Investors are buying higher-priced houses and undertaking costly makeovers to woo wealthy buyers.
Home-flipping has gone high-end.
Instead of snapping up low-priced foreclosures and sprucing them up with paint and new carpet for a quick profit, a growing subset of investors are now turning to million-dollar properties — such as the house that broker Greg Lawrence dubbed “The Big Flip,” a 7,750-square-foot Minnetonka home with indoor and outdoor pools, a brand-new luxury kitchen and a list price of $1.495 million.
It’s a much higher risk than the 40 or so starter houses that Lawrence, owner of Home Avenue, has bought, rehabbed and sold in recent years, he said. But he believes the time is right.
“Five years ago, nothing was selling in the upper bracket,” he said. But now listings and pending sales for million-plus homes in the western suburbs are up, and short sales and foreclosures in that category are now rare. “That’s a big change. I’m encouraged.”
Home-flipping soared during the recession. But because of increased competition for low-priced makeover candidates, investors with deep pockets are focusing on higher-end houses. Many reject the term “flipping.” Instead of quickly selling, they’re often holding and renting the property, waiting for the right market conditions. And when they renovate, they’re not just slapping on a coat of paint but investing in major remodeling.
The number of single-family home flips fell 13 percent from 2012 to 2013, with a steep 35 percent drop in the third quarter, according to a recent report from RealtyTrac. Meanwhile, high-end flipping (homes priced at $750,000 or more) rose 34 percent between third-quarter 2012 and the same period this year. High-end flips are concentrated in New York and California, but home-flipping in the Twin Cities also is moving into higher price brackets.
“That’s definitely what we’re seeing,” said broker Ryan O’Neill, Minnesota Real Estate Team, ReMax Advantage Plus. “Early on, as the market really crashed, a lot of people were gobbling up bank-owned inventory. But there’s only so much of that. A lot of those have gone through the pipeline.”
With higher prices, some small investors have been pushed out of the market, O’Neill said, leaving it to seasoned rehabbers with greater buying power. “There’s less competition at the upper end because there are less people with those deeper pockets, to be able to put $100,000, $200,000, $300,000 into a house and not be freaked out by those numbers. It’s certainly not for the faint of heart.”
‘I could do that’
Interior designer Mary Rossi of Mary Rossi Designs and MRDwellings, who buys, rehabs and sells homes in the $250,000 price range, is having a harder time finding houses.
“It’s more challenging because more people are doing it,” she said. “People watch HGTV and think, ‘I could do that.’ It’s gone to another level. There are multiple offers. Home flipper companies are coming in and doing seminars. It has become big business.”
Al Theisen, owner of Al Theisen Renovations, seeks out smaller houses in Edina and southwest Minneapolis that he can update and expand with an addition or a second story and sell for $500,000 to $700,000, which is still less than comparable new construction, he said. “I don’t do teardowns — you’re paying for something you’re destroying.”
Most high-end makeovers to sell take place in high-demand neighborhoods. “What’s happening now, in communities like Edina, a lot of people want that location and are willing to pay a premium for that location,” O’Neill said.
Location is a strong selling point for Lawrence’s listing. The house sits on a wooded half-acre overlooking a pond, on a winding road near Wayzata. Lawrence’s father, a retired Cargill executive who now lives in Arizona, first spotted the property on the Internet and kept his eye on it as the price dropped and it went into foreclosure.
The house, built in 1989 by Bruce Bren, boasts dramatic cathedral ceilings and a 1,000-square-foot master suite. But it was “terribly outdated — everything was 1989,” Greg Lawrence said, including midnight-blue kitchen cabinets, a black “bat cave” powder room and shiny brass stair railings. After his father bought the house, Greg cleaned it up and rented it out for a couple of years before deciding the time was right to overhaul it and put it back on the market.
He did some of the work himself, such as refacing the brick fireplaces with cut stone. His wife, Janet, who owns a staging company, Set to Show, oversaw the design and staging.
The Lawrences updated the look of the gray marble master bath by buffing its shiny gold-plated fixtures down to the subtler chrome underneath. “My mom took that project on,” Greg said, while bigger projects, such as gutting the kitchen, a bathroom and removing 4,000 square feet of popcorn ceilings, were hired out to contractors. “You can’t sell a house for $1.5 million with popcorn ceilings.”
Even with higher prices and increased competition, rehabbing houses for resale can be lucrative.