or appeal to their
Making sure the house has up-to-date features, such as digital
thermostats (which run about $40 to $80), and adding the latest
technical devices, such as a video intercom system (starting at
$120 to $180 for basic systems), can make buyers feel like
they're getting the most state-of-the-art home features.
But he warned against over-improving a house for the
neighborhood. "You want to keep up with the Joneses and go
one step ahead, but you don't want to spend too much money and
go over the top."
Corbett visits open houses in the area or asks his real estate
agent to find out what features the neighboring houses have.
Yet even with buying low and upgrading wisely, setting the right
sales price is still key to successful flipping, said
contractor-flipper Donnelly. "You have to accept that it's
a different market now and that you might not get the returns
During 2006, Donnelly had five properties on the market in
Silver Lake in the $675,000 to-$700,000 range, none of which
were selling. When he finally lowered the prices by about
$15,000 to $20,000, he sold four of the five in a week.
Although market conditions can affect the level of profit, savvy
flippers can still come out ahead.
"Even when prices are going up," said John Karevoll,
chief analyst for DataQuick Information Systems, a La
Jolla-based real estate research firm, "the most successful
flippers are the ones who can pounce on a deal."