It was American Thanksgiving, and I was in Phoenix doing my best to enjoy a turkey dinner whilst recovering from emergency dental surgery. In-between bites, I ended up selling a home in east Oshawa. The Sellers ended up settling a good price which helped them move to a rental and enjoy the equity their home had built up since they purchased it over 60 years ago. 7 months later, in June of this year the home came back on the market for sale. The Buyers had spent tens of thousands on renovations, hoping to flip the property, however the “flip” market had sailed ship months ago.
They listed the home for $20,000 less than they paid and it looks as if they had hoped to get a bidding war happening. The home was taken off the market a month later, unsold.
Let’s take a minute to dig into how a “flip” looks from a financial point of view.
When a Buyer buys a home, in this case for $921,000 their closing costs, on average will be about $17,000 bringing the purchase price to $938,000. Before we add in the cost of renovations, let’s look at carrying costs between the purchase date and the eventual closing date, (mortgage payments and property taxes) and costs to sell. I am going to average out an example, as we don’t know what kind of mortgage amount is on the property or what the Realtor costs are, however we can use a low average of about $70,000. (lawyers fees, realtor fees, HST, mortgage, tax and insurance for 6 months) In order for the investor to break even, they would have to sell the home for at least $1,008,000. Now we add in the renovations. It looks like this investor did somewhere in the range of $75,000 by removing walls, adding pot lighting, new kitchen and baths. That would mean to break even the investor would need to sell for a minimum of $1,080,000. The numbers don’t add up, it is easy to see.
This type of investor has left the market. It is not possible to buy and sell in a short period of time and cover costs.
Since around the time I sold this home, there were 3 other homes sold on the street where the Buyers attempted to flip the properties. Here is what their attempts look like:
- Bungalow sold Dec/21 for $830,000. Renovated and placed back on the market for $850,000 and then $875,000 and finally $798,000. After 42 days on market, it was taken off, unsold.
- Sidesplit sold Oct/21 for $820,000. Renovated and placed back on the market for $900,000 and then $950,000 and after 13 days of market time the homeowner rented the property.
- 2 storey sold Jan/21 for $1,000,000. It looks like the home was not altered, and was introduced for sale in Spring/22 for $1,500,000 and then $1,789,000, reduced to $1,300,000 and taken off the market after a total of 23 days.
There were many properties that were purchased with the Buyers hoping to flip the properties and pocket the difference and in many cases they ended up with successful transactions, however whenever there is a transition, or a shifted market some people get caught. Warren Buffett has a saying; “Be fearful when others are greedy, and greedy when others are fearful.” This quote applies to the last few years as people jumped into investing like they were seasoned investors only to find out that the downsides can be financially challenging.
Is there an upside? Absolutely! When properties don’t sell, the investors need to recover their carrying costs, and the easiest way to do this is by renting the properties. This adds desperately needed rental stock to our market. Tenants have had a challenge finding rental accommodation, and any new units introduced into the market are welcome.
The market we are currently moving into is one of balance. A time where a person can take a bit of time to decide on a home, have more selection and can have the protections of home inspections and finance conditions. That being said, we sold a home to a Buyer last week who bid on several homes, lost out in bidding competitions to other Buyers and finally settled on a property. Well priced homes, that show beautifully and are in desirable neighborhoods are still in high demand. I love a slower market and we look to be heading there. Real Estate is best viewed as a long term investment and history proves what you pay now, will be far less than what you will sell the property for in 5 – 10 years. My suggestion to a Buyer is to continue the search and when you find the “right one” move quickly. It is painful when your dream home slips away from you.
If you have any questions on this shifting market, I can be reached at lindsay@buyselllove.ca