Cool housing market puts a freeze on flipping
Real estate flippers have made out like bandits in Canada’s red hot real estate market over the past two years. But with today’s slower sales and house prices dropping rapidly, it’s time for a reckoning.
Clark Cai counts many such real estate flippers – investors who buy real estate to resell for a quick profit – among his clients. He’s a sales representative at Chestnut Park Real Estate Ltd. Brokerage in Toronto, as well as co-founder of Winchester Design and Build Ltd., a company specializing in real estate and land development.
Along with his realtor partner Will Zang, they coach flippers, who typically sell the properties after undertaking major renovations, on the interior design process, including advising exactly what changes will make a house more attractive in a certain market. As realtors, they can also help clients find the right kinds of houses and neighbourhoods that are good prospects for flipping.
“Investors don’t know the market as well as we do, because we work with the resale side,” Mr. Cai says. “So, we bridge that gap between the designers, architects, engineers and the market. I can tell them that in this neighbourhood, it’s good to add another bedroom on the second floor, or that according to the last 10 sales, projects with a waterfall staircase worked out really well. That translates into getting the maximum resale value.”
When Toronto house prices continued to soar last year, Mr. Cai began advising his investor clients not to buy anything with the intention of flipping and just watch to see what’s marketable. Currently, given the sinking home prices – down 19 per cent in Toronto compared to February 2022, according to the Toronto Housing Market Report – combined with high construction costs and the competition for increasingly expensive tradespeople, Mr. Cai says he personally wouldn’t bank on doing a resale flip for the next year or two.
“The math doesn’t make sense right now for flipping,” Mr. Cai says. “We’re finishing up everything on the properties we bought a year or more ago. Some investors may decide to rent their property out short term or just hold it. We’re still deciding about one that’s just completed, 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 because some homeowners won’t be able to refinance and will be forced to sell. However, anyone wanting to buy right now should look for something that produces an income like a rental property.
“Rents are high right now and the demand to rent is high,” Mr. Cai says.
“If market comes back in the next two years, you can always start renovating and flip it then. The housing supply in Toronto and the GTA is extremely low so I can’t really see how this how the price drop is going to be endless.”
Matt Francis, a realtor and managing partner of StreetCity Realty Inc. Brokerage in Stratford, Ont., believes there are still opportunities out there for investors, regardless of whether it’s a severe seller’s market, as was the case for the last two years, or if it’s turning into a buyer’s market. But the declining market has created problems for investors without deep pockets.
“Just as some people bought not knowing that they were going to finish their flip in a really, really profitable seller’s market, others bought at high prices at the tail end of this surge and the market flattened on them,” Mr. Francis says. “If they entered that flip with the mentality of putting all their eggs in one basket and having to sell it for 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 okay. The rental market is huge.”
However, “some of them might need the equity to do the next property, which might put them on hold for a while, depending on their specific financial situation,” Mr. Francis says. “But if they can put a renter in there for a couple of years until the market starts picking up again, they can sell then and get their profit.”
While Mr. Francis says he’s not overly harsh on renovation for profit, he is harsh on flippers who hide or ignore the important repairs.
“Buyers are always going to be attracted to those freshly renovated properties with ‘of the moment’ style, like white kitchens and grey flooring,” Mr. Francis says. “But buyer beware on those renovated-for-sale, flipped houses to make sure that the ugly money – for furnaces, waterproofing, insulation, and roofs – has been spent. You’ll have to pay that ugly money eventually, or it’s going to drag down your sale price when you do sell – and that applies to flippers, too.
“I am much more of a proponent of wealth creation for my clients over making a quick buck. Purchase, renovate, refinance, rent and retain. We need people to renovate old houses. That makes our housing stock better and is good for our economy.”
From a flipping standpoint, contractors and tradespeople definitely have an advantage over the investor flipper who has to hire people to do the renovations.
“The successful flippers are the contractors or tradesmen who have stuck it out through this turbulent market and who do this as a secondary means of income,” Mr. Francis says. “The guy who has to hire the contractor can’t flip as fast 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 wholesale and store materials until they’re ready to do their next house.”
Aside from shortages and the rising cost of construction materials, labour costs are up due to high demand, which makes renovations more expensive. That also means contractors and tradespeople can “be more selective,” he says.
“If I have my pick of five jobs, I’m going to accept the person who’s willing to accept my quote. That in no way suggests that contractors and tradespeople are profiteering on the lack of availability. It’s fair business.”
So, is it financially smart to buy a house that’s already renovated if you want to flip it?
“No, because you’re banking on market rise there,” Mr. Francis says. “I’d rather be cautious and wrong, than overestimate [the market] and hurt your financial bottom line.”
