The supply of houses at the lower, cheaper end of the market is drying up fast, which is stymying would-be homeowners, sure, but you know who else is having trouble? The investors who want to make money off of those houses by renting them out or flipping them. Well, they're having to look at places in the middle-and-above section of the market, says the LA Business Journal, and lucky for them they're finding a healthy supply of outdated mid-century houses in nice neighborhoods that, with a few sledgehammers and a contractor, can be flipped into desirable houses and of course profitable investments.
· Flipping firms are all taking different approaches, but a glance at three players in LA (American Coastal, Sequoia, Pathfinder Partners) reveals that they're spending anywhere from $500,000 to $5 million to buy these ugly ducklings, and as much as 100 percent of the purchase price to fix them up.
· Like a huge number of buyers in this part of the market, the flippers are buying in cash. That's a change from "mom-and-pop flippers who bought homes with debt before the housing bubble burst," and, with investors backing them, these firms have little to no competition with "less-well-funded buyers."
· Another cash advantage: flippers can get houses fast and relatively cheap. Many of the firms get direct calls from real estate agents whose clients want to sell quickly. "We're not the people who are going to pay you top dollar for your house, so if it's going to be a bidding war, don't call me. Call me if you need all cash and you need it fast," said a rep for one of the firms.
· All these firms have multiple projects going on at one time. "Sequoia's active inventory is about six homes under construction; Pathfinder aims to have from nine to 12 going at a time; and American Coastal now has 25 projects under way." That's a lot of flipping!
· LA is perfect for this kind of house "repositioning" because the city has a good amount of housing stock built in the 1950s or 1960s that's in great areas but otherwise outdated and out-of-step with what modern buyers want—take Pathfinder's recent Palos Verdes flip, which didn't take advantage of the property's ocean view. "The home was completely gutted from top to bottom; everything was taken down to bare studs and built back up again," and glass walls and back patio were added. That house is currently listed for $2.7 million.
· Another notable flip-in-the-works is the home of former cinema star Mitzi Gaynor, which American Coastal's president predicts will bring in about $8 million for the firm. Gaynor's 1929 Spanish-style house in Beverly Hills sold for $4.9 million in January, but it's already a beautiful house, so what's to fix?
· How long before this well of fixer-uppers dries up, too, though? There's a debate. Some firms are in the million-dollar reno business for the long haul, confident that "more homes that fit the firm's criteria will become available as baby boomers age and move to retirement homes or die," but others are in it to make money as fast as they can while they can. "We think this strategy has probably another three years left, it's not going to be there forever. Once the housing market is fully recovered, it's going to be hard to find a property and add significant value," says founder and president of American Coastal.
· Flipping Lid [LABJ]