The report by the Irvine, Calif.-based firm shows the Santa Rosa-Petaluma Metropolitan Statistical Area as the 18^th 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

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

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.

Article source: http://www.northbaybusinessjournal.com/73472/santa-rosa-ranked-one-of-most-profitable-flip-markets/

Droves of cheap foreclosed homes are drawing serious investor money. From mom-and-pop folks seeking retirement income to Wall Street-backed funds with hundreds of millions to spend, investors buy distressed homes to either fix and flip or, increasingly, to hold and rent out, mainly focusing on the most-affordable areas – those most devastated by the downturn.

“There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”

But for now, many distressed homes – foreclosures and short sales – sell for about a third off their peak values, and often for less than it would cost to build a new home.

Investor impact in the Bay Area was magnified during the downturn. That’s because for many years, the Bay Area’s stratospheric prices made buying homes to rent out a losing proposition, so investors bought elsewhere.

“Historically the (sales) price-to-rent ratio for California single-family homes has never made sense to hold houses at any scale,” said Brian Burke, managing director of Praxis Capital, a Santa Rosa real estate investment company. “But the market dynamics have completely changed and opened up an opportunity for us to buy, hold and rent, as well as buying to fix and flip.”

A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought.

Absentee buyers

Absentee buyers were most common in Solano County, where they accounted for almost a third of sales. Solano has by far the lowest median home prices in the Bay Area, weighing in at $200,000 in September, for instance.

Flipped homes – those resold within six months of purchase – went from about 2.5 percent of all Bay Area sales in 2007 to about 4 percent of sales currently, with the biggest bump coming this year. Again, bargain-basement Solano had the most activity, with around 6 percent of sales being flipped homes.

Investors played a big role in helping the market start to recover, experts say.

“The real estate market hit a floor sooner because of investor appetite, so it plays into a stabilizing housing market and overall economy,” said DataQuick analyst Andrew LePage.

But there’s a downside, too. Deep-pocketed investors paying all cash often elbow out prospective homeowners. “It makes it awfully frustrating for first-time buyers who have to compete with them,” LePage said.

Big draw for investors

For now, market dynamics continue to lure investors.

“There are a lot of investors out there, large and small, who continue to relish residential real estate in a market where many people either don’t want to buy a house or cannot buy a house and so are renting,” LePage said. “For a lot of these investors, it’s still penciling out at sometimes-record levels.”

Praxis Capital is a case in point. In 2009, Burke, who had 20 years experience buying homes at foreclosure auctions, partnered with Rivendale Homes, a large private builder, to form Praxis. It started buying about 100 to 120 homes a year to fix and flip in 12 northern California counties, including the East Bay, North Bay and Sacramento area.

A year ago, Praxis started buying houses to hold onto and rent out because home prices finally made the math work, generating positive cash flow. It now has about 100 rental homes, with more in the pipeline.

For instance, it paid $182,000 at a foreclosure auction for a four-bedroom, two-bathroom Santa Rosa tract home that is now getting a $15,000 “cosmetic rehab” of new carpets, paint, flooring and landscaping. The house should rent for $1,950, Burke said. Once it’s rehabbed, he projects its market value will be $253,000. After renting this and similar homes out for five to seven years, Praxis will sell, hoping for significant appreciation.

Praxis has spent $15 million to date on both its flipped and rental properties, and is launching a fund in January focused just on buying homes to rent out. It hopes to raise $25 million, primarily from high-net-worth individuals in the region – winemaking families, small business owners and professionals who are looking to diversify their portfolios, Burke said.

Finding tenants is easy because so many displaced families need housing.

Dominating the market

“Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters,” Burke said. “That demographic is an important market segment for us.”

Fixing up dilapidated foreclosures “is the home building of the current decade,” Burke said. “In the 2000s, people were building houses everywhere. The home building of today is taking an old rundown house that hasn’t been cared for and bringing it up to current standards and modernizing it.”

Despite its millions of dollars worth of investments, Praxis is small compared with the Wall Street-backed giants who have plunged into the distressed residential real estate market. Oakland’s Waypoint Real Estate Investment Group, for instance, hopes to pour $1 billion into single-family homes over the next couple of years. It owns hundreds of homes in eastern Contra Costa County and Oakland, as well as markets outside the Bay Area.

It’s since been joined by other private-equity backed heavyweights, including Blackstone Group, Colony Capital, Och-Ziff and American Homes 4 Rent.

Many of those big players are focusing on cheaper markets than the Bay Area, such as Arizona, Nevada and Florida. Likewise many mom-and-pop investors have shied away from buying locally.

‘Unlikely to last’

“California doesn’t have large cash flow; it’s more of an appreciation play,” said Kathy Fettke, CEO of Real Wealth Network, a Walnut Creek real-estate investment club. Her club usually steers members to lower-cost markets, but recently recommended buying California homes between $150,000 and $300,000.

“This is the first time we’re featuring California,” Fettke said. “We now have a combination of low home prices and low interest rates, which makes for better cash flow than we’ve ever seen.”

But it’s unlikely to last. “In the last six months, prices have gone up as much as 20 percent in certain neighborhoods,” she said.

“Investor activity eventually will taper off,” LePage said. “Prices will get to the point where it doesn’t pencil. That’s inevitable – but the big question is when. You have to know when the economy will gain a lot more traction.”

Carolyn Said is a San Francisco Chronicle staff writer. E-mail: csaid@sfchronicle.com

Article source: http://www.sfgate.com/business/article/Investors-rushing-into-real-estate-deals-4026281.php