Estate agent Clark Kaye says it’s a tough market for house flippers as mortgage, building and labor costs have increased while the housing market has weakened significantly. NICK IVANISHIN / THE GLOBE AND MAIL
Over the past two years, property hunters have gone rogue in Canada’s red-hot real estate market. But with today’s slower sales and home prices falling fast, it’s time to take stock.
Clark Cai counts many such real estate flippers—investors who buy real estate to resell for a quick profit—among its clients. He is a sales representative at Chestnut Park Real Estate Ltd. Brokerage in Toronto, as well as co-founder of Winchester Design and Build Ltd., a real estate and land development company.
Along with his broker partner, Will Zang, they coach the flippers, who typically sell the properties after major renovations, in the interior design process, including advising on exactly what changes will make the house more attractive in a particular market. As realtors, they can also help clients find the right types of houses and neighborhoods that are good flipping prospects.
“Investors don’t know the market as well as we do because we work with resale,” says Mr Cai. “So we’re bridging that gap between designers, architects, engineers and the market. I can tell them that this neighborhood is good for adding another bedroom on the second floor, or that according to the last 10 sales, projects with a waterfall staircase have done very well. This means getting maximum resale value.”
When home prices in Toronto continued to rise last year, Mr. Cai began advising his investor clients not to buy anything with the intention of flipping and just see what’s for sale. Currently, given plunging home prices — down 19 percent in Toronto from February 2022, according to the Toronto Housing Market Report — combined with high construction costs and competition for increasingly expensive tradesmen, d Cai says he personally wouldn’t bank on doing a resale for the next year or two.
“Right now, the math doesn’t make sense to reverse,” says Mr. Cai. “We are finishing everything on the properties we bought a year or more ago. Some investors may decide to rent their property short-term or simply hold on to it. We’re still deciding on one that’s just finished, whether to bring it out in September [to sell] or wait until next spring.
Mr Cai says he expects to see some deals emerge in the next six to 12 months as some homeowners will not be able to refinance and will be forced to sell. However, anyone looking to buy right now should look for something that produces an income like a rental property.
“Currently, rents are high and rental demand is high,” says Mr Cai.
“If the market comes back in the next two years, you can always start renovating and turn it around then. The supply of housing in Toronto and the GTA is extremely low, so I can’t see how the price drop will be endless this way.”
Matt Francis, broker and managing partner of StreetCity Realty Inc. The Stratford, Ont.-based brokerage believes there are still opportunities for investors whether the seller’s market is as tough as it has been for the past two years or if it turns into a buyer’s market. But the falling market has created problems for investors without deep pockets.
“Just as some people bought not knowing they were going to end up throwing in a really, really profitable seller’s market, others bought at high prices at the end of that spike and the market closed in on them,” Mr Francis says. “If they went into this flip with the mentality of putting all their eggs in one basket and having to sell it at a high price, then they’re in trouble. But if they have enough money in the bank that they can say “that’s fine, I’ll just rent this house,” they’ll be fine. The rental market is huge.”
However, “some of them may need equity to buy the next property, which could hold them over for a while, depending on their particular financial situation,” says Mr Francis. “But if they can get a tenant in there for a few years until the market starts to pick up again, they can sell then and get their profit.”
While Mr. Francis says he’s not too hard on for-profit renovations, he is tough on flippers who hide or ignore important renovations.
“Buyers will always be drawn to these freshly renovated properties with ‘of-the-moment’ styles such as white kitchens and gray floors,” says Mr Francis. “But it’s buyer beware with these renovated for-sale flip houses to make sure the ugly money — on furnaces, waterproofing, insulation and roofing — is spent. You’ll eventually have to pay that ugly cash or it will reduce your sale price when you sell – and that goes for flippers as well.
“I’m much more into creating wealth for my clients than making a quick buck. Buy, renovate, refinance, lease and hold. We need people to repair old houses. It makes our housing stock better and it’s good for our economy.”
From a flipping perspective, contractors and tradesmen definitely have an advantage over an investor who has to hire people to do the repairs.
“The successful flippers are the contractors or traders who have made it through this turbulent market and who do so as a secondary means of income,” says Mr Francis. “The person who has to hire the contractor can’t turn over as quickly as the contractor or tradesmen who can do the work themselves and have better access to materials. Because they know they’re going to do another flip, they can buy materials in bulk and store until they’re ready to do their next house.”
In addition to shortages and rising prices of building materials, labor costs are increasing due to high demand, making repairs more expensive. It also means contractors and marketers can “be more selective,” he says.
“If I have a choice of five jobs, I will take the person who is willing to accept my offer. This in no way suggests that contractors and marketers are profiting from the lack of availability. It’s an honest business.
So, is it financially wise to buy a house that’s already been renovated if you want to flip it?
“No, because you’re counting on the market going up there,” says Mr Francis. “I’d rather err on the side of caution than overestimate [the market] and hurt your bottom line.”
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