LOS ANGELES (Reuters) - At the height of the housing bubble, the practice of “flipping” homes - buying them for cheap, fixing them up and reselling them for a quick profit - was popular enough to inspire its own TV show.
The housing crash that began about five years ago put the brakes on it, but it is now re-emerging in another form, with some investors selecting foreclosed homes in cities like Los Angeles and Phoenix for flipping.
A dilapidated house at 509 North Avenue 54 in Los Angeles - a three-bedroom, two-bathroom, one-story home built in 1909 - shows how this business model works. The property was purchased this month for $305,000 by a new California-based group called Community Rebuild Partners (CRP) that invests in foreclosed real estate.
Within hours of finalizing the purchase, a crew of local contractors was on site to demolish walls, shore up the foundation, and start in on a major remodeling effort.
After investing about $80,000 in renovations, the group hopes to sell the house this summer for $460,000, with about $70,000 in profit, CRP founder and managing director Greg Hebner said.
Some 700,000 foreclosed homes currently sit vacant across the United States, according to the tracking firm RealtyTrac. With such a glut of bank-owned homes, President Barack Obama and Federal Reserve chairman Ben Bernanke have encouraged the idea of investors buying pools of foreclosed properties to rent.
But there has been less focus on the idea of investors buying foreclosed, often blighted, homes to sell. Some economists scoff at the idea that such efforts could make a dent in the glut of foreclosed homes, but others are more optimistic.
Ross DeVol, an economist at the Milken Institute think tank in Los Angeles, said savvy investors could benefit from pent-up demand for quality family homes as the U.S. housing market slowly improves.
“There is very little supply of decent, affordable homes on the market, because there has been so little construction in the last four to five years,” DeVol said.
The key to CRP’s business model is what properties to buy, and in what neighborhoods. Hebner said that for every 40 vacant, foreclosed properties he and his team inspect, only one is purchased.
CRP does not buy batches of foreclosed properties in areas riddled by blight, Hebner said. Instead, it acquires two or three fixer-uppers at a time in working-class neighborhoods close to schools and transportation hubs, usually for $150,000 to $300,000, he added. Typical buyers are teachers, firefighters or electricians, Hebner said.
“We are aiming for the widest pool of potential buyers and the most financeable properties,” Hebner said.
Hebner said his group, with the help of investors, has purchased about 100 properties throughout California in the past 16 months, and invested a total of about $20 million in the purchases and accompanying renovations.
“We are hitting singles, not home runs,” said Hebner, using a baseball analogy. “That’s the plan.”
Hebner said not all the projects have made money. There have been losses and cost overruns due to unforeseen extra work or permit problems with local planning offices.
“We’ve made lots of mistakes. We’ve hired bad contractors, we’ve hired bad realtors,” Hebner said.
Many Americans are familiar with the practice of “home flipping,” which was featured in the U.S. cable TV series “Flip This House.” Hebner said he hates the term “flipper” and calls himself an “investor” helping to take blighted, foreclosed properties off the market and improve neighborhoods.
In Phoenix, Arizona, Marty Boardman spent much of the housing boom years making big profits from flipping houses through his firm, Rising Sun Capital Group.
Today, like Hebner, he is sinking investors’ money into the foreclosure market, carefully selecting his purchases, renovating them and seeing a steady annualized return that he pegs at about 12 percent.
Boardman said he typically buys homes for between $150,000 and $400,000, usually with three to four bedrooms.
“We pick and choose,” Boardman said. “We look for middle-class suburban family homes.”
Boardman said his average time from purchase to sale is 68 days. He said he has three “high net-worth” individuals who pay into an equity fund that usually holds about $500,000 at any one time. He said he has bought and re-sold 12 homes this year.
“In 2005, at the peak of the boom, we wouldn’t even consider doing a deal if we weren’t going to make a quick $40,000 profit,” Boardman said. “Nowadays we are happy with $15,000. The profit margin is slow and steady.”
Crocker Liu, a real estate expert at Cornell University in Ithaca, New York, expressed misgivings about the return of the practice of “flipping.”
“As the market is starting to improve, these flippers are coming in. It’s happening everywhere. It’s happening here in Ithaca. They’re not doing this out of the kindness of their hearts, otherwise they’d be called Habitat for Humanity,” Liu said, referring to the well-known housing charity.
Liu added that the cherry-picking approach will never solve the foreclosure crisis because the number of bank-owned properties is so great.
“In the bad neighborhoods, you will never sell them no matter how beautiful you make them,” Liu said.
Hebner’s investors, though, seem pleased so far. Ahmed El Alfi, a veteran investor who runs Sawari Ventures, an international venture capital firm with a focus on the technology sector in the Middle East, is an investor in CRP and said he has known Hebner for years.
“Everybody is trying to figure how to make a buck out of distressed real estate,” he said in a telephone interview from Egypt. “Greg is taking distressed property off the market, renovating it, and putting it back on the market - while at the same time making money. It’s a good business model and one I was happy to be a catalyst for.”
Editing by Jonathan Weber and Will Dunham