On Flipping - Or Building Equity - For Canadian Real Estate Buyers
For the sake of this post, I'm going to zero in on the Troonto real esate market. Which, at the moment, has some serious similarities to the Vancouver and Montreal markets, but obviously oscillates in different ways from many of the smaller Canadian micro markets.
I have some clients who are in the renovation business who are looking for a property suitable for a comprehensive transformation. Let's call them "Bert and Brenda".
Most people would call them flippers, which for many construes the same connotation as used car salesmen and, er, um, real estate agents.
Just as I believe I'm worth my weight in gold - here's My Due Diligence Program To Help Buyers Make The Right Real Estate Purchase - I genuinely appreciate the skilled design/build teams who purchase tired, dated, obsolete crap boxes (like all those Toronto Housing Corporation dumps which were unloaded a few years ago) and turns them into quality, renovated, mechanically-sound dwellings for resale while extending the life span of these properties another thirty years. In fact, I fully support the home improvement industry earning a premium return on investment for jobs-well-done.
Before you think it's super easy to flip properties, it's actually one of the most challenging of all the shelter industry occupations because you're trying to get the highest return in the shortest amount of time while operating at the whims of what can be a very fickle market. Basically - at any moment - the market dynamics can change on a dime based on many external factors. Most recently the renovation industry have been slammed by government interventions like the introduction of a foreign buyer's tax, the resulting resistance of Buyers waiting to see the impact of such a policy, and the Bank of Canada's multiple increases of interest rates. With that, there's also the propensity for the media to sensationalize with headlines touting all hell is breaking loose in the 1) stock market, 2) Brexit and 3) the fallout from USMCA.
Even more challenging is that the demand for Toronto real estate is so strong, end users - that's people who are buying to occupy a property as a personal residence - are often willing to pay more than a flipper simply because they're willing to pay a premium - which is another way of saying 'future value' - to secure a property in a highly competitive market. Did you know there are four values to real estate, three of which are intangible and prone to seeing a property garner a sum that exceeds what a rational educated prudent well-informed buyer might otherwise pay? Here are The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate which explains how flippers often lose to end users because they've found the Prince Charming of bricks and mortar.
For the flippers who do lock down a property, there are instances where some do a disservice to the housing industry for their lack - as TV Personality / Contractor Mike Holmes says, to 'Make It Right', whether it's for cutting corners, having poor design sensibility, or terrible taste in fixtures and fittings. I've had occasion to share some amusing but sad tales from the real estate trenches including:
On recessed lighting overkill --> We Flip Burgers, Not Houses
On choosing ubiquitous Big Box Store fixtures --> We Flip Flapjacks, Not Houses
On sloppy installation --> We Flip Quesadillas, Not Houses
On poor space planning --> We Flip Eggs Over-Easy, Not Houses
On cheap light fixtures --> Staging Nightmare
On metal doors and faux stained glass --> Stains On My Window
Given the Toronto real estate market has been bumpy at best for the past year, I'm seeing many flippers either breaking-even, losing money or making minuscule profits given the time, energy and capital investment required to take on such a risk. Did you know there's a rule of thumb in the real estate development industry (where I launched my career in the 90s recounted in I'm Steve Fudge, And I Sell Real Estate) that says for every five developments: two make money; one breaks even, and two lose money. It is not as lucrative, or as easy, as one might presume.
For example, here are two flips on the same street in the central west side that recently sold. Given their Triple AAA locations - they were strong contenders to make money, or better money, had the market maintained its momentum:
The house above - a mediocre flip - was listed and relisted five times on MLS before it sold. The Sellers paid $1,300,000 in April 2017 (the peak of the market) and executed the more superficial cosmetic renovations rather than the more comprehensive building components most buyers prefer when they're buying a property over $1,5mil. They installed a shiny luxe kitchen and finished the basement (without digging it down), and slapped lots of paint top to bottom, but their mistake was not keeping the quality and aesthetics cohesive throughout the property which I suspect turned buyers off (and leaving a full bath carved in a corner of a 'formal dining room - srsly?'). Starting at a list price of $1,648,888, it wasn't until they dropped the price in desperation to $1,450,000 did it sell for $1,433,926. Given the acquisition price, renovation capital plus buying (50k) and selling (60k) costs, this flip lost money.
This house - a quality flip - also struggled to find a buyer. The owner paid $1,300,000 in January 2017. She stripped this to the studs and rebuilt it to exacting specifications using quality fittings and finishes. But she made a judgment in error by renovating a house that was too small to realize a huge return. It was 2 storeys and only had three bedrooms - when a 3 storey four-bed dwelling is always the better route because it has broader appeal because there are so many fewer of that size in the city core - and they're less likely to come to market because owners of four-bed houses stay in them for 20+ years. She also didn't install a master ensuite which becomes highly problematic when you're courting the high-earning on-trend professional buyer. Starting at a list price of $2,600,000, it was on the market four times over the span of 8 months, with three price reductions, a failed effort at listing low at $1,850,000 with a hold back on offers with the aim of inciting a bidding war, and then ultimately selling for $1,918,000 on its final relist price of $1,950,000 after four days. I estimate the owner put in around $375,000 in hard costs – and paid a further $175,000 in buying, carrying and selling costs – so she made a squeak of money at best on this. I wish she had profited more given the care, attention to detail and commitment to the quality she invested. This owner completely subscribed to the Make It Right philosophy of Mike Holmes (can you tell I'm a fan of his?), but market forces dragged her down, although I suppose it's possible to 'over improve' a dwelling when you care that much. I know as I've done it in my own residences for personal use. If I were a flipper, I know I would struggle to opt for cheaper options in an effort to make more profit.
In the case of my Buyers who want to renovate for resale, Bert and Brenda have now been on the hunt for six months. Spanning the better locations in the original City of Toronto, during this time there have only been a handful of true contenders. I assure you this is not easy money, but if you're considering transforming a property for profit, here are some of my past blogs worth reading:
Just beware of the black hole of expenses which will suck your profit dry!
Not a flipper?
If you're simply looking to buy a property and increase its value through intelligent upgrades as a way to build equity, here's my list of essential posts I recommend you read before you buy:
A surprising, but relevant fact: Given the high closing and selling costs associated with a real estate purchase, Toronto buyers have to see their dwelling increase about 7% simply to break even!
It can be a challenge to navigate the swiftly moving Toronto real estate market. Once Buyers accept that they can't "beat" the market, but rather, must follow it's a natural flow to gain equity over time, they're much happier. Please know I, and the Urbaneer.com team, are here to guide you!
Thanks for reading my monthly real estate contribution - orignally posted on Urbaneer's Homewatch News series - where I share my insights on anything and everything related to the homeowner experience! Are you seeking property in Toronto? May I be of assistance?
Contact me - Steve Fudge the purveyor of Houseporn.ca and the proprietor of Urbaneer.com - at firstname.lastname@example.org for more info!
~ Posted by Steven Fudge, the purveyor of houseporn.ca and proprietor of Urbaneer.com, a division of Bosley Real Estate Ltd., Brokerage.