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Not so easy to flip

The quick turnaround has cooled. Now it takes savvy and caution to pull off the fast fix and make a profit.

March 04, 2007|Jennifer Lisle | Special to The Times

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 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 2005.

"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 make.

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 negotiate."

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 buyers.

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 and Miele.

You don't want a buyer to open the cabinet and "see cheap material," Najjar said.

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