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Pardon Our Dust
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April 23, 2006
They had a plan, then reality intruded
Four friends thought they could 'flip' a house, but cost overruns, bad timing got in the way.
A group of friends who set out to buy, fix up and "flip"
a Palm Springs tract house haven't found the riches they were seeking.
But the four Newport Beach residents — all experienced remodelers
— learned some lessons about themselves, about working with others
and about real estate investing.
"It was actually a great experience," said Ron Haughey, 42,
director of financial operations for Hyundai Motor America, "the
finance guy" among the group.
Among other things, they learned:
• Not everyone enjoys remodeling by committee.
• The real estate market is fickle and can shift in just a few months.
• High-end upgrades don't necessarily reap big profits.
• Timing is everything, and it's harder to sell during the holidays.
• The surest way to make a profit in speculative remodeling is by
getting spectacular bargains on fixer-uppers.
"You make your money when you buy the house, not when you sell it,"
realized Nina Smith, 38, a software saleswoman who owns rental properties.
"We didn't get a good enough deal on this house."
In August, the four bought a three-bedroom, two-bathroom, 1,900-square-foot
home that seemed like a good-enough deal at $425,000. Houses in Palm Springs
had been appreciating consistently, and other homes on the same street
were listed for considerably more.
The 1964 rental was priced lower because of its condition: broken windows,
animal-stained carpeting, and aging cabinets, counters and fixtures.
For the purchase and all subsequent expenses, the costs were divided equally.
All four names went onto the 5.5% 30-year adjustable-rate mortgage. (Each
friend had a FICO score above 775.) All four names went on the title as
tenants in common, with a 25% undivided interest each. For the deposit,
each contributed $2,500. And at the end of escrow, each wired their share:
$10,500.
The plan was to spend $60,000 fixing up the house, then sell it in two
months for about $650,000. According to Haughey's calculations, the profit
would be $60,000 after all expenses, taxes and commissions, or $15,000
for each partner.
The initial planning was easy and pleasant. The four had remodeled their
own homes over the years and, for this job, planned to hire subcontractors
and handymen they already knew who would be willing to drive to Palm Springs.
Each partner assumed responsibility for a portion of the project.
Smith supervised the scraping of the acoustical ceilings, interior and
exterior painting, fence repair, baseboards and appliances.
Haughey was in charge of the floor tile, carpeting in bedrooms, pool repair,
electrical upgrades and the budget.
The third friend, Jeanine Scalero, a 37-year-old attorney, handled the
landscaping, windows and doors, including a new sliding door that would
give the living room a bigger view of the pool area.
And the fourth, 43-year-old medical equipment salesman Steve Smith (no
relation to Nina), was "the design guy." He took on a complete
overhaul of the kitchen and baths.
Spirits were high when the project began. The friends worked full time
during the week and then spent weekends in Palm Springs on their project.
They visited tile stores, drove around neighborhoods looking at paint
colors, dined at their favorite local restaurants and generally enjoyed
their time together.
But as the renovation went forward, the budget crept up to $67,000, mainly
because the kitchen and bathrooms cost more than expected. The kitchen
got a luxury makeover with oak cabinets, some with frosted glass doors,
plus brushed aluminum hardware and granite counters.
The group also opted to install dual-pane windows to keep down utility
bills, and to replace all electrical switches and sockets.
Of the four partners, Steve Smith figures he had the most fun.
"I'd like to do it full time," he said.
Scalero enjoys home design as much as Steve Smith, but she found the collaborative
process torturous. Although she had no problem with her partners making
decisions on their portions of the remodel, she recoiled when they weighed
in on her choices. When Nina Smith remarked during the project that Scalero
was probably the student in law school who didn't like study groups, Scalero
agreed.
"I'm an independent worker and I like to work alone," she said,
adding that although she likes investing in real estate, she may not enter
such a partnership again.
After the house was finished in late October, it was listed with Scalero's
father, Victor, a licensed broker in Rancho Mirage who typically sells
in new-home developments.
Until the talk turned to setting the sales price, there had been no major
disagreements on financial issues. But at this point, the partners disagreed.
Haughey, who said he's conservative by nature, had based his financial
projections on a sales price of $650,000, but he would agree to a listing
price up to $675,000. The others, though, were so impressed with the beauty
of the remodel that they wanted to go higher — $725,000. Eventually,
they compromised on $695,000 and had dreams of pocketing about $22,000
each. The house went on the market in early November.
It turns out that Haughey had a better handle on the market than the others.
Though they held open houses each weekend, their intended market —
"snowbirds" drawn to Palm Springs' balmy winters — do not
flock to the area until after the December holidays
In early January, the group agreed to lower the price to $669,000. When
the house still did not sell, the foursome decided to stage it, moving
in some of their own furniture to give it a more lived-in feeling, and
to sign up with a major real estate company in the area, Prudential California,
to get the residence better advertised.
Their new agents, Brian and Diane Walker, suggested lowering the asking
price to $649,000, and the foursome agreed. The monthly carrying cost
was $2,800, or $700 each.
According to Brian Walker, the market had "softened" a lot between
the time the house was purchased in August and it was listed with him
in late January.
"If they could have sold it in August," he said, "it would
have been good."
The house is now listed for $629,000, and if it sells for that, each partner
will pocket just $5,000.
"It's not risk-free," Nina Smith said of her first foray into
speculative remodeling. "I need to better educate myself on finding
a better property."
And if the house doesn't sell for the current price?
"We have all discussed Plan B," Scalero said. "The possibility
of turning it into a vacation rental. We've been told that weekly rentals
go for around $1,500."
Source book
Kitchen and bath design: Steve Smith, Newport Beach, (949) 683-4443
Construction: Executive Home Improvement, Eonn Skye, Desert Hot Springs, (760) 834-5717
Tile: Porcelanosa USA, Joe Magana, Anaheim, (714) 772-3183
Cabinets: IKEA, Costa Mesa, (714) 444-4532
Windows: Ganahl Lumber, Costa Mesa, (714) 556-1500
Sandblasted front door: Sand Visions, Palm Springs, (760) 322-2239
Plant and gravel installation: Jose Martha, Cathedral City,
(760) 320-6827