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North Bay Business Journal

Monday, May 20, 2013, 6:57 am

Santa Rosa ranked one of most profitable ‘flip’ markets

Report: market is in top 25

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    As median home prices climb sharply in the North Bay, a recent report by real estate data tracker RealtyTrac shows that the Santa Rosa-Petaluma market is one of the most profitable nationwide for “flipping” homes.

    The report by the Irvine, Calif.-based firm shows the Santa Rosa-Petaluma Metropolitan Statistical Area as the 18th most profitable market for those who buy, renovate and resell homes, part of a list of the 25 markets where the practice generated the highest rate of return in 2012.

    Brian Burke

    Brian Burke

    Yet Brian Burke, managing director of the Santa Rosa-based real estate private equity investment fund Praxis Capital, cautioned against labeling the area or any other as a hub for that activity.

    “It’s very deal specific — it’s hard to generalize,” said Mr. Burke, whose company specializes in real estate investments that include flipping homes. “What that tells me is not that Santa Rosa is the best place to buy homes because you can buy at a deep discount. Houses in Santa Rosa have appreciated faster than homes in other areas.”

    A “flipped” home in Santa Rosa generated an average gross profit of 19 percent, or $53,558, according to the report. There were an estimated 527 such sales over the year, with an average original purchase price for the home of $285,344. The number of single family homes involved in the practice had increased 47 percent from the year before.

    The city was the least profitable of other Bay Area markets that made it to the list. Flipped homes in San Francisco and San Jose generated an average return of 23 percent.

    The most profitable market on the list was Orlando, Fla., where a home purchased at an average price of $103,701 generated an average profit of 63 percent upon resale, according to RealtyTrac.

    Climbing home prices have attracted an array of investors in the current market, with “flipping” being among those practices. RealtyTrac estimated the sales that involved a flip by counting transactions that occurred within six months or less of a previous sale of the same home. The firm looked at 600 metro areas for the report.

    The practice has changed from the days when buyers could purchase a distressed property at a deep discount and sell at a profit after basic renovations, Mr. Burke said. While investors were able to put between $10,000 and $30,000 into a property for a profitable sale while the market was at its low, those activities now entail from $30,000 up to as much as $250,000, he said.

    “Now the business has shifted to looking for properties that may need another bedroom, or even a full rebuild of a home,” he said. “It’s basically the homebuilding of this decade. It used to be you buy a property and build 20 homes on it — that was real estate development.”

    Investors, which account for the majority of absentee buyers, purchased 24.2 percent of all homes across the Bay Area in April, according to San Diego-based real estate data tracker DataQuick. That number was up from 23.5 percent in April 2012, with investors paying a median of $362,000 across the Bay Area region.

    With multiple private placement funds involving single-family homes, “flipped” homes and multifamily properties in Texas, Praxis has grown to $25 million under management in four years, Mr. Burke said. Those funds have generated an average 20 percent annualized return for investors, but it is the stability of the funds that has proven attractive in a volatile investment climate, he said.

    Median home prices in Sonoma County were up 23.5 percent in April versus the same month in 2012, at $376,000, according to DataQuick. The number of sales, 611, was also up 15.3 percent, while the number of sales Bay Area-wide notched down 0.6 percent.

    Median prices continued to climb outside of Sonoma County as well, with approximately half of that due to price appreciation and half due to a greater number of higher-priced homes in the sales mix, according to DataQuick. Distressed sales are also on the decline, accounting for 24 percent of sales versus 44 percent across the Bay Area one year ago.

    In Marin County, a median price of $799,000 was 29.3 percent greater than one year ago, with 345 homes sales representing an 18.2 percent increase. Napa County saw an April median of $385,000, up 21.3 percent, and a 13.3 percent increase in homes sales, at 136. There were 1.3 percent more homes sold in Solano County, at 564, and the median price of $238,000 was up 36 percent from April 2012.

    Bay Area-wide, median prices rose above $500,000 for the first time since almost five years. Prices first passed that threshold in May of 2004, and continued rising for four years before dropping below $500,000 in June 2008. Median prices for homes sold across the Bay Area reached a low of $290,000 in March 2009.

    Bill Facendini

    Bill Facendini

    With fewer distressed properties in the mix, larger investors are now looking towards higher-end homes and income properties, said Bill Facendini, president of Terra Firm Global Partners. More of their investor clients are holding on to their current properties, particularly those that are generating rental income, he said.

    Meanwhile, the period of flipping distressed properties has left a positive mark on many neighborhoods, he said.

    “It has been good for communities. I’ve seen some communities that had started to slide, but then these people come in and refresh some of these distressed homes. People are having pride of ownership again,” he said.

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