Flip Sells, But Margin's Tight

By Dave Fratello | December 22nd, 2022

Would you try a quick, cosmetic flip in this market?

There are warning signs from one that has just closed.

1143 23rd Street Manhattan Beach CASince July, 1143 23rd (3br/2ba, 1764 sqft.) has been trying to find a buyer.

It came out of the blocks in July this year at $2.395M.

(We are obligated to state that 1143 23rd was listed by Keith Brabec of Century 21 Union Realty.)

This ask was more than $900K over the acquisition price, $1.480M, from January.

So you could see how the numbers must have looked to the investor who had picked up the property and gave everything a once-over. That $900K would be a tidy profit for investment of perhaps $1.7M and 6 months' work.

But by July, the market had turned, and Summer was just a little more difficult than it usually is in a "normal" year.

Over about 6 weeks in August and September, they cut the price... 5 separate times.

Cuts were $100K the first time, and then about $50K each time after, ending at $2.099M in late September.

1143-23rd-bedroomThat didn't sell the property, and the DOM was getting long, so they rebooted and restarted that DOM count (with the same listing agent) in early October.

Then the prices started having those "lucky" 8s in them: $2,088,888, then $1,988,888.

The sale has now closed with an 8 in it, but lower still: $1.890M.

Here was the market saying this home was worth $505K less than they had specked it out.

accounting-spreadsheetNow just take a guess at the costs. (It's an exercise; we don't have precise figures.)

The sale at $1.890M would have had an approximate net to seller of $1.795M with traditional commissions, and the seller may have had expenses up to $10-$15K for escrow and title. Call it $1.780M net for now, for discussion's sake.

That's precisely $300K over acquisition.

And precisely 1/3rd of the original ambition with that July list price of $2.395M.

Now you have to deduct holding costs and remodeling costs from the $300K.

The home had new everything: Siding, paint, flooring, kitchen & baths; windows, roof, electrical, and so on.

If a civilian set out to do this work, it could get to $250K pretty quickly. Those who remodel for profit tend to be able to do it for less.

So the true net profit on the flip, due to how the market dropped as they worked on prepping and selling the home, probably was very minimal. And probably not of the scale that would have led anyone to green light the project at the outset.

Flippers and builders are often the first to disappear when market conditions change, so it's possible we may not see another cosmetic fix-and-flip like this for quite a while.

It should be noted somewhere that the flip was a bit less of a good bet due to location, overlooking Marine Ave. from the rear, where traffic noise is notable in the house, especially the primary bedroom. And this exemplifies another truism when a market shifts: Buyers quickly become far more sensitive to location, and this must have been a factor for 23rd – a double whammy along with the market shifting.

625 33rd Street Manhattan Beach CAThe same gravitational forces may not apply to another flip that recently went into escrow: 625 33rd (4br/3ba, 2080 sqft.).

For one thing, that's a superb location on a leafy block and fairly near to the Sand Dune.

For another, the Tree Section will always move, even when East Manhattan homes backing up to Marine Ave. do not.

Lastly, we already know it's not going to take them 2 listings and 6-7 price cuts to find a buyer. They had inked a deal for this one within the first couple days of showing the house.

And at $3.700M.

If they can close that one up near that price, you may see those particular investors again.

Why wouldn't they keep going?

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