L.A. Times: A cooling trend in real estate flipping

According to this March 4 article by Jennifer Lisle, the number of flippers in the California (a flipper as defined as somebody owning a house six months or less) has decreased from an already mere 4.2% of home resales in 2005 to 3.2% in 2006. The article makes it sound like there were never that many to begin with, and I wonder if the definition is a bit too narrow. But in any case, I find it interesting that the media features a story on flipping as a profit opportunity. It's as if the number of flippers getting burned hasn't reached a critical mass yet.

There could be something to that. According to the story, the number of flipped sales resulting in a loss turned out to be 7.5% in 2005, but up to 24.9% in 2006. 1 out of 4 flipped sales incurred a loss last year. But the flipping dream lives on.

Now you have to know what you are doing. "The market where you could just go in, tidy something up, and move on is gone" according to an experienced flipper and Beverly Hills broker. According to this same agent, the number of clients he has had looking for flips has declined by 75%.

One savvy flipper, a real estate agent in the San Fernando Valley, has become increasingly more stringent in her criteria for what might constitute a flip. Potential profit for a home in the $500K to $700K range must be (after improvement costs and closing) $80K or more, and she says that most properties are just not priced low enough for that. She also pads in a 10% cushion in the event "the market falls" by the time property is back on market.

Michael Corbett, the host of "Mansions and Millionaires" and author of "Find It, Fix It, Flip It" suggests looking for properties in historically low-priced areas that are on the upswing. Ah yes, "gentrification" areas. Corbett suggests Watts as a potential flip area (as well as Echo Park, Atwater Village, and Culver City). I distinctly remember a conversation I had one morning with my busdriver about the places we live, and he lives in one of those "gentrification" areas and complained about how the local residents can no longer afford the rents not to mention housing prices. I can hardly blame him!

Then there are those flippers hedging their bets, flipping properties that are highly rentable. One flipper says "you have to make sure the rent you could get would cover your costs" in case it doesn't resell quickly.

Teacher, I have a question! If these flippers are trying to sell into a softening market at the same time, and then they all try renting out their properties at the same time when they are unable to get their sale prices, won't that soften the rental market too?!?!?

And what kinds of upgrades should savvy flippers undertake? One agent interviewed said that you "can't just upgrade kitchen counters without making sure that the cabinets are of the highest quality and that the appliances have name brands such as Viking and Miele. (Now where have I been?!? Here I have been living in apartments for many many years, I thought happily so, and didn't even know unfulfilled and unsatisfactory my life has been because I had never heard of Miele!)

Corbett, the Flip It author, warns that if you exceed your renovation budget, "a soft market will not bail you out." In terms of upgrades, Corbett likes "lifestyle renovations", features that increase the perceived living space, or add state-of-the-art home features such as digital thermostats.

Neighborhoods worth flipping over, according to the article interviewees:

Traditionally upscale:

Hancock Park
Larchmont Village
Los Feliz

More desirable neighborhoods:

Studio City
Valley Glen
Valley Village
Burbank

Older homes in transitional areas:

Echo Park
Atwater Village
Culver City
Watts

Gentrification areas:

Highland Park
Echo Park
Glassell Park

"I've always done well in these areas"

Silver Lake
Long Beach
Torrance

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So now we've got a media story saying you can still flip IF you know what you are doing. I also love the "well you can always rent it out" psychological plan B. What does it realistically cost to rent it out? How many flippers in this market are seriously overestimating their skills and smarts, especially in the face of what could be some serious price trouncing?

Be sure to check out Flipper Nation for some laughs if you haven't already done so!