325 Pearl Avenue — the Analysis of a Flip.
March 17, 2008
Flipping homes is a numbers game — you either make a profit, or you don't. It's that simple. When contractors decide to remodel a house and flip it, they must have a firm grasp on what numbers are required to make the effort financially worthwhile.
So when I saw that a much different version of 325 Pearl Avenue in the White Oaks neighborhood came back on the market after just 7 months after its last sale, my interest was definitely piqued. (The current sale of 325 Pearl Ave is being offered by Greg Celotti of Alain Pinel Realtors)
First, a quick history on this home: It sold in July 2007 for $1,070,000, which was a whopping $191,000 premium over the asking price of $879,000. I heard that the winning offer competed with 9 or 10 others that were submitted. When I reviewed the original house, I referred to it as a “BYOB” … which stands for Bring Your Own Bulldozer. Truly the only redeeming value of this listing was the lot — a prime 7,500 square foot lot on a great White Oaks Street. Every inch of the house desperately needed some degree of upgrading. Here's the specs on the original:
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Fast forward 7 months later to today, and here's the new version of 325 Pearl Ave. By comparing the specs, it appears that they added a bedroom and a bathroom, and increased the square footage from 1,730 sq ft to 2,188 sq feet. Here's the specs on the “new” place:
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For a photos of the before and after, take a look at the two links:
- 325 Pearl Ave (Before)
- 325 Pearl Ave (After)
Clearly, this remodel was much more than just a coat of paint and some new carpets. The builder did a marvelous job updating this home. The difference is stunning — it looks completely different from the original place. So what's my point?
Well, let's take a closer look at the numbers. It's currently listed for $1,298,000 — a difference of only $228,000 from what it was purchased for. Assume for this exercise that it eventually sells for the asking price minus a 5% cost of sale, and an assorted $500 in additional fees. That takes a bite of $65,400 out of that difference, which would leaves only approximately $162,600 to work with.
The remaining profit of ~ $162,600 must now fund the cost of carrying the mortgage for 7 months, and the material cost and labor of the remodel (and landscaping.) How much is this? I wouldn't even venture a guess. But considering that most contractors want to see a profit of $100k (or more) on a 7 month project to make it worthwhile, you're really left with three possible conclusions:
- The builder is banking on getting significantly more than list price, or
- They're going to have to be happy with a current margin on this flip.
- My analysis is completely off-base 🙂
Thoughts?
Posted in:
Chuck, the links to the pics and virtual tour are not working. I’m curious now!!
Hi Mina,
I added a couple of links in the middle of the post that show the before and after of the remodel. Those links have photos and virtual tours that were taken of both listings. The difference is amazing — they did a great job of getting this together in such a short time.
Thanks for your comments,
Chuck
But what happened to the trees? Did they just cut down the one on the right?
Why is there a picture of the electric meter on the old virtual tour? Just to prove that the house did get electric service in case there was any doubt given the condition?
Nevertheless, I agree that the remodeling job was done well. If someone gets to buy it close to the asking price, I think they got a good deal. No way a regular homeowner can do that extensive remodeling for under $250k. But I do think the contractor overpaid of the house initially – $975K would have been more reasonable.
Back in July, I knew that this home would draw lots of interest. However, I was pretty surprised that it drew as many offers and went for as high as it did.
Thanks for the comments!
Chuck
I am always puzzled as to why more contractors don’t buy in San Carlos and remodel especially if they add a second story. There are usually a few houses on the mls which are in the 800-950k range which seem likely candidates especially if they can then be resold for at least 1.6 or higher after a remodel. The residents in White Oaks seem to be adding 2nd stories for around 500k and it must cost even less for a contractor. That would be at least 100k profit. The newly remodeled houses with modern layouts, higher end kitchens etc seem to sell quickly as long as they have some yard left. (I’m thinking of 2100 Greenwood Ave which is a lovely house, but had no yard and took a long time to sell.)
SC Resident,
You bring up a very good point. Although it may not be apparent, some contractors have indeed bought older homes and turned them into large, two story custom homes. 2261 Howard, 1939 Birch, and 64 Belvedere are three recent examples. The reason there aren’t more is due to the cost involved of doing 2nd story structures.
To add second story to an existing single-story home almost always involves significant work to the foundation to support the new structure, and foundation work is usually intensive and expensive. It becomes even more expensive if the city requires the foundation to be concrete piers (which is happening more often lately.)
The other problem revolves around the basics of flipping a home — buying low, and selling high. Finding a suitable lot in a desirable location and at a low price is getting very tough as San Carlos gets more popular. This entry level is where you see the fierce competition and multiple offers, thereby removing the bargain factors that the contractors must have to make the cost numbers work for the flip.
But regardless, now that all of the “original” homes in San Carlos are turning 60-70 years old, you’re going to continue to see much more remodeling — both single and two story projects.
Thanks for your comment!
Chuck
Chuck – Do you know if the two new houses currently under construction on Cedar and St. Francis and Greenwood (or is it Howard?) and Cedar are owned by contractors and will eventually be for sale?
Thanks for a great blog. It is very informative as I am always interested in the value of my San Carlos home!
SC Resident,
Thanks for your kind words about the blog. I’m glad that you find the site to be informative. There is never a shortage of material to write about in this town 🙂
Regarding the homes you mentioned:
— Cedar (across from Central Middle School) has been under construction for a looooooong time. I don’t know the specifics of what they plan to do with it afterwards.
— Howard Ave — 2200 Block: This is an extensive 2nd story addition that will be occupied by the current owner after completion. Ironically, 2261 (right across the street) was a flip.
— Saint Francis — another BIG remodel. I’m not sure of the situation behind this one either.
Thanks again for taking the time to comment!
Chuck