Steve Jones, a Southern California real estate developer, bought a three-bedroom teardown in Los Angeles’s Glassell Park area last year. It was a risk—after all, this had been gang territory in the ’90s and was still on the border of gentrification. But Jones believed the fringe neighborhood on L.A.’s far east side was ready to attract a different kind of buyer. Over six months he gutted the home, installed marble countertops in the kitchen, put in a pool, and added an attention-grabbing orange front door. He hoped to sell the rehabbed property for $850,000—a lot of money, considering how far you have to drive for a decent cup of coffee. “The customer dictates the price,” he says during a walk-through of the house. “There’s an inexhaustible supply of hipsters in L.A. You saw the same thing happen in Brooklyn. The hipsters pushed out until they got to the water.”
Hipster is a nebulous, overused term, but L.A. brokers loosely define it as the segment of the city’s population that buys $10 artisanal chocolate bars, brings its own tote bags to the grocery store, and sports creative facial hair. With market confidence returning and interest rates near record lows—even after a half-point hike in mid-June—open houses are flooded with creative types searching for homes with a Dwell-ready look. Jones’s firm, Better Shelter, along with three other so-called hipster-flipper outfits, ModOp Design, Native Homes, and ReInhabit, is cashing in by bringing an artful take to the renovation game.
“What the market had been offering in terms of renovated homes was bad laminate flooring, granite countertops—the Home Depot (HD) school of remodeling,” Jones says, citing the kind of quick profiteering that gives flippers a bad name. “There had to be a buyer who appreciated better design.”
There are lots of them, it turns out. According to 2012 data from the U.S. Census Bureau’s American Community Survey, L.A.’s “creative class”—those who work in tech, business, media, entertainment, law, and health care and earn an average of $81,000 a year—make up 34 percent of the area’s workers, more than the national average. In March, Rudy Dvorak, the founder of ReInhabit, sold a three-bedroom, two-bath bungalow in Echo Park, a low-income neighborhood in central L.A., for $922,000 after a bidding war. The firm had paid $300,000 a year earlier, renovated the property, and hung a chain saw on the wall as art. On the popular real estate site Curbed, one commenter wrote of the sale, “The 1968 RCA console TV just shows that they have vision. You can sell anything to hipsters as long as you make them believe it’s hip.”
“People are making all-cash offers of 10 percent over asking with no contingencies,” Dvorak says. “They’re throwing out all rational home-buying practices and saying, ‘Here’s a suitcase of money.’ ” Median home prices in L.A. in February had risen 14 percent from a year earlier, according to the Standard & Poor’s/Case-Shiller Home Price Index. “Prices would have increased more if it weren’t for the rigorous appraisals,” says Glenn Kelman, chief executive officer of the brokerage firm Redfin. In other words, bidding wars drove prices above what banks thought the homes were worth. “It’s easy to get a buyer. It’s harder to close the deal,” Kelman says. In the first quarter of 2013, almost one-third of home sales in L.A. were all-cash deals, up from 7 percent six years ago. The median price on an all-cash deal spiked to $351,000, from $230,000 in 2009.
The hipster-flipper aesthetic, in addition to kitschy, semi-ironic décor, is more about stripping away than adding square footage. One of ModOp’s first flips was a 1920s Craftsman in Echo Park. A previous owner had stuccoed over beautiful but aging redwood siding; at significant expense, the ModOp team chipped away the stucco and patched the siding. “If there’s any architectural integrity to the house, we try to preserve it,” says Alexandra Becket, granddaughter of noted L.A. architect Welton Becket, who runs ModOp with her husband, Greg Steinberg. At the hilltop home in Glassell Park, Jones—who honed his design skills during 20 years at the surf brand Quicksilver—removed a shoddy kitchen addition, which distracted from otherwise clean lines. “At the most basic level,” Jones says, “people crave authenticity and integrity.”
Photographs by Nathaniel Wood for Bloomberg Businessweek
When flipping houses, there isn’t a business plan so much as a calculator: Profit equals sale price minus the cost of renovation. For these developers, the problem lately isn’t finding well-capitalized buyers but locating rundown properties priced low enough to meet their margins. ReInhabit aims to flip 10 houses a year; if Dvorak spends more than $500,000 acquiring a property, he wants to walk away with a $200,000 profit. As the economy has recovered, however, the supply of foreclosed homes has dried up. (Eleven percent of homes sold in L.A. in March were flips, down from 14 percent a year earlier.) It’s not uncommon for the owners of a teardown to get more than 40 offers.
Private equity firms such as Blackstone Group (BX) are partly to blame. In 2012, Blackstone’s Invitation Homes arm spent about $3.5 billion acquiring 20,000 homes in nine U.S. markets. Dvorak also points to the rash of copycats on cable-TV renovation shows, which make flipping seem like a can’t-lose proposition. “No one ever pays a commission on these shows,” he says. “And materials and labor are free. They never show the real cost.”
Dvorak recalls an early project in Mount Washington, in the hills of northeastern L.A., where he discovered dead animals in the attic. He wasn’t turned off; he bought the house for $90,000, put in $225,000, and sold it for $535,000. In April, ModOp flipped a two-bedroom home in pricey Nichols Canyon that had been connected to a septic tank. The price of running new plumbing to the town sewer was exorbitant. The firm still made a profit of more than $100,000, but the home took nearly a year to complete, and Becket had to stage it while she was nine months pregnant. Naturally, she used local artwork and faux taxidermy.
The three most prominent hipster flippers—Dvorak, Jones, and Steinberg—all attended the same high school in Laguna Beach. “We’re friends, but there’s a rivalry for sure. I’ll bump into Steinberg at an open house, and I’ll just nod my head,” Jones says. Dvorak is less politic: “Steve Jones is a good friend of mine. It’s arrogant of me to say, but I think he and Steinberg would agree [ReInhabit does] better, more creative design work.” When pressed for specifics, Dvorak cites a mid-20th century property he flipped on Mulholland Drive. His creative director, John Douglas, hid a speakeasy behind the kitchen pantry. Elsewhere, they turned a 1950s intercom into an iPod dock.
The buyers appreciate the effort. Photographer Polly Borland bid on a ReInhabit flip on Mulholland when her husband, director John Hillcoat (The Road), was out of town. Asked whether that’s a testament to ReInhabit’s good work or the strength of her marriage, she answers, “Both.” Jennifer Kunzler and her fiancé, Brandon Walter, bought the hotly contested home in Echo Park, for cash, after bidding on and losing two other properties during a four-month search. They spent $75,000 more than they’d budgeted, but with a baby on the way and frustration levels high, they went all in, beating out at least 10 other offers. “We fell in love with the house,” says Kunzler, who works in advertising. “We appreciated the reclaimed wood,” she says, although she didn’t end up keeping the vintage refrigerator or TV. “I dig the neighborhood. We can walk to coffee shops. A Whole Foods (WFM) is opening in Silver Lake,” she says. And, for the record: “I don’t consider myself a hipster. But I don’t have any problem with them.”
The market shows no sign of cooling, and if it does, Jones says, a well-executed remodel will still sell itself as long as the agent pushes the neighborhood’s potential. “Highland Park benefits from being near Echo Park, which benefits from being near Silver Lake,” he says. His orange-doored flip in Glassell Park went into escrow at north of $875,000 after less than two weeks on the market. The revolution, Jones says, has already come. He points to a nearby bakery, Lemon Poppy Kitchen, which opened in a strip mall. It sells, among other organic fare, kale smoothies.