Energy-Wise House Flipper
November 01, 2009
This article originally appeared in the November/December 2009 issue of Home Energy Magazine.
David Robinson is a retired contractor who recently started doing what he calls Energy-Wise Renovations of foreclosed homes. He is buying clusters of homes in run-down neighborhoods, hard hit in the housing crisis, in the San Francisco Bay Area and into California’s Central Valley, and retrofitting them with measures such as R-50 insulation in the attics, air sealing, and Energy Star appliances. But he is also creating some pretty stylish kitchens, redoing hardwood floors, and installing granite countertops, crown molding, and wainscoting in these homes. “You can’t sell a home on energy efficiency alone. The first time home buyers in my market just won’t pay the price of a deep energy retrofit. But when it’s all included in the whole package, they buy it easily,” says Robinson.
Robinson is having no problem selling these houses for 10%–20% above market prices, and he’s still giving the home buyers, and the neighborhood, a very good deal. “I believe that there is a wonderful and huge opportunity in bank-owned foreclosures—millions of them,” he says. “And we must rescue all those wonderful opportunities from the normal house flippers, who would just add carpet and paint and turn them into a rental and lower the values and miss the opportunity for deep energy reduction. Isn’t that like putting makeup on a corpse? I buy all foreclosed homes and don’t feel bad about beating up the banks to get the best deals possible so I can put in complete energy packages and some very nice renovation and still sell the finished product at the end.”
Robinson is looking for potential investors who would like to take advantage of this opportunity while the housing market still has plenty of cheap homes to sell. He wants to teach them his method and therefore accelerate the process of converting our housing stock to affordable, efficient, and sustainable housing, and to make a good living doing so. He’s added one word to the descriptor he used in his call-in radio show: Saving the planet, one (foreclosed) house at a time. (For another take on affordable and efficient housing, see sidebar “Look to Seattle.”)
Not Just in Fresno
After completing eight projects, Robinson has seen a definite pattern that results from this approach to renovation. “Your mileage may vary, but don’t let that stop you. Within 50 miles of any point in this state, there are some neighborhoods with similar demographics to the neighborhoods that I have worked in. You mainly just need to move inland from the more-expensive coastal neighborhoods.” The same holds true for neighborhoods all across the United States and Canada.
Typical homes and neighborhoods have the following features:
- Homes are 30-to-50-year-old tract housing; 1,000–1,500 square feet; with three or four bedrooms and two baths.
- They have 4 x 12 pitch roofs and 8-foot ceilings; they are single-story construction, usually on a slab, usually stucco.
- They are in a desirable area—people want to live there.
- Neighborhood is not the lowest-priced zip code in the area—median home value for this zip code is about median for the whole city.
- Neighborhood includes anchors (jobs, shopping, parks) that attract buyers.
“These homes usually have everything worn-out,” says Robinson. “Roofs, A/C, windows, carpet, paint—everything can benefit from renovation. Newer homes don’t need enough. Older homes may need too much work and could become money pits.” Robinson recommends focusing on tract homes. “The tract homes will all be built the same. Stay in a tract and get economies of scale and knowledge of prices and start controlling your own comps and appraisals.”
The 8-foot ceilings, slab foundations, and stucco make these typical “flipper” homes easy targets for energy saving. “Probably the biggest problem in American housing stock is air infiltration through the leaky building envelope,” says Robinson. “One of the biggest culprits is a ventilated crawlspace combined with unsealed floors. This causes the stud bays and the whole house to be a “stack,” and the stack effect, where warm air rises, automatically takes away our conditioned air.” Obviously this doesn’t happen with a slab floor. “Flat ceilings (8 foot or any height) are easier to seal and insulate than the various other configurations: shed ceilings, cathedral ceilings, coffered ceilings, arches, and so on. All of these are areas that can be problems,” says Robinson. “Wood siding on homes has been notoriously leaky. Stucco with the building paper barrier behind it, not so much.”
Robinson looks for homes that allow him to realize energy savings without spending too much. “I choose to buy in tracts where it is pretty easy to realize big savings. Much older, and there is danger of them becoming a money pit. Much newer, and they don’t need as much. So there isn’t really room in the budget for what I do.
“New home buyers typically go for three bedrooms and two baths, and the fixed-up homes offer even greater appeal,” says Robinson. “Studies have shown that the newer buyers want two bathrooms, three bedrooms minimum. And they are willing to pay for it.” In other words, Robinson buys and fixes up the configuration that he has the best chance to sell. Less-desirable homes wouldn’t sell for 10%–20% above market rates, and wouldn’t lift the whole neighborhood while providing much-needed tax revenue to cities.
The federal government is stepping in to help as well. “There are a lot of first-time home buyers, and the current administration is determined to get as many as possible into home ownership,” says Robinson.
|Look to Seattle
Other innovations are coming from Seattle, where G2B Ventures is creating a private equity fund to invest into residential energy efficiency in a socially and environmentally responsible way—buying homes out of distress and taking the opportunity to drive in energy efficiency before offering them for rent. “Our goal is to bring energy efficiency into the market that shows the greatest need for our work—and to do so at large scale. Homes consume about 20% of our nation’s primary energy, so we can really make a difference by turning distressed housing stock into comfortable, attractive homes that use less energy,” says Aaron Fairchild, Managing Partner of G2 Ventures.
The firm takes a twist on the standard buy/sell model by offering them to a market segment that the green building movement often overlooks—renters. “We are taking a lead on offering green homes to the typically under-served market of renters so that the benefits can be spread a little further,” says Fairchild. The firm keeps the relationship going with its tenants by offering energy saving tips and tricks, home maintenance manuals, and feedback on utility usage. As these renters eventually move on towards home ownership, they will look for similarly efficient homes to buy, therefore encouraging the marketplace to keep offering green homes. “It’s a virtuous cycle,” comments Fairchild, “with benefits extending for many years beyond our initial efforts.”
Sonja Gustafson is a marketing manager at G2B Ventures.
For more information on The Efficient Real Estate Fund and G2B Ventures, please visit their Web site at www.g2ventures.com or contact Aaron Fairchild at (206) 947-8208.
The Energy Package
Robinson’s experience so far has taught him that serious energy-efficient retrofits are hard to sell unless they are combined with more visible things that first-time buyers are attracted to, such as the oft-cited granite countertops in the kitchen. With the complete package, Robinson has had no problems finding buyers for his renovated homes. He decided early on to avoid government-mandated or -funded programs to create energy-efficient homes that sell. He has found that the Energy Package sells, as long as it is combined with other popular retrofit measures. The Energy Package consists of
- redesigned, sealed R-8 ducts, second return;
- new HVAC equipment (typically 2-ton 13-SEER, 80% package units), or mini-split systems;
- new vinyl dual-pane replacement windows;
- low-e 140 glass on east and west windows;
- R-50 cellulose attic insulation;
- R-13 cellulose wall insulation;
- ceiling fans;
- CFLs everywhere;
- planting one or more shade trees;
- installing mechanical ventilation (Panasonic Energy Recovery Ventilator FV-04VE1 or Panasonic bath exhaust a minimum)
- shell sealing attic;
- shell sealing under floor and/or sealing crawlspace and installing poly ground sheet;
- installing gas and Energy Star appliances;
- installing light and motion sensors;
- duct test done by HVAC subcontractor; blower door test done by A/C sub; and
- combustion air test done by A/C sub.
(The last two on the list are the test-out procedures. All systems are deemed “catastrophic,” so there is no test-in procedure.)
Along with the Energy Package, Robinson also includes what he calls the Wow Package and Done Package. The Wow Package includes upscale items such as new kitchen cabinets, all-stainless appliances, crown molding, custom tile showers, and designer light fixtures; and the more practical but still attractive features of the Done Package include water-efficient landscaping, new garage doors and windows, 30–50-year composition roofs, proper drainage away from the house, dash coat or complete exterior paint, and new 100-amp electrical service.
Robinson calculates that the energy and other packages and soft costs—interest expenses, insurance, taxes, waste, theft, Realtor fees, closing costs, utilities, and missed estimates—along with a good $20,000 profit per house, add up to $100,000. He suggests that the total buy-sell spread be no less than that amount. “If there isn’t a 100k spread from buy to sell, you must modify your cost structure or pass and wait for a better deal,” he says. “That’s the bottom line.”
Robinson offers some cautions for people who want to enter this business of energy-wise house flipping. “For this math exercise to make sense, you must have a good idea of your final sales price. To get clarity on this, you must have a well-done comparative market analysis (CMA) from your Realtor. Some Realtors want to wing it and give you their opinion without doing the CMA. They are the wrong Realtor, so keep looking.”
Jim Gunshinan is Home Energy’s editor.
For more information:
David Robinson coordinates a teleconference every Tuesday at 6 pm Pacific Time. If you want to know more, call him at (559)994-9477, or e-mail him at email@example.com. He will e-mail you a PowerPoint presentation that you can look at on your own computer and give you a call-in number and password for the teleconference.
Robinson also teaches classes through Pacific Gas and Electric (PG&E), www.pge.com.
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