Rising home prices and short supply have investors setting their sights on a new real estate play.
Home flipping, loosely defined as buying and selling the same home within six months, fell out of favor during the housing recession, as falling prices left no prospect for profit. Now the market is on the rise again, and flippers are testing the waters, but the game has changed. This time high rollers are taking the lead, backed by private equity cash.

The million-dollar flip is a high-risk, high-reward play, with investors catering to the latest architectural whims of the highest-end buyers.

Climbing through the shell of a Los Angeles home he bought for just over $800,000, real estate investor Nicholas Sinatra confers with a team of architects, designers and contractors. They discuss a new floor plan and high-end finishes that will allow them to list the home for more than $2 million. It is high-end house flipping in its highest form, and Sinatra’s company, American Coastal Properties, is pushing both the walls and the envelope.

“In the hotter markets, like coastal Southern California, you have a unique situation where there’s a high barrier to entry, and highly desirable neighborhoods, where people want to come in, and there’s no supply, there’s no inventory,” said Sinatra. “We’re looking at properties all the way from $1 million in acquisition price … we just purchased one for $9.5 million.”

House flipping nationwide is down 13 percent from a year ago, but high-end flipping (homes priced above $750,000) is up 34 percent, according to a new report from RealtyTrac, an online real estate company.

More than three-fourths of all high-end flips were in five markets: the New York metro area and four coastal California markets—Los Angeles, San Francisco, San Jose and San Diego. These are land-constrained areas with high demand and limited new construction.

Flips on homes priced between $1 million and $2 million increased 42 percent year over year, while flips on homes priced between $2 million and $5 million increased 350 percent year over year.

Most of the flippers are using all-cash, as credit for flips is tight and expensive. American Coastal Properties, still a boutique firm, hopes to double the number of homes it rehabs and flips to around 50 a year, thanks to a $50 million infusion from equity firm Colony Capital and the Pritzker/Vlock Family Office.

Colony has been putting millions of dollars into low-end foreclosed properties in the so-called sand states, fixing up the properties and putting them up for rent. This is a new and arguably riskier tack.

“It’s a bigger upfront risk and on the back end you have usually fewer buyers, but the payoff can also be much bigger,” said Daren Blomquist of RealtyTrac. “We’re showing the average gross profit on one of these high-end flips is about $240,000, compared to about a $55,000 average profit on the lower end.”

For all flips, California metro markets rank high in profitability, but Washington, D.C., nets the highest at an average gross profit of $260,569. Los Angeles nets an average gross profit of $127,634, but on the high end it can be far higher.

“There are some very large homes in one-of-a-kind neighborhoods on the beach for example that are old, dated stock that we see an opportunity in,” said Sinatra.

While many investor/builders will buy older properties and tear them down, Sinatra said it is more cost effective to strip them to the studs and add space if necessary. That helps him avoid some costly tax and zoning issues. He does not see his company as competing directly with home builders, because he sees his business as unique.

“We are pioneering this higher-end space, so there aren’t as many other investors in the space, and when they do come in the space that’s going to allow the pricing to run a little bit, so we’re optimistic about the next three to four years as to where the space is going.”

—By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.