http://www.businesstimes.com.sg/arch...ng-us-20130813
Published August 13, 2013
High-end home flips booming in US
Between 2011 and today, transactions valued at US$1m or more are up almost 40%, according to housing data company RealtyTrac
[LOS ANGELES] JAN Brzeski stands in a sun-filled, beautifully refurbished living room high in the Hollywood Hills, looking out at a swimming pool and, miles below, stunning views of Los Angeles. Mr Brzeski is a private money lender running an investment firm in Los Angeles that provides loans to house flippers, investors who buy a home, refurbish it, and sell it on at a profit. Many flippers go to money lenders because they can't get banks to provide such short-term, quick financing.
Standing with Mr Brzeski is Scott Ryan, the realtor who bought this four-bedroom, five-bathroom house in December 2012 for US$1.5 million - with money lent by Mr Brzeski - and has transformed it with another US$600,000. This week, the property will go on the market at US$3.295 million.
"People will come in here and fall in love," Mr Ryan said, with a house flipper's standard issue optimism. "This is an emotional sale. If it takes a week to sell, I will be surprised. There are a lot of young, wealthy people here, and a lot of money out there."
Eighteen months ago, Mr Brzeski and his firm, Arixa Capital Advisors, were lending investor money to flippers of very different properties: US$250,000 single family homes in southern California's up-and-coming low to middle class blue collar neighbourhoods. Most of the deals involved foreclosed homes that were totally refurbished, and then sold quickly.
No more. Mr Brzeski now focuses on developers working on high-end flips of mansions and townhouses in exclusive neighbourhoods, such as the Hollywood Hills and Bel Air. And he is not alone. There has been a surge in high-end and luxury flipping nationwide. Between 2011 and today, flips of homes valued at US$1 million or more have risen almost 40 per cent across the United States, according to RealtyTrac, the housing data company.
New money
Between 2011 and 2012, high-end flipping rose 456 per cent in Phoenix (150 properties from 27); 867 per cent in Orlando (29 homes from three); and to 73 properties from 10 in Las Vegas, according to RealtyTrac. To qualify as a flip for the figures, a home has to be bought and sold within six months.
Newly flush Wall Street investors moved into the mid-market with so much money that they bought nearly every foreclosure in sight, mostly to rent. The Blackstone Group, for example, spent US$5.5 billion on 32,000 homes across America, according to the firm. American Homes 4 Rent, the California-based real estate investment trust founded by self-storage billionaire Wayne Hughes, spent US$3.3 billion, on over 19,000 houses.
"These Wall Street guys employed huge dollars," Mr Brzeski said. "These firms came to the courthouse steps and bought everything in sight. So the low to mid-market dried up."
Mr Brzeski said that he had originally been wary of the high-end market, because of the much bigger sums involved and thus greater risk. But then in 2011, he financed the purchase of a house in West Hollywood for US$1.425 million. Another US$1.175 million was spent on a total refurbishment.
"When the developer put it on the market, they had multiple, all-cash offers," he said. "There was a line out the door to buy it. It sold for US$3.5 million. This was an incredibly profitable project. This really opened my eyes."
The house was bought by actress Sarah Gilbert, who became famous on the sitcom Roseanne.
Daren Blomquist, RealtyTrac's vice-president, said: "Flippers are getting more confident that the market is really recovering, and therefore are more willing to go high-end, even though it's more risky."
He said that with the stock market doing so well, there is a lot of investor cash out there, and a huge amount of wealth and pent-up demand at the high-end of the market. When a beautifully refurbished mansion hits the market, they are snapped up, often with all-cash offers, he said.
Foreign investors are also spending billions on the US property market. Last year, Chinese investors spent US$12 billion on US real estate, making the country the second biggest foreign investor, just behind Canada, according to the National Association of Realtors.
Risky business
Mr Blomquist also sounded a warning for anyone who thinks flipping is easy. Many who try, make catastrophic losses. "It's 10 times as risky doing high-end flips. Unfortunately what happens a lot of times, flippers have a property, then they can't find a buyer to purchase it."
Mr Brzeski's business model is simple. Using a fund of investor money, he lends 75 per cent of a project's "hard costs" - that is, money used for the purchase and refurbishment - and collects interest at an annual rate of about 10 per cent. Usually the loan is repaid within 6-12 months. He does not share in the profit made by the flip. Mr Brzeski loans between US$1 million and US$4 million on each project.
Another factor, unique to California, helps him fund luxury flips, said Mr Brzeski. Because of a 1978 voter initiative law known as Proposition 13, the tax assessments of California houses have increased dramatically less than home values since the law was enacted, as long as the home has remained unsold. Now, owners who had been reluctant to part with their large homes since the early 1970s because of "Prop 13" are dying, or are finally ready to downsize.
"Almost all our homes in these A and A-plus neighbourhoods have something in common. You look at the appliances in the kitchen. If they are from the 1960s or 1970s, that's the house to flip," Mr Brzeski said.
Across the country, close to Washington, DC, Chris Haddon works for Hard Money Bankers. They provide money for investment deals on "fix and flip" projects in Washington, Maryland and Virginia. Mr Haddon says that he, too, has seen a surge in deals involving high-end properties.
"A few years ago, you would look at a US$2 million property and have no idea how long it would take to sell. The high-end market is always the last to rebound. But it's now rebounded and DC is hot."
In Miami, Mark Black, a realtor, said that people with cash have been moving into the high end of the market in the past year. "The market has gone through the roof. You see people buying properties one year ago and selling them at 20, 30 per cent profit. Some of these are no more than paint jobs. The ones that are doing big rehabs are making huge profits."
In Manhattan, Tim Desmond, a realtor with luxury realtors Stribling, said that high-end flips in New York are not for the faint of heart, but the profits can be huge. He cited a 12,000 square foot home on Manhattan's East 56th Street that was bought by an investment group for US$10 million. It took two years to convert it into two, three-storey, 6,000 sq ft condominiums. The first is now on the market for US$17 million. - Reuters
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