Investors high on high-end house flips - CNBC.com

Climbing through the shell of a Los Angeles home he bought for just over $800,000, real estate investor Nicholas Sinatra confers with a team of architects, designers and contractors. They discuss a new floor plan and high-end finishes that will allow them to list the home for more than $2 million. It is high-end house flipping in its highest form, and Sinatra's company, American Coastal Properties, is pushing both the walls and the envelope.

"In the hotter markets, like coastal Southern California, you have a unique situation where there's a high barrier to entry, and highly desirable neighborhoods, where people want to come in, and there's no supply, there's no inventory," said Sinatra. "We're looking at properties all the way from $1 million in acquisition price ... we just purchased one for $9.5 million."

House flipping nationwide is down 13 percent from a year ago, but high-end flipping (homes priced above $750,000) is up 34 percent, according to a new report from RealtyTrac, an online real estate company.

More than three-fourths of all high-end flips were in five markets: the New York metro area and four coastal California markets—Los Angeles, San Francisco, San Jose and San Diego. These are land-constrained areas with high demand and limited new construction.

Flips on homes priced between $1 million and $2 million increased 42 percent year over year, while flips on homes priced between $2 million and $5 million increased 350 percent year over year.

(Read more: What your home might look like in the future)

Most of the flippers are using all-cash, as credit for flips is tight and expensive. American Coastal Properties, still a boutique firm, hopes to double the number of homes it rehabs and flips to around 50 a year, thanks to a $50 million infusion from equity firm Colony Capital and the Pritzker/Vlock Family Office.

Colony has been putting millions of dollars into low-end foreclosed properties in the so-called sand states, fixing up the properties and putting them up for rent. This is a new and arguably riskier tack.

"It's a bigger upfront risk and on the back end you have usually fewer buyers, but the payoff can also be much bigger," said Daren Blomquist of RealtyTrac. "We're showing the average gross profit on one of these high-end flips is about $240,000, compared to about a $55,000 average profit on the lower end."

(Read more: Map: Tracking the recovery)

Source: http://www.cnbc.com/id/101124320
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