Not Everyone Is Doing Cartwheels Over ‘Flipping’

In the last 12 weeks, Nick Manfredi has bought eight homes in the Riverside area. Not to live in but to sell as quickly as possible, for as much as possible.

He picked up one Corona four-bedroom for $201,000 on July 5 and, he boasted, was in escrow for $267,000 two days later. A speculator who specializes in what’s known as flipping, he’s a sign of the times: Real estate isn’t much of a gamble in a market as hot as Southern California’s has been for the last 12 months.

“Most people are so euphoric, they are in big denial that 1991 can come again,” Manfredi said, recalling when the last L.A.-area housing market bubble burst.

Not everyone is in denial. Real estate experts noticed that in May the number of homes sold that had been owned by the sellers for six or fewer months was 47% higher than it was a year earlier. And these constituted 3.1% of all homes sold in the month -- nearing the flipping record of 3.5% set in early 1989, according to DataQuick, a La Jolla real estate information firm.

“I don’t think we are in a big speculative bubble right now, but the fact that these numbers are on the rise is something we are closely watching,” said John Karevoll, an analyst with DataQuick.

A marked increase in flipping -- the buying of a house for the sole purpose of selling it swiftly at a profit -- is viewed in the industry as a sign of an overheated market. In fact, two years after the 3.5% flipping record was set, the Los Angeles housing market began to sputter, with prices deflating 22.2% from early 1991 through 1995.

Many real estate experts believe that 2004 and beyond will be different.

The low-supply, high-demand fundamentals behind the doubling and tripling of prices in the metropolitan area in recent years will prop up values for some time to come, they say, even if double-digit percentage gains come to an end.

The caveat is that if the flippers who are helping to fuel the price increases decide that the end is near, they could help create something of a downturn.

“You expect to make 30% returns in just a few months if you are flipping,” said G.U. Krueger, a housing analyst in Irvine. “The danger is that speculators might suddenly decide to sell at prices far less that what other people would sell for.”

But, Krueger said, “there doesn’t look like there are super-dangerous levels of speculation occurring.”

And what do the flippers themselves think?

“This market is flooded with investors right now,” said Jim Sheils, co-owner of real estate investment company Titus Financial, who has bought and sold 120 homes in Bakersfield in the last three years with a group of backers he described as family and friends.

“A lot of people coming here from Los Angeles, outside investors, are overpaying,” he said. “It can be dangerous.”

Sheils isn’t giving up, though, and Manfredi is also still in the game. But Smitha Chandrabose is taking a breather.

Chandrabose said she had made some serious money turning properties around -- last year, for example, she sold a house in Santa Monica for $623,000 that she had bought five months earlier for $445,000 -- and didn’t want to risk losing any now. Prices, she said, are just too rich for speculation.

That will change, she predicted, in just a few years, when people buying now with adjustable-rate or hybrid mortgages -- which typically convert from an initial fixed to an adjustable rate after five years -- find themselves unable to pay as rising interest costs boost their monthly payments. Then she’ll go back to flipping, buying up foreclosures.

“Some of these young people don’t remember double-digit interest rates,” she said. “I’m expecting to get back in when these fixed rates switch to adjustable rates and people just can’t make their payments.”

Andrew Goldsmith, an investor with a real estate license, is also sitting it out for now. In fact, his most profitable flip was in 2001, when he bought a home in the Sunset Plaza area of the Hollywood Hills for $825,000, put in $100,000 of improvements and sold it six months later for $1.1 million.

“Lately, with money still being so cheap [to borrow], I’m not seeing the opportunities,” he said. “Someone buying a home to live in will pay a lot more than I will to fix it and flip it.”

Speculation is especially troublesome in Orange County and other areas where new homes are being built. Houses in a first phase of a development can go up in value by $50,000 or more in a matter of months, often in anticipation that the second and third phases will sell for much more, making them ripe targets for flippers. Builders are concerned that absentee owners don’t contribute to the companies’ desire to create communities and that in some cases these owners compete with them for clients.

“We’ve talked to the new home builders and they are all concerned about speculators,” said Rick Fromm, senior director of financial planning at Irvine Co., Orange County’s largest landowner. “They artificially drive prices up by taking homes off the market, which means there is even less supply out there.”

Irvine and many other home builders include anti-speculation clauses in sales contracts that mandate penalties if buyers sell in less than a year. Many such clauses stipulate that if a house is sold for a reason other than a divorce or job transfer, the difference between the purchase and sales prices would go directly to the home builder.

At California Pacific Homes, which built more than 300 houses in Irvine last year, most priced from $500,000 to $1 million, anti-speculative contracts have been the norm for several years, said Jon Robertson, a senior vice president at the company and former head of the Orange County Building Industry Assn., a trade group.

The same is true at Los Angeles-based KB Home, one of the nation’s largest builders, which constructed more than 5,500 houses in California last year. Flipping “always happens in an overheated market,” said Jay Moss, KB’s regional general manager for Southern California. He says the company also works with brokers to weed out possible speculators.

“We don’t want our development to be Wall Street or a piggy bank for someone else,” Moss said.

In Orange County, real estate lawyer Camellia Schuk said she was busy preparing anti-speculation contracts. Some speculators, she said, are using multiple names to try to tie down several new homes at once.

“This really reminds me of the late 1980s,” she said, adding, “but I don’t think it’s quite the frenzy we saw then.”