Flipper alert: Dana Point

We've made the point a few times, but here it goes again: Yes, homebuilders may be hitting the panic button and are trying (hoping) to unload as much of their inventory as possible by slashing prices and adding incentives for buyers right now, but there remains an intrepid few who are looking to turn a quick profit by flipping OC real estate.

This week's flip in the making takes us to Dana Point. Here are the details:
34038 Selva Road #116, Dana Point, Calif., 92629
Size: 2 beds, 2 baths, 1,000 sq ft (built in 1982)
MLS: S491891 (97 days on Redfin)
Asking price: $629,000
Asking price/ sq ft: $629
Purchase price: $555,000
Purchase date: 1/12/2007
2006 property taxes paid: $1,251
HOA dues: $370
Type: Condominium
Style: Cape Cod
From listing: What a Beautiful Remodel on OCEAN SIDE of PCH across from Salt Creek Beach, close to the Ritz Carlton and St. Regis! Kitchen has new appliances, new counter tops, garden window. Italian tile floors in kitchen, LR, D/R, and both patios. All new doors to patios. Walk along the beach or enjoy the community pool and spa. Private lower level. Near new Headlands Development.
Despite the initial red flag of not actually having a photo of the exterior of this property with the listing, this place doesn't look too bad. It's possible our flipper is banking on this unit's prime location to bring in the dough. And believe us, this is a prime location - beach close and near the Ritz Carlton and St. Regis hotels. Not surprisingly, they're not the only listing in this complex to tout those facts.

If this property sells at the current price, the current owner stands to make $36,260 - assuming 6 percent selling costs.

Four problems with this scenario:

1. The potential profit does not take into account money spent fixing up the property. Who knows how much this "beautiful remodel" cost. Well, guess the flipper does. We know from the listing that, not surprisingly, one focus area of the remodel was the kitchen. Classic flipper MO to throw in new kitchen appliances and counters.
   
2. Neither does it take into account holding costs. Usually, a successful flip will involve holding the property for as little time as possible, therefore cutting down on the amount of interest owed to the bank. The longer the owners cannot sell, the more of their profit is eaten up. Guess there's a chance the current owner paid all cash for this and doesn't need to be in a rush to unload it, but doubtful.
   
3. This property was purchased in January. We know the market has fallen since then. Therefore, the property's intrinsic value is less than it was when the flipper purchased it.
   
4. The property is nearing the 100 days on Redfin mark without a sale or price reduction. Therefore, it is reasonable to believe that this property is not priced correctly. Too high you say? Let's confirm by glancing at the comps...
   

Here are three other properties showing up in the same complex on Redfin. Note: This listing says the square footage is 1,000, but I could not locate any other 2 bed/2 bath properties in the same neighborhood of that exact size, so this number is suspect. All the other properties for sale and recently sold in the complex are listed at 873 sq ft, so I am making the assumption that this is the correct size. If anyone can confirm or correct this, it would be appreciated in the interest of accuracy.

*34040 Selva Rd #122 is also 2 beds/2 baths, 873 sq ft. It's listed for $685,000. Why so high you wonder? Glad you asked. This is no ordinary condo! It's a "luxurious top of the line ' Safari / Plantation Style' remodel by prominent Scottsdale, AZ. designer." Talk about a mouthful. Time on Redfin: 15 days.
*34036 Selva Rd #108 is 2 beds/2 baths, 873 sq ft. Its asking price is $569,900, which is $59,100 less than our flipper. Time on Redfin: 137 days. Original asking price: $609,999. Not very good news for our flipper, since this property has already been dangled on the market without success.
*34022 Selva Rd #52 is the same size as the others. The current owner is asking $549,000, making this property the lowest-priced of the bunch. If a buyer decided to choose this property over our flippers' (and they would, according to the principle of substitution, which says someone is going to pick the cheaper of two properties that suit their needs equally as well), they would save a cool $80,000. Nothing significantly different than our flipper's property - this one was "remodeled just a couple years ago." Days on Redfin: 70.

Bottom line here: Flipping properties is a risky game - even more risky when there is a dearth of buyers looking to enter the market. The philosophy behind this type of project is usually that you make your money when you buy the property at a discount, because you've got a cushion to do some fixes in key areas, list it at a fair retail price, and realize a profit (calculated ahead of time) when it sells.

But these days, when real estate is concerned, all bets are off.