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They had a plan, then reality intruded

Four friends thought they could `flip' a house, but cost overruns, bad timing got in the way.

April 23, 2006|Kathy Price-Robinson | Special to The Times

A group of friends who set out to buy, fix up and "flip" a Palm Springs tract house haven't found the riches they were seeking.

But the four Newport Beach residents -- all experienced remodelers -- learned some lessons about themselves, about working with others and about real estate investing.

"It was actually a great experience," said Ron Haughey, 42, director of financial operations for Hyundai Motor America, "the finance guy" among the group.

Among other things, they learned:

* Not everyone enjoys remodeling by committee.

* The real estate market is fickle and can shift in just a few months.

* High-end upgrades don't necessarily reap big profits.

* Timing is everything, and it's harder to sell during the holidays.

* The surest way to make a profit in speculative remodeling is by getting spectacular bargains on fixer-uppers.

"You make your money when you buy the house, not when you sell it," realized Nina Smith, 38, a software saleswoman who owns rental properties. "We didn't get a good enough deal on this house."

In August, the four bought a three-bedroom, two-bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more.

The 1964 rental was priced lower because of its condition: broken windows, animal-stained carpeting, and aging cabinets, counters and fixtures.

For the purchase and all subsequent expenses, the costs were divided equally. All four names went onto the 5.5% 30-year adjustable-rate mortgage. (Each friend had a FICO score above 775.) All four names went on the title as tenants in common, with a 25% undivided interest each. For the deposit, each contributed $2,500. And at the end of escrow, each wired their share: $10,500.

The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Haughey's calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.

The initial planning was easy and pleasant. The four had remodeled their own homes over the years and, for this job, planned to hire subcontractors and handymen they already knew who would be willing to drive to Palm Springs.

Each partner assumed responsibility for a portion of the project.

Smith supervised the scraping of the acoustical ceilings, interior and exterior painting, fence repair, baseboards and appliances.

Haughey was in charge of the floor tile, carpeting in bedrooms, pool repair, electrical upgrades and the budget.

The third friend, Jeanine Scalero, a 37-year-old attorney, handled the landscaping, windows and doors, including a new sliding door that would give the living room a bigger view of the pool area.

And the fourth, 43-year-old medical equipment salesman Steve Smith (no relation to Nina), was "the design guy." He took on a complete overhaul of the kitchen and baths.

Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. They visited tile stores, drove around neighborhoods looking at paint colors, dined at their favorite local restaurants and generally enjoyed their time together.

But as the renovation went forward, the budget crept up to $67,000, mainly because the kitchen and bathrooms cost more than expected. The kitchen got a luxury makeover with oak cabinets, some with frosted glass doors, plus brushed aluminum hardware and granite counters.

The group also opted to install dual-pane windows to keep down utility bills, and to replace all electrical switches and sockets.

Of the four partners, Steve Smith figures he had the most fun.

"I'd like to do it full time," he said.

Scalero enjoys home design as much as Steve Smith, but she found the collaborative process torturous. Although she had no problem with her partners making decisions on their portions of the remodel, she recoiled when they weighed in on her choices. When Nina Smith remarked during the project that Scalero was probably the student in law school who didn't like study groups, Scalero agreed.

"I'm an independent worker and I like to work alone," she said, adding that although she likes investing in real estate, she may not enter such a partnership again.

After the house was finished in late October, it was listed with Scalero's father, Victor, a licensed broker in Rancho Mirage who typically sells in new-home developments.

Until the talk turned to setting the sales price, there had been no major disagreements on financial issues. But at this point, the partners disagreed.

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