SREP in th WSJ.pdf

7/28/2019 SREP in th WSJ.pdf

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By SANETTE TANAKAThere is a new breed of quick-change artist on

the real-estate front: luxury flippers who focuson high-end properties.

Million-Dollar Flips

Stephen Voss for The Wall Street Journal

FLIPPED OUT: Jordan Ghrist bought a four-bedroom in Washington, D.C., for cash, guttedit and resold it after three days on the market atan estimated 28% profit.

Popular before the housing bust, house flippingwhere a property is bought, renovated andsold quickly to make a profitis seeing acomeback nationwide. Rising prices and tightinventory are driving more investors to theupper end of the market. Flips of homes pricedat $1 million or more shot up 35% in 2012compared with 2011, according to marketresearcher RealtyTrac.

"Investors have actually run out of inventory on the low end of flips, and now they're moving to

the higher end," says Daren Blomquist, vice president of RealtyTrac. The million-dollar homesare "the untapped market."

Some new players are behind the uptick: foreign buyers, institutional investors and professionalswho have made money in other industries.
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Source: RealtyTrac

"In this market now with these numbers, everyone thinks they're going to catch the next wave,"

says Zar Zanganeh, a real-estate broker in Las Vegas, adding that he gets three times as manyrequests for homes to flip now than a year ago.

Patricia Delinois, president and chief executive officer of Century 21 Premier Elite Realty inMiami, facilitated a flip for a 6,255-square-foot "complete fixer-upper," she says.

The property was purchased in January 2012 for $1.2 million by an investment group led by anAmerican and backed by Venezuelan, Brazilian, Colombian, Russian and French investors. Theyrenovated the kitchen and bathrooms, installed top-of-the-line appliances and lighting, anddecked it out with luxury finishes.

The renovations cost almost $1 million, she says. Now it is on the market for $2.98 million.

In Washington, D.C., Beth Hughes, a real-estate agent with DCRE Residential who finds homesfor flippers, last summer found a 2,000-square-foot house in Columbia Heights for Jordan Ghrist,president of Level One Development LLC. He bought the four-bedroom, 3-bathroom house for$461,500 and gave it a "total gut job," he says. Mr. Ghrist has a $2 million fund so he can paywith cash.

The house went under contract for $805,000 about a month ago after a mere three days on themarket. The sale is expected to close this weeknetting about 28% in profit, he estimates.

Flipping high-end homes can be particularly challenging. Selling a luxury property can takelonger than a midprice home, and renovation costs can be steep, because high-end buyers expectto be wowed. Plenty of flippers have lost money. RealtyTrac data show that in Naples-MarcoIsland, Fla., for example, flippers who purchased homes for $1 million or more lost 14% of theirinvestment when the property sold within six months.


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Ideally, the purchase, renovation and sale should occur within six months to maximize profits,says Bruce Bartlett, managing partner at Sequoia Real Estate Partners, a private-equity firm inLos Angeles.

"These aren't paint-and-lipstick jobs. Basically, you have to re-envision the entire house," says

Mr. Bartlett, who flips single-family and multifamily homes with a team of partners, includingEric Sussman, senior lecturer at the Ziman Center for Real Estate at the University of California,Los Angeles.

Mr. Bartlett recently bought a 1,850-square-foot modern house in Los Angeles's Hollywood Hillsfor $690,000. He then spent $50,000, mostly on cosmetic changes, adding walnut flooring andrailings, maple cabinets and granite counters in the kitchen, a new wet bar, and fresh paint. Heexpects the house to close this week for $888,888at a 20% profit.

When buying a home to flip, Mr. Bartlett says he first considers the foundation, roof, electricalsystem, plumbing, and heating and air-conditioning. "That's where you really drop all yourmoney when you fix a house," he adds.

For materials, Mr. Bartlett shops at outlet and wholesale stores. He looks for sales and asks fordeals. In the Hollywood Hills house, he wanted a white-patterned decorative tile, but designer-name versions were too pricey, from $40 to $77 per square foot. Instead, he opted for a genericwall tile that cost $3.82 a square foot. For the wet bar, he chose a generic black tile that cost$1.99 per square foot and a porcelain tile in sea-foam green instead of glass.

For items that people see, such as appliances and fixtures, he'll buy brand names. Sometimes hebuys in bulk. "Costco had really, really great Hansgrohe bathroom faucets for $70 each. I took20," he says. "I don't know yet where I'll use it, but I know I'll use it. And when a buyer comesinto the house, he'll see Hansgrohe."

High-end flips are particularly gaining traction in the markets hardest hit during the downturn.Investors could scoop up homes at big discounts in areas that now have some of the highesthome-appreciation rates. Some metro areas have seen more than a sevenfold increase in million-dollar flips over the past year, although million-dollar homes make up less than 1% of all flips,according to RealtyTrac data.

The million-plus flips offer more room to make a profit. The high demand means investors cantake bigger risks in rehabbingand get higher prices.

In Atlanta, property appraiser Dan Fries says the $1 million homes he appraises are typically

valued for $250,000 more after they are flipped, depending on whether the changes improve thehouse functionally or are purely cosmetic. Sometimes, he says, investors earn back five times theamount they put into renovations.

In recent months, high-end flippers have had to be creative in finding homes. Mr. Bartlett, theLos Angeles flipper, bought a house in Rancho Palos Verdes after a friend told him the owner haddied, and his family, who had inherited the property, lived out of town. The property had been
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vacant for six months and had water damage. He called the family's real-estate agent, who soldthe property to him for $825,000.

He plans to spend $200,000 to create an open floor plan, reconfigure the master bedroom, redothe landscaping and put in air-conditioning. Normally, he doesn't take on houses that need a

complete overhaul, but he expects this one to sell for $1.4 million, a 37% profit, he says.

Lloyd Segal, a house flipper himself and author of "Flipping Houses," a guide to buying andfixing houses, finds homes through bankruptcy courts, probate courts, courthouse auctions andpeople in his network, to whom he'll pay an assignment fee.

Sometimes he just drives around Los Angeles to scout properties. That's how he found one of hislatest homes, which he bought for $2.85 million. "I was late for a date and driving like a maniacthrough Hollywood. I see this little sign that said 'For Sale' and a phone number," says Mr. Segal,adding that he immediately pulled off the side of the road to call. "I was late for the date. You cansee my priorities. Don't tell anyone that."

Write to Sanette Tanaka at [email protected]

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Additional Photos of SREP homes in the article:
mailto:[email protected]:[email protected]


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