So Cal Real Estate News

This is the second of three posts on three homes that recently closed escrow on the same block in Lakewood, CA. The first was “A Tale of Three Listings: The probate seller’s big mistake,” and in a few days we’ll post the last, “The team that made it happen.”

I “flipped” my first house back in the late 1980s, before those cable networks that made “flipping” popular were even invented.

As an experienced Realtor who has advance access to listings & who can save on commissions, you might think that I’ve flipped scores of homes since then, but you’d be wrong. I’ve actually only flipped a handful or two of properties over the last 20 years. That’s partly because I’ve become more of a buy and hold investor, but it’s also because “flipping” is much harder than it looks.

In the early 90′s a colleague and former partner of mine began “flipping” homes as a business. He developed a model that worked well for him, with some unique means of acquiring the properties you won’t find at a seminar or on a DVD or TV show. According to him, the key to success was acquiring the property substantially below market. As he explained it to me once, “We’re basically pirates. The key is to steal the property.”

Each flip has to be carefully evaluated, but I want to pay at least 20% below market, preferably 25% – 30%. My colleague prefers more than that.

I have to laugh when I watch “Flip this House” and similar shows, especially the part at the end where they compute their “profits.” After spending way too much overdoing their improvements, some bright-eyed young Realtor is brought in to rave about the house & tell the flipper how much they’ll get for it.

These agents may be young, but they’re well schooled in the number #1 way to get a listing–tell the seller what she wants to hear (see ” Top 5 ways NOT to pick an agent“). They generally quote an unrealistically high price. Then on the screen the show computes the flipper’s mythical profit, completely ignoring costs of purchase, selling costs like commission, or holding costs like monthly mortgage payments.

Well, that approach to flipping may sometimes work when homes are going up by thousands of dollars every month because everybody and his dead dog can qualify for a loan (see “How we got into this mess“). But in a flat market, let along a down market, flipping calls for skills that even most Realtors don’t have.

As is illustrated by this sad story.

When this home hit the market last September, it was priced 5% – 10% below market. It was the classic case of the lazy seller and lazy agent. The home was occupied by a pack-rack tenant who also made it almost impossible to show. The correct remedy would have been to get the tenant out & do a quick & cheap fix-up, rather than drive down neighborhood values. Instead, they priced it low & sold it quick. It was the first home in the neighborhood to list below $400,00, and the agent who bought it negotiated the price down to $390,000. He opened escrow late in September and closed it mid November, according to the SoCal Multiple Listing Service.

I thought about buying it myself, but I knew prices always move lower as we move through the winter (see “Our Two R.E. Market Cycles“), and I expected the coming winter to be especially brutal. Plus, the selling price wasn’t near 25% below market.

Long story short, it was bought by an agent who bragged to me how he’d flipped 60 homes. I hope he banked his profits. He had the concepts down, but not for a down market. During the five months it took him to close escrow on his purchase, fix it up, and put it on the market, prices plummeted. He did a nice job of sprucing it up and staging it, but he was used to prices going up $5,000 or more a month. This time, they were going down.

After wasting a couple weekends trying to sell it by owner, this Realtor put the home in the Multiple Listings for $475,000 on February 8th. He eventually reduced it to $449,000, which he told me was what he needed just to break even. I guess he didn’t, because it was later reduced to $429,900. In mid April it went into escrow and it closed on May 21 at $428,000.

That was less than 10% over what was paid for the home, and resulted in a loss of over $30,000 by the flipper’s own projections. Four months of work to lose over $30,000!

In a normal market, let alone in the current down market, flipping is not for amateurs. In this case, it wasn’t for professionals, either!

Please bear that in mind next time you’re watching “Flip this House!”

In a few days, we’ll discuss the third sale on this same block, “the team that made it happen.”

Editorial note: This special Memorial Day post is part of our continuing effort to keep a proper perspective on material things in general and real estate in particular. For others, scroll down to “Categories” in the right hand column & click on “Perspective.” Our promised “Tale of Three Listings” post should be fairly soon, once Beth delivers her baby.

Warning: This post has a spiritual emphasis. You’re free to disagree or skip it but please don’t complain about it. There really is more to life than real estate.

Got up this morning to see my neighbor’s flag up for Memorial Day. Their son-in-law, Dusty, woke up this morning in Iraq.

He’s one of millions of Americans who have risked their lives so you and I could wake up this morning in a free nation. Since the Revolutionary War was fought 230 years ago, hundreds of thousands of America’s best have paid with their lives for things we too often take for granted.

These brave men and women certainly deserve a flag flying in front of every home and business today and a “Moment of Remembrance” as tokens of our gratitude.

A day like today helps keep our current economic woes in perspective, as do the recent tragedies in China, Burma, & Oklahoma. People have lost their children and their homes, & I’m upset about losing a little equity or the price of gas.

Yesterday in church Pastor Chuck spoke about how little regard we should really have for those material things that consume too much of our time. He thought St. John’s description of heavenly streets “paved with gold” helps put material “treasures” in perspective.

Reminded me of an old joke about the multi-billionaire who supposedly talked God into letting him to take some of his wealth with him after he died. When he met St. Peter at the Pearly Gates, he was pulling a huge trunk behind him which he had filled with gold.

“Sorry, you can’t take anything with you,” old St. Pete told the billionaire.

“Actually, I’ve got special permission,” replied the billionaire.

“Sounds fishy to me, but I’ll check it out,” said Peter, picking up his Verizon wireless Voyager [unpaid product placement].

After a minute talking to Central Processing, Peter put down the phone with an amazed look on his face. “I’ve never seen anything like this before, but you’re right–you can bring it in with you. Now I’m curious–would you mind showing me what’s in the trunk?”

Proudly, the wealthy old guy opened up his suitcase to show shining blocks of gold.

Peter looked at it & scratched his head. “Asphalt?”

In America, at least, it’s too easy to sacrifice things that really matter for temporal things that don’t. Many of us live as if money were our God.

Luke 16:13-15 reports an interesting discussion Jesus had with some money-loving fundamentalist religious leaders of his day.

“No servant can serve two masters,” he said, “for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.”

I’ll let Dr. Luke tell what happened next:

The Pharisees, who were lovers of money, heard all these things, and they ridiculed him. And he [Jesus] said to them, “You are those who justify yourselves before men, but God knows your hearts. For what is exalted among men is an abomination in the sight of God.”

Shocking, but true. When it comes to money, “What is exalted among men is an abomination in the sight of God.“

Jesus spent a lot of time teaching those who would listen to value God and people above all, and to trust God to provide our daily needs. (See, for example, Luke 12:13-34, where he really puts it all together.)

Blair and I hope you enjoy your Memorial Day. Put out the flag, spend some time with the family, & maybe take some time to recheck your priorities. With God’s help, we can all live lives that make a difference, and leave this life with more than a trunk full of asphalt.