What makes a property flip become a property flop? Here’s how to avoid some crucial mistakes when flipping properties that every would-be flipper should know.
The best way to answer the above question is to tell the story of a property that sold in 2019 in Toronto. We’re looking at it from an outsiders perspective, with no knowledge of the transaction apart from what we could glean online and through research. To protect the privacy of the people involved, we won’t reveal the address.
Instead, let’s go through the story of the property and see what lessons can be learned. In this case, we can see great examples of what happens when mistakes are made during the flip of a property. Here’s the story of this property and the three mistakes made along the way.
Located on a desirable street close to a nice stretch of Queen Street East, this detached home is on a nice, regularly shaped lot. It’s not a big house, with three bedrooms and 1 ½ washrooms, but with a finished (small) basement and private laneway parking, it ticks most of the boxes.
Our story begins in October, 2013, when it was bought by the home owners for just under $600,000.
It ends in October, 2019, when it is sold for $1,090,000 and becomes someone else’s property.
On the surface, that six year period looks pretty lucrative. Even when we take out land transfer costs and realtor fees, selling for $590K more than what you bought it for is no sob story!
Without a doubt, they’ve benefited from the explosive growth in the Toronto real estate market and they’ve done all right on the sale. Let’s look at what happened along the way and where they could have done even better. Here’s the three ways these home owners made mistakes on the sale of the home.
Missing out on the Long Flip
Take a look at the photo below of how the home looked from the outside when they bought it back in 2013 and how it looked when they sold it in 2019.
PHOTOS FROM COLDWELL BANKER CASE REALTY, BROKERAGE AND ROYAL LEPAGE EXCEPTIONAL REAL ESTATE SERVICES, BROKERAGE
It definitely looks nicer now. New paint, railings and few other upgrades to the exterior.
In real estate, you sometimes have the opportunity for what is called the long flip. Unlike a short-term flip where you buy a home, renovate it as quickly as possible and then sell, the long flip is naturally about a longer-term project.
Whether you are living it in yourself or renting it out to tenants, if you do the renovations to update a home shortly after you buy it, you have the benefits of those renovations while you continue to own the property. An updated exterior, kitchen, bathrooms and so forth are much nicer to live in than an outdated version. If you’re renting out the home, you can charge a higher rent and attract higher quality tenants if you do those renovations before you list it for lease.
When you do eventually go to sell, the home has still been recently updated. In many cases, a renovation from five years ago doesn’t look tremendously different from a renovation from five weeks ago.
In this case, it seems likely that the renovations that were done to update the home took place not too long before they listed it for sale.
In June of 2019, the Google Streetview for the property shows lots of activity going on.
In the following month, the home was listed for sale.
It seems likely that the renovations to get it ready for sale were done specifically for sale. The sellers didn’t get the benefit of living in a renovated home for their time there and the renovations that were done were focused on how they looked rather than how people live. We viewed the home with clients and appliances didn’t fit properly in the renovated space, gaps existed between flooring and window casements and it basically felt like a quick, cosmetic upgrade.
If you have the opportunity to live in or rent out a property you intend to sell for profit at a later date, doing the renovations shortly after you buy it results in more thoughtful quality work that translates into greater enjoyment during the time you live there (and higher rent if it is tenanted). It also translates into a more cared for feeling when you put it up for sale, which results in higher offers and eventual sale price.
Sending mixed messages.
The next way our home owners failed to get the best return on their sale was the way in which the property sale was handled.
As discussed, the home saw a significant cosmetic renovation. While it may not show as high quality renovations, it is clearly being marketed as a move-in ready property. The MLS wording for the listing focuses on the renovations.
“This Bright Fully Updated Home Boasts Gleaming Hardwood Floors Throughout, New Kitchen/W Ss Appliances, Spa-Like Washrooms, Oak Stairs, Pot Lights, Great Front Porch And Rear Deck.”
The latter half of the MLS listing changes tactics though, where it references “Deep Lot With Great Potential And Detached Garage.” A section for Realtors clarifies that the detached garage is not there, and it is actually referencing a permit having been submitted for a two car garage at the back.
The question then becomes, is this a move-in ready home or a tear down? Based on the photos, it appears some significant money was done on renovations. When you visit in person, it seems the renovations are more cosmetic than functional, but money was still spent to make it look this way – money that the seller will want and need to recover.
Yet, the home is still quite small, with the MLS listing also focusing on the lot size and how it has great potential. This means it has great potential to build a bigger home, which means those renovations aren’t useful. So which one is it? Is it a nicely renovated home with a two car garage you can move into? Or is it a great lot with potential where a permit has been applied for the garage?
When you fail to project a clear message to potential buyers as to who the property is best suited for, you end up with confusion on all sides. When we went through, our clients weren’t impressed with the finishes but it seemed a shame to have to tear out what was just done. We also knew that the seller would require a higher price than if they hadn’t done that work.
If you’re interested more in the lot and doing some work, the money spent by the seller was likely wasted, as any significant renovation requires ripping out the very cosmetic upgrades that were just installed.
If the home owners had decided that it should be presented as a tear-down and gut-job, they could have saved money on renovations as well as significant time with carrying costs as it sat vacant for sale. In this case, it was vacant for three full months while it was on the market. Mortgages, utilities and property taxes were all continuing to be expenses during that time.
On the other side, if the sellers had decided they would get the best return by marketing it as a great, move-in ready home, they should have done renovations more in keeping with that sort of customer. Rather than applying for a permit for the garage, get it approved and built. Complete the renovations by doing things like turning the ½ bathroom into a full bathroom, landscaping the property and having a carpenter frame in the appliances properly.
When buyers are confused as to who should buy the property, they don’t make offers. When it does sell, it sells for less than it could have if the sellers had committed to one specific strategy.
Timing it poorly.
Finally, the home owners and their agent ran into timing issues.
They missed the spring market in Toronto and finished renovating to list in the dead of summer. They put it on the market just after the Canada Day weekend, holding back on offers for a week to try to generate a frenzy.
It didn’t work and after it didn’t sell, they relisted for about $200K more than before, clearly hoping to get close to $1.2M. After a month with no sale, they lowered the price down to $1.15M and after 14 days at that list price, sold it for $1,090,000. That’s 95% of the list price, when the average sale to list price in that part of Toronto for detached homes at that time was 103% of list price.
They chose to list in the summer and they chose to accept a lower priced offer in the dog days of summer. September is typically when prices rebound as buyers get back to looking after a summer off with the kids. Who knows what could have happened if they had terminated the listing and relisted in September?
When we review the story of this property, we see that they made three mistakes that impacted the eventual sale price of the home. They missed out the chance to benefit from the renovations they did over the course of their ownership of the home, they sent out mixed messages about what the home was best suited for and they ran into some less than ideal timing.
While it did sell, the results were certainly not what the sellers initially hoped for, as they took away $110K less than their highest list price.
The clearest source of proof that the sale wasn’t optimal is what is happening now. The buyer of the home is a builder and the renovation and work that was done to get it ready to go on the market seems to have been ripped out completely.
It seems likely that the home will soon have a larger footprint with some significant changes to the interior and exterior. It might even have that two car garage! When the home goes back on the market in the new year, we’ll update this article on the result.