Study: Real estate flipping a profitable venture in Sonoma County
Published: Thursday, May 23, 2013 at 4:05 p.m.
Last Modified: Friday, May 24, 2013 at 7:09 a.m.
As home prices rebounded in Sonoma County last year, real estate investors jumped into the market and flipped hundreds of properties for hefty gains, according to a new study.
One in 10 homes sold in the county last year was purchased and resold within six months, a common definition of flipping, according to the study by RealtyTrac, a real estate information firm.
Last year, 527 single-family homes were sold twice within six months, increasing 47 percent from 2011, RealtyTrac reported.
Investors poured into the local housing market for good reason: Sonoma County was one of the most profitable places in the country last year to buy a home, fix it up and sell it, according to RealtyTrac.
The study, which measured the average spread between the purchase price and the sales price of flipped homes, ranked Sonoma County 17th among more than 600 metropolitan areas. The top 25 communities included San Diego, San Jose, Sacramento and San Francisco, as well as Las Vegas, Phoenix and Miami.
“I think the number one reason they're on the list is because of rising home prices,” said Daren Blomquist, a vice president at RealtyTrac.
The company estimated that Sonoma County's median home value increased 16 percent for the 12 months ending Feb. 1. Among the top 25 communities, the annual increase ranged from 9 percent in Nashville, Tenn., to 33 percent in Phoenix.
Flippers paid, on average, $285,344 for a house in Sonoma County and resold it for $338,903, producing what RealtyTrac called a “gross profit” of 19 percent.
Local home flippers were quick to point out that actual profit margins are much smaller, after including the cost of renovating and reselling a property. In Sonoma County, the older housing stock requires greater investments than in many communities that also had large numbers of foreclosures, they said.
If the county was ranked on net profit, “it would be way down there because the houses in Sonoma County take a lot more to fix up,” said Chris Peterson, a managing director of Praxis Capital in Santa Rosa, which buys properties for both rentals and for flipping. “The net margins are very small in Sonoma County.”
What both flippers and RealtyTrac agree on is that 2012 may have been more profitable than normal for flippers, as home values took what Blomquist called “a bounce off the bottom.” As such, they said, this year's profits may be more subdued, partly because any increase in home values is likely to be more modest.
Flipping refers to the often-risky business of buying a home, fixing it up and quickly reselling it. The practice gained widespread attention a decade ago as housing prices soared.
Its popularity diminished briefly when prices tumbled, but flipping came back strong about five years ago as foreclosures skyrocketed. As new housing projects diminished, local contractors and construction workers jumped into the business, too.
Most of the communities at the top of the RealtyTrac list experienced enormous drops in home values and huge numbers of foreclosures.
In Sonoma County, the median price during the housing bust plunged 51 percent, from a peak of $619,000 in August 2005 to a low of $305,000 in February 2009. April ended with a median sales price of $435,500.
More than 10,000 county homeowners lost houses and condominiums to foreclosure in the past six years, and an additional 4,000 relinquished properties through short sales.
That has created opportunities for investors to buy homes and rent them out or, as prices rise, sell them for a profit.
The size of the profit can vary, depending partly on how much work is needed to renovate a home, local flippers said.
“The only time the sales price minus the purchase price equals profit is on those reality TV shows,” said Brian Burke, another managing director at Praxis Capital.
Burke and Peterson noted a home they are renovating on Mark West Springs Road. Workers there have installed a new septic system and new beams to reinforce the ceiling. The construction costs likely will exceed $80,000.
“If we can make 10 percent net profit on a home, we're doing really well,” Burke said. “And these days that's getting harder to do.”
Blomquist said the flippers make a valid point because there was no way in the study to factor in the condition of the properties. Even so, he defended the use of measuring the difference between the original purchase price and the flipped price.
“This is a starting point to give you an idea of markets that might be favorable for flipping,” he said.
In the RealtyTrac study, Orlando, Fla., ranked first with an increase of 63 percent in the flipped price over the original price.
Local real estate investors also said it would be hard to make a profit by selling a home for only $54,000 more than they paid for it, the average gain last year for homes flipped in Sonoma County, according to the RealtyTrac study.
“There's no way you can make money on a $54,000 spread,” said Lynn Tardibuono, an owner of Sun Pacific Mortgage & Real Estate in Santa Rosa.
J Barreto, an agent with RE/MAX Central in Santa Rosa, said the difference in the two prices often needs to be between $70,000 to $120,000 to pay for the costs of renovating and reselling the property. To justify the risks, a typical investor wants to walk away with a return of $25,000 to $35,000 per home after accounting for renovation and resale costs.
Last year's big jump in prices “made me look good” by increasing profits, Barreto said. “For that reason there's more people involved” now trying to flip homes, even as properties become harder to find.
Rick Revetria, a vice president of Vacaville-based Blue Mountain Homes, another company that flips home in Sonoma County, said renovation costs generally run 7 to 10 percent of a home's retail value.
The typical home in Bennett Valley is going to cost more to improve due to its age than one in Las Vegas or Florida, he said.
Rising prices are making it harder for flippers to find deals that make financial sense.
Looking ahead, Revetria said, “I don't think you're going to see as much appreciation.”
The flippers acknowledged that many people think they are making exorbitant amounts of money on the flipped homes. To that sentiment, Peterson quipped, “Well, go to the courthouse. You can buy one, too, if you think it's a great idea.”
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