Editor’s Note: Hal Cranmer has had a wild past. Born in India, he’s lived all over the world and started his working life as an Air Force Special Operations and Commercial airline pilot. After 9/11 brought him down from the clouds, he entered the corporate world and rose to the level of running a $36M machining plant. Yet from 2006 on, he caught the passion for real estate investing. He flipped a bunch of houses in Minneapolis and still owns several multifamily rentals there. Lately, he is into assisted living, and owns 5 assisted living homes in the Phoenix area. He loves to follow real estate trends, both locally and nationally.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Cranmer provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out our other super-helpful Market News Updates. For now, enjoy...
From Hal Cranmer...
There’s always been a traditional process to fix & flip properties:
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Find a deal on a property in poor condition
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Demo all the problem areas
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Remodel the property to make it look great (in the flipper’s opinion)
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Stage it and sell it
Some flips diverge slightly from these 4 steps but most of them follow the process. The trouble with this model is that the home is rehabbed according to the rehabber’s best judgement…
It may not be what a buyer wants. It may be close to what a buyer wants. It may be close enough that the average buyer says they will take it.
But… it may not be completely there.
Truth is that a home is a very personal purchase for someone. After all, a home is where:
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Newlyweds start living together
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Kids are raised
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Grandparents are cared for
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Pets become part of the family
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Memories are created
People want to the space to be their own.
Many times it’s money that makes them accept what the previous owner did. If they had their choice, they would like to pick out everything.
That’s why builders of new construction offer lots of different options before the home is built. The buyer feels like the ‘own’ the design. Buyers love new construction for this reason.
Making Old Construction New Again
Personalizing a property is a particular problem in the high-end luxury market…
When you’re paying several million dollars for a home, you want to be darn sure the home is exactly as you’d want it. I know of a very wealthy individual who purchased a $3 million home on a Caribbean island and proceeded to gut it because he didn’t like the floor plan.
That makes a luxury flipper’s job difficult.
How do you know if that $50,000 kitchen is the right kitchen?
That could be a very expensive mistake in a high-end property.
Some real estate professionals are trying to change their businesses to sell to a high-end luxury clientele. In cities such as New York and LA, they are gutting luxury properties…
They just put the property on the market clean and gutted down to the studs. And in some cases, they are finding they are making more money with this model. They call this process “White Boxing.”
This article on the CNBC website describes how a 7,000-square-foot penthouse in the “storied, iconic” (though I’ve never heard of it) Sierra Towers was recently stripped down to the bare studs and listed on the market for $58 million.
They are saying the fact that it is empty makes it more valuable. (Yep, that’s it in that pic.)
The reason the sellers say it’s more valuable is that a buyer can really customize the space exactly as they want. Sure, a buyer can do that with any old fixer upper…
But when it’s already demoed and clean, all the buyer has to do is put it back together again. Plus many buyers believe in being environmentally friendly. They don’t want to be responsible for hauling a bunch of construction debris to the dump.
Think of selling a home more as “designer ready” than “move-in ready.”
What the Rich Do Today Is What Everyone Else Does Tomorrow
I’m sure many investors would think “I’m not flipping $58 million penthouses.” So they think this idea of white boxing wouldn’t really apply to them…
Don’t be too sure.
Look at things like plasma TV’s. When they first came on the market, they were $5,000-$10,000. A rich person’s status symbol.
Now you can go to Walmart and pick up a plasma (or whatever the latest flat screen technology is) for a couple hundred dollars.
The rich are very often sort of like a “test center” for new products and ideas. When the new product first comes to market, production efficiencies and innovation are in their infancy.
After they are out for a while and they’re selling, high-end products become lower-end products as more competitor’s race into these high-profit niches. Pretty soon, the price point drops and everyone has access to the rich person’s domain.
White boxing seems to have the potential to follow this trend.
One of the biggest hurdles seasoned real estate investors will have to overcome is the buyer’s lack of imagination. Half-assing a rehab job can seriously cut into your sales price.
If a buyer has to imagine what a house will look like when it is completely finished, and finished well, they become very turned off. No amount of fancy advertising and sales copy will help nearly as much as having a beautifully finished and staged home.
These days that lack of imagination can be overcome…
Computer modeling and simulation can show a buyer what a home can look like before anyone picks up a hammer. Better yet, if the buyer doesn’t like what they see on the model, everything can be changed at no cost. The changes can keep coming until the buyer is satisfied. Then the home is put back together exactly as the buyer wants it.
Everyone is happy…
The buyer moves into a home that is completely customized to her tastes. And the investor knows they have a high probability of a buyer closing on it before he starts his outlays for rehab.
Or the investor walks away from the property with a profit for doing nothing by the demo.
Just look how they run some of those rehab shows on TV... the hosts of the show help a buyer select a run-down property, go through a bunch of computer models with them, and then rehab the house exactly as the buyer wants.
Except white boxing removes the real estate investor before they have to go through the rehab with the buyer. Even easier.
With the technology available today, coupled with the customized preferences of super-rich homebuyers, white boxing is a trend that could filter down to the masses as technology improves and buyers in lower price ranges become more finicky.
Questions, Comments, Thoughts
Have you been able to sell a flip prior to finishing it? Let us know how you did in the comments section below.