The chilly housing market freezes the flipping

Real estate agent Clark Cai says it’s a tough market to turn homes as mortgage, construction and labor costs have risen while the housing market has declined significantly.NICK IWANYSHYN/THE GLOBE AND MAIL

Real estate geeks have been acting like bandits in Canada’s red-hot real estate market for the past two years. But with today’s slower sales and rapidly falling home prices, it’s time for reckoning.

Clark Cai counts many such real estate flippers – investors who buy real estate in order to resell it for a quick profit – among his clients. He is a Sales Agent for Chestnut Park Real Estate Ltd. Brokerage in Toronto and co-founder of Winchester Design and Build Ltd., a real estate and property development company.

Along with his brokerage partner, Will Zang, they coach Fins, who typically sell the properties after extensive renovations, in the interior design process, including advising on exactly what changes will make a home more appealing in a given market. As real estate agents, they can also help clients find the right types of homes and neighborhoods that offer good flipping prospects.

“Investors don’t know the market as well as we do because we work on the resale side,” says Mr. Cai. “So we’re bridging that gap between the designers, architects, engineers and the market. I can tell you that in this neighborhood it’s good to add another bedroom on the second floor or projects with a waterfall staircase have worked really well according to the last 10 sales. That means getting maximum resale value.”

As Toronto home prices continued to soar last year, Mr. Cai began advising his investor clients not to buy anything with the intention of flipping something and just observe what is marketable. With falling home prices — down 19 percent in Toronto from February 2022, according to the Toronto Housing Market Report — coupled with high construction costs and competition for increasingly expensive tradesmen, Mr. Cai says he personally wouldn’t bank on it in the next one or two years to do a resale flip.

“The math for flipping doesn’t make sense right now,” says Mr. Cai. “We are just finalizing everything on the properties that we bought a year or more ago. Some investors may choose to rent out their property for the short term or simply hold it. With one that was just completed, we’re still considering releasing it in September [to sell] or wait until next spring.”

Mr Cai says he expects some deals to materialize over the next six to 12 months because some homeowners will be unable to refinance and will be forced to sell. However, those looking to buy now should look for something that will generate income, such as a rental property.

“Rents are high at the moment and the demand for rents is high,” says Mr. Cai.

“If the market comes back in the next two years, you can always start the renovation and then turn it around. Housing supply in Toronto and the GTA is extremely low so I can’t really see how the price drop will be endless.

Matt Francis, a real estate agent and managing partner of StreetCity Realty Inc. Brokerage in Stratford, Ontario, believes there are still opportunities for investors regardless of whether it’s a strict seller’s market, as it has been for the past two years was, or if it develops into a buyer’s market. But the declining market has caused problems for investors without deep pockets.

“Just as some people bought not knowing they were going to end their flip in a really, really profitable seller’s market, others bought at high prices at the end of that rally and the market flattened on them,” says Mr. Francis. “If they’ve entered this turnaround 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 to say, “That’s fine, I’m going to rent this house,” they’ll be fine. The rental market is huge.”

“However, some of them may need the equity to build the next property, which could put them on hold for a while depending on their specific financial situation,” says Francis. “But if they can put a tenant there for a couple of years until the market picks up again, then they can sell and make their profit.”

While Mr. Francis says he’s not too hard on renovations to make a profit, he’s tough on fins that hide or ignore the important fixes.

“Buyers are always drawn to these newly renovated properties with contemporary styles like white kitchens and gray floors,” says Mr. Francis. “But buyers are wary of these renovated upside-down homes for sale to ensure the ugly money – on stoves, waterproofing, insulation and roofing – has been spent. You’ll have to pay that ugly money eventually, or it will drag your selling price down when you sell – and that goes for fins too.

“I’m much more of a proponent of building wealth for my clients than making a quick buck. Buy, renovate, refinance, rent and keep. We need people who renovate old houses. That makes our housing stock better and is good for our economy.”

From a flipping standpoint, contractors and handymen definitely have an advantage over the investor flipper who has to hire people to do the renovations.

“The successful fins are the contractors or tradespeople who have fought their way through this turbulent market and are doing it as a sideline,” says Mr. Francis. “The guy who has to hire the contractor can’t flip as easily as the contractor or handymen who can do the job themselves and have better access to materials. Because they know they’re going to make another flip, they can wholesale and store materials until they’re ready to build their next home.”

Aside from shortages and rising costs for building materials, labor costs are increasing due to high demand, making renovations more expensive. It also means that contractors and craftsmen “can be more selective,” he says.

“If I have five jobs to choose from, I take the person who is willing to take my offer. This in no way means that contractors and craftsmen benefit from the lack of availability. It’s a fair deal.”

So is it financially wise to buy an already renovated home if you want to flip it?

“No, because you’re betting on the market going up there,” says Mr. Francis. “I’d rather be cautious and wrong than overestimate [the market] and affect your bottom line financially.”

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