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House `flippers' work with no net

A tough market, taxes can bring novices crashing down to earth.

April 02, 2006|Todd Stein | Special to The Times

EDDIE KING no longer has the moves that earned him a spot as a fullback for USC in the mid-1960s. But his ability to spot an opening and capitalize on it has earned him millions in another favorite Southern California sport -- home flipping.

Over the last 30 years, King has bought, renovated and sold -- or "flipped" in real estate parlance -- 60 houses in Los Angeles, Hawaii and elsewhere. Most years, he's sitting on four or five homes worth a total of more than $5 million. It's the kind of success story that inspires daydreams of quick riches among the rest of us.

But don't cash in that home equity just yet, warns King. Like most sports, this one isn't kind to rookies who don't know the rule book.

"Most people who are newcomers to flipping get into it kind of like it's an art project, and they spend too much money and try to impress their friends," said King, 61, who lives in Sunland, a community of horse properties north of Burbank.

For The Record
Los Angeles Times Wednesday April 05, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 37 words Type of Material: Correction
Investment property: An article in Sunday's Real Estate section said that profit from investment properties owned two years or more was taxed as a long-term capital gain. The minimum length of ownership is one year, not two.
For The Record
Los Angeles Times Sunday April 09, 2006 Home Edition Real Estate Part K Page 5 Features Desk 0 inches; 34 words Type of Material: Correction
Investment property: An April 2 article stated that profit from investment properties owned for two years or more is taxed as long-term capital gains. The minimum length of ownership is one year, not two.

Inspired by exuberant real estate pundits and late-night TV pitchmen, many homeowners who have watched prices appreciate by double digits for several years may now be convinced that home flipping is a better investment than the stock market. But advocates of the nothing-down, double-your-money-in-a-year strategy often fail to mention potential pitfalls. There are the obvious downsides -- failing to budget properly and overspending on repairs -- but the bigger hazards include market volatility and unforeseen tax consequences. As a result, brokers and accountants who work with flippers say that for every smart investor like King, there are dozens who lose their shirts or, worse, their savings.

"If you really know what you're doing, you've got a good chance of making money," said Mike Teer, president of Teer One Properties in Riverside and agent to several successful home flippers. "But if you aren't on top of your game, you can get taken to the cleaners."

Topping the list of pitfalls is the sheer unpredictability of the market. Bill Brame, a Westwood Realtor who has flipped homes since 1989 and has several such clients, recalls how the market turned on him when he least expected it.

After starting out with just a couple of homes, the former film editor had created a virtual empire by the early '90s. He had 14 houses going at once, with three crews of hand-picked renovators working full time to rebuild cracked foundations, repair leaky roofs, paint, plumb and generally transform fixer-uppers into top-dollar properties. Then, in 1993, the market took a dive. Unable to keep up with mortgage payments, Brame was forced to sell most of his homes at a loss and lay off his crews.

"I just overextended myself because I was having so much fun," said Brame, a hale 78-year-old who edited the original "Star Trek" TV series and several "Star Trek" films before retiring from Hollywood to take up real estate.

"Now," he said, "I never do more than two houses at a time, because there are always things that can happen to a market, or to yourself, and you end up with two incomplete houses and no income coming in."

Another veteran home flipper who has felt the bite of the market is Herb Rizzardini, 63, a hardware-store owner in the Kern County community of Ridgecrest, Calif., who's completed about 16 projects in the last 20 years.

After making "decent" money buying, renovating and selling three homes, Rizzardini bought some rental properties in Ridgecrest in 1988 and then sat on them for the next 15 years.

"I bought them, and the market dipped and then it didn't go up for 15 years," Rizzardini recalled. "I didn't make a cent."

Perhaps the second-biggest issue novice flippers fail to factor in is the complicated nature of the tax system. Accountants who work with casual flippers -- the weekend warriors who hear about a good deal and quickly mortgage their homes to buy another -- say they often are ignorant of the tax implications of owning investment properties.

"I'm always surprised by how many people don't know the rules," said Michael Cain, a certified public accountant in the Woodland Hills firm of Safer & Cain.

For starters, Cain and other CPAs say that most homeowners are far from current on Internal Revenue Service regulations. For instance, in 1997, the IRS ended the so-called rollover provision, which permitted profits from a home sale to be applied to another such purchase without the seller having to pay taxes on the gain. The current law allows a seller to keep, tax-free, gains of up to $250,000 (or $500,000 for married couples filing jointly) on the sale of a primary residence if the seller has lived in it for 24 of the previous 60 months.

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