Flipping homes, where an investor buys a house, makes some improvements, and then quickly resells it for a big gain, might seem like a relic of the real estate boom.
But it has again become big business.
Real estate investors are buying homes at foreclosure auctions from banks and then reselling the properties within months or even weeks for large gains -- often reaping bigger profits than speculators enjoyed during the heyday of the real estate run-up in the first half of the decade.
The lucrative business has attracted local players such as Hank Trione, a member of one of the county's wealthiest families, and Chris Peterson, a prominent home builder who teamed up with investors to launch a house flipping business in 2009 that now spans Northern California.
The financial returns can be eye-popping. One investor purchased a Santa Rosa home at auction for $153,575 and sold it 30 days later for $330,000 -- a 115 percent markup.
Those payoffs have allowed a handful of investors
to generate tens of millions of dollars in profits, according to a Press Democrat analysis of the nearly 700 Sonoma County homes sold to investors at auctions in a nearly three-year span.
About one in every 10 homes foreclosed in Sonoma County was sold at auction to a third-party investor such as Peterson, according to foreclosure records provided by MDA DataQuick of San Diego.
The Press Democrat conducted an analysis of all 6,463 properties that went to auction in the county between January 2008 and October of this year. Nearly 700 were sold to third-party investors, and the rest were seized by lenders.
Investors on average paid $236,000 for homes sold at auctions, and were able to resell the properties about three months later for an average of $330,000 -- a markup of $94,000 or 40 percent.
But the profits flowing to real estate investors have come at a cost, and stirred up resentment among former homeowners who allege wrongful foreclosures by banks and unethical behavior by flippers.
Some former homeowners say lenders misled them into believing they would receive a home loan modification, only to discover their property had been sold at auction to an investor.
Others complain they were bullied and pressured into quickly leaving their homes by investors who bought at auction and wanted to sell quickly. One woman said a flipper drilled out the locks of her Santa Rosa home and then dumped her possessions on the driveway.
The result has been dozens of lawsuits in Sonoma County -- either because an angry homeowner refuses to leave or because they file a civil suit against the bank in an attempt to reclaim the property.
Many real estate investors said they sympathize with the families, but also say this process must occur if the housing market is to recover. Many borrowers who lost their homes in foreclosure proceedings took out loans they could not afford and now new families must be found to move in, Peterson said.
REVIEW FINDS FEW PERMITS BY INVESTORS
Many auction buyers said the large markups they got
when flipping homes can be deceiving because they often put tens of
thousands of dollars into refurbishing the homes.
But a review of 41 homes purchased at Sonoma County auctions
revealed flippers applied for only four building permits, which are
required by local municipalities to do work such as replacing
toilets, redoing electrical wiring, putting in new water heaters or
other more extensive structural work.
Many investors said they conducted this work when asked about
costs, but a review of county and city records showed they never
The extent of work on one Sonoma County home purchased by real
estate investor Chris Peterson was detailed in a newsletter to his
financial backers. It described and included photos of the repairs,
which included installing a new shower, toilet, sink and raising
the kitchen ceiling from seven feet to eight feet.
But no permit was ever pulled for the home at 1422 Forestview
Drive, on the outskirts of Santa Rosa.
"There would be a permit requirement for that," said Patrick
Mullin, customer service supervisor at the county's Permit and
Resource Management Department.
Mullin estimated the cost of the permit would be about $1,800 to
$2,500. Peterson's company sold the home in September for a markup
of about 65 percent -- or $208,000 more than it paid at
Mullin said homeowners who buy homes with unpermitted work are
still responsible for the unpaid fees, but that the seller is
"obliged to disclose that they did work without a permit."
Peterson said the work done at 1422 Forestview Dr. did not require
building permits, and that raising the kitchen ceiling a foot was
-- Nathan Halverson