We regularly work with investor clients to buy and hold income properties.  It’s a proven strategy to build wealth over time by having tenants pay your mortgage down while market appreciation builds even more equity in the home.

While most of our investor clients are thinking mid to long-term for their purchases, we also work with some clients who like short-term purchase and sales.  Flipping real estate can be exciting and very lucrative if it is done right, but there are significant transaction costs in buying and selling.

On the purchase side, the land transfer tax is the biggest transaction cost that buyers incur and if it is in Toronto, it is doubled due to the Toronto Municipal Land Transfer Tax.

On the sale side, real estate agent commissions are the biggest transaction cost, typically at around 5% of the sale price.  We always work hard to make sure our clients receive value commensurate with those costs and one of the best ways to do that is for us to be involved from start to finish in a flip project.

Broadly speaking, the biggest benefit our clients receives when they work with us on flipping real estate is our experience in the market and seeing what works and what doesn’t.

• We’ve seen sellers trying to make $200K on a property in three months after just putting in new floors and painting the walls.
• We’ve seen dilapidated properties go on the market, sell and then come back on the market a year later as stunning homes that cause bidding wars.

Mostly though, we’ve seen sellers make mistakes and fail to make much money on flipping a property.

While there are a number of factors that impact the profitability of a flip (buy-renovate-sell) project, the most crucial is your purchase budget.  Specifically, having a big enough budget.

Here’s why.

The cheaper the place, the more people can afford it.

There is an old axiom in real estate which states you make money in real estate when you buy, not when you sell.

If you overpay for a property, it is quite difficult to make up for that overpayment with your sale price.

The biggest factor that leads to a buyer overpaying for a property is competition.  The more people who want a home, the more it likely sells for at the end of the day.

The lower priced a home is, the more competition there is from other would-be house flippers.

With every $100K up you go in purchase price, there are fewer people who can afford the purchase, carrying costs and transaction costs (land transfer tax for example) of the home.

While we’re currently in a market with very few homes for sale, our experience has been that homes in GTA that are listed as “handyman specials” and marketed to flippers show the result of competition at different price points.

On the lower end of the price scale, homes that were listed between $700K to $900K sold for, on average, 107% of the asking price.  It’s reasonable to assume that implies a fair bit of competition from flippers who could afford the home.  Even if some were interested in the home for their own use rather than a flip, the lower price point still resulted in more competition.

In contrast, if we look at homes that were listed a bit higher, between $900K to $1.1 million, we see they sold on average for 99% of the asking price.

Paying less than list price sounds a lot better than paying more than list price, don’t you think?

Percentages stay the same but the dollar value goes way up.

The second reason higher purchase prices are better for flip properties has to do with return on investment in dollar terms.

We often talk about ROI in percentages, which makes sense when you are trying to compare apples to apples.  At the end of the day though, our clients want to make a certain amount of money.  If you received a 14% return on investment, that sounds pretty appealing, but it is how much that turns out to be in actual dollars that determines if you want to do it or not.

Consider two scenarios that returned similar profits in terms of percentage ROI.

In the first scenario, we found a good flip option for $750,000.  With land transfer taxes and 10% of your purchase price set as a budget for renovations, you put about $100K into it, so your total investment was around $850K.  If we sold for 33% more than your purchase price, you’d sell for almost $1M and clear a profit after commissions of around $121,000.  That’s about 14% return on your $847,000 investment.

In the second scenario, we found a more expensive property that was also a good flip option and we bought it for $1.125M.  Your land transfer taxes and a 10% renovation budget brings your total investment to about $1.275M.  We sell for the same 33% more than your purchase price and that means a sale price of $1.496M, which allows you to clear $178K in profit after commissions.  That is also about a 14% return on your investment.

Two options, both using similar assumptions and both returning about 14% ROI. The lower priced property nets you $121,000 in profit and the higher priced property about $178,000.  That’s $57,000 more in actual dollars.

If it took six months for the flip and you were the only one involved in funding the purchase and renovation and you also oversaw the renovations, the first option sees you make you make about $20,000 per month before tax.  That’s $5K a week, or about $680 a day if you’re there all the time.

The second option sees you clear almost $30K per month, which is $7,500 a week, or just under a thousand bucks a day.

Obviously the above calculations are just examples and how much you buy, spend and sell for makes the results very different, but if you’re using the same percentage assumptions about costs and returns, then the higher the purchase price, the more you are rewarded for your investment of time and money.

When you’re looking at a flip property, you need to think beyond simply the ROI, because you want to make reasonably decent money if you do a flip project.  It has to be worth your time and at the lower price points, it becomes pretty easy to find yourself working hard to make not much actual money, regardless of what the percentage looks like!

Renovations cost a bit more with higher budget purchases

Finally, let’s go over something that seems pretty counter intuitive.  We view the fact that renovations cost more with higher budget purchases as a positive reason to buy more expensive properties.

We say that’s a positive because they only cost a bit more than they would with a lower budget home, yet the benefit can be a lot more.

The reality in real estate is that more expensive homes are often not much bigger than cheaper homes.  The location of a home has a huge impact on the price of real estate and we have shown many $2M plus homes that are not bigger than $1M homes in other, less desirable areas.

When you renovate a home that has a lower price point, there is a limit to how much additional value you will add to the home.  If you spend $100K on a $800K home in a not great area, that home is not going to get you an additional $100K in appreciation on top of your work and sell for $1M.  It may not even sell for $900K.  Put simply, people will love the home, but they won’t be willing to pay that much for the home in that area.

In contrast, if you spend $150K on a $1.3M home, you might very well be able to get $1.6M for it and realize a $150K profit on top of your expenses.  You put more money into the property, but the upside on the renovation is increased on higher priced properties.

When you can realize much greater returns on renovations with only slightly higher renovation expenses, you see that higher priced homes offer much better opportunity to make more actual dollars.

As it became obvious to us that higher purchase prices often result in higher margins and higher actual dollars of profit, we developed an investment structure that allows individual clients of ours to combine funds and see better returns together.  In many cases, we partner with the clients as well.

If you are interested in investing in real estate and wants to make more money on a flip by combining your investment with other like-minded investors, then we’d love to help make it happen.  The first step is getting in touch with us so we can sit down and talk about how it works.  Talk soon.

One thing that doesn’t change in real estate – regardless of whether it is a seller’s market, a buyer’s market or even the rare, balanced market – is that being prepared makes everything easier.

If you’re properly prepared, there’s less stress, lower costs, and better outcomes.  This is true whether you’re buying or selling, trying to find a place to rent, or as a landlord renting out a place.  The better prepared you are, the better the results.

While being prepared is useful in all sorts of real estate transactions, it is when you’re listing a property for sale that it becomes absolutely crucial.  We’ve come up with the three key stages in preparing a home for sale and by following them, you get the most amount of money, in the least amount of time, with as little stress as possible.

You ready?  Of course you are!

STAGE ONE – If it’s broke, fix it.

Throughout your time living in a home, stuff breaks.

Sometimes it is just at the end of its useful life and through normal usage, it breaks down.  Sometimes, you have kids, friends or family members who don’t treat the home like the delicate flower it is!

Whether it is an outdoor light that stopped working (and replacing the light bulb didn’t fix it), or a kitchen faucet that is getting looser and looser each time you wash dishes, there will be things in a house that need fixing.

While you may have been able to live with it during your time in the home, anything that is actually broken needs to be fixed when you’re selling the home.  There is a tendency amongst home owners who are about to become home sellers to run out of steam at a certain point and try to pass the repairs on to the buyers.

We definitely understand this desire to pass the buck.  There is so much going on when preparing for a sale that everyone reaches a point where they say “Look, it’s not that big a deal, the buyers can just get it fixed.”

The challenge with that is that when we are selling a home, uncertainty is the enemy.  A home owner may have a very good idea of what is wrong and what it will require to get it fixed, but just not have the energy or time to make it happen.  A home buyer who doesn’t have the same knowledge can turn a minor repair into a major issue, with questions about who can do it, how much it will cost and how big a disruption it will be to them.

If this happens enough times when considering a property, a prospective buyer can decide that the property is a fixer-upper ,that is more work than they can handle.

Whenever possible, fix broken items in the home.  It’s worth it.

STAGE TWO – Tone it down, clean it up.

We’ve all heard the expression beauty is in the eye of the beholder.

This second stage involves understanding that when selling your home, you are aiming to appeal to as many people as possible.  Call it the lowest common denominator or builder bland, but the goal is to have a home that has only a few unique, style flourishes.

It’s often a challenge for home sellers to understand that your taste is not everyone’s taste.  We’ve been in many homes where the seller likes a particular colour and has painted and decorated accordingly.  After all, it’s their home and they should have it look the way they want.

However, when we want it to become someone else’s home, we need to tone it down.  This doesn’t mean everything has to be off white and beige, but it does mean that the 2^nd bedroom that the family calls the Purple Palace might need a coat of paint and some different linen.

The stronger the feel and character of a home, the fewer people it will resonate with, which means less interest (and therefore competition) for your home.  Finding a buyer who has the identical taste as the seller is very hard to do and whatever can be done to make the home broadly appealing, should be done.

At the same time as we tone down the unique aspects of the home, we need to declutter and clean up the home.  Life often gets in the way of how we’d like to live but an effort needs to be made to show the potential buyer how beautiful living in this home could be!  Buyers are often aspirational, looking for more space, a nicer neighbourhood, a better life.  When a home is clean, with everything in its place, buyers look around and say, “I want to live like this!” and decide to make an offer.

In whatever ways you can, make your home appealing to the majority of buyers.  It’s worth it.

STAGE THREE – Avoid rush hour.

The final stage in preparing a home for sale involves planning in advance to leave enough time to show at its absolute best, right out of the gate.

• Whenever you see a listing with bad photos or a “Photos Coming Soon!” placard online, the listing Realtor has failed their client.
• When there is no marketing material at the home or information about the property available, the listing Realtor has failed their client.
• When the home is dirty or cluttered, the listing Realtor has failed their client.

With only one chance to make a great first impression, leaving enough time to create that impression is the crucial final stage in preparing a home for sale.

Cleaners need to be organized, stagers need to move in any staging, photographers need to be booked, marketing material needs to be created and printed – all of it takes time.

Unless there is an extremely time sensitive reason to rush a listing, sellers are well advised to make sure that the home is presented at it’s best from day one of the listing.

Whenever possible, give yourself enough time to do things right.  It’s worth it.

Let’s recap the three stages and how your real estate agent can (and should) help with each.

If it’s broke fix it.  Whether it is co-ordinating tradespeople or contractors, sourcing multiple quotes or arranging deliveries, fixing the visible problems in a home requires some work.  We work with our clients to support them in this stage, to get things done.

Tone it down, clean it up.  As real estate professionals, we see dozens of homes each week and have a good perspective on what is causing homes to sell and what is causing them to sit.  We can advise on changes to be made and we can also arrange cleaners as well as decorators and stagers to come in to consult with the seller.

Avoid rush hour.  For every one of our listings, we create a calendar where we work backwards from a listing date to make sure that everything that needs to be done, from repairs, to styling a home, and through to getting marketing materials ready, can be done in the time we have.  We avoid stress and achieve the best first impression by planning ahead.

While selling a home is hard work, we work with our clients to make sure that when they pass the torch and say, “Get it sold!” they have had a partner and support in getting the home to that point.

If you considering selling your home and you want a partner to help with the process, don’t hesitate to get in touch.  We promise we’re prepared for that conversation.

In real estate, you sometimes have a house for sale where the house is actually of no value.  Such listings may technically have a house on the property and may even include some limited information on the house like number of bedrooms and bathrooms, but the value isn’t in the house and the land, it’s just in the land.

When you have a property with a house that is not habitable, the valuation process is focused on different aspects than a property with a liveable home.  You don’t need to think about how an extra bathroom in one property affects the value of a comparable with one fewer bathroom and so forth.  The focus becomes the characteristics of the lot and aspects that might be of limited impact in a typical listing become quite important.  In some cases, a positive attribute for a property with a good house might actually be a negative for a building lot.

Given that the value of a building lot is quite different than the value of the same lot with a viable house on it, we often work with clients who want to know what the lot itself is worth.  While each property has its own set of characteristics and attributes that impact the value, let’s review some of the factors that impact building lot value.

Zoned out.

We’ve written before about how a change in zoning can dramatically increase the value of a property, but the current zoning in likely to remain the same for most building lots in an urban area.  As such, it’s important to look at the zoning for a property to determine if your planned use is in fact permitted on the lot.

While the desired use is often an individual specific choice, the current zoning of a property can dramatically impact the value of the building lot.  Some sellers make assumptions that their property is worth the same as another building lot nearby without looking into the zoning.  Consider a property that is on the edge of a mixed use (commercial and residential) zoning area.  If they use a residential only zoned property nearby, they may be undervaluing the property, as the highest and best use might be a commercial building that could be built upon the lot.

If you’re interested in reading about how we look up zoning and interpret it, we wrote an article about that and you can find it here.

Sometimes being exceptional is bad.

The literal definition of exceptional is “unusual; not typical” but most people use it in the positive sense of “unusually good; outstanding”.

In real estate and real estate zoning, there are often exceptions to the zoning of a specific property.  They are often due to historical planning decisions and offer an interesting glimpse into how the municipality thought about what was desirable on that property in past years.

If you’re reviewing the zoning and there is an exception for the property, it can have a negative impact on the property if it limits what is permitted on that specific plot of land.  We’ve seen streets where three houses have exceptions due to environmental aspects that severely limit what can be done on the property.  You couldn’t tell a difference between those three properties and the dozens of others on the street, but anyone who bought one thinking they could do the same infill development as elsewhere on the street would be sadly mistaken.

Size matters.  Well, maximum floor space index and buildable site area matter.

Every property has restrictions on how big a home can be built on it.  These restrictions have a tremendous impact on the value of a building lot, as by dictating the size of the home, they dictate the possible sale price of any development on the lot.

On any street where you see a number of new build properties, it is likely that the builder built a home that was the maximum size that was permitted for that specific lot.  Older homes on the street are likely smaller, with more space between themselves and their neighbour, but a new build will be as close to the lot line as minimum setbacks allow, and they will be as big as possible.  Buyers often consider square footage as a proxy for value and an extra bedroom or washroom can have a big impact on the eventual sale price.

Just regular folk.

While there are some unique houses that use unusual angles and curves to create an attractive home, most houses tend to be based on squares and rectangles.  This tends to be the most efficient design to optimize useable space and it requires a lot that is regularly shaped.  A 25 x 100 foot lot offers a straight forward way to build a house with maximized layout and space.

We’ve shown properties where they were wedge-shaped, with a house that ended up resembling a wedge of cheese.  In practice, this resulted in strange layouts, such as a kitchen that starts out at 14 feet wide but drops to 7 feet by the time we reached the back door.

Unusual and irregular lot dimensions mean that much of what needs to be done is custom and buyers often need to adjust how they live (and the furniture they live with!) in the property.  While such unusual lots can be very interesting from a design perspective, they typically are less valuable than a standard, regular shaped building lot.

Opposites attract!  Or do they repel?

One of the curious aspects of a building lot is that sometimes what makes it less valuable is what makes a lot with a liveable home valuable.  The prime example of this is mature trees on a lot.  On a property where the house in place is remaining, the presence of a mature tree on the lot is very desirable.

In contrast, when someone is looking at a lot with the intent of tearing down the existing house, a mature tree can make building a larger home impossible.  It can be quite difficult to get permission to tear down a mature tree and depending on the location of the tree(s) on the lot, it can make it difficult to have a larger footprint that results in a higher sale price.

Less park, more parking.

A final aspect that can impact the value of a building lot is the parking situation.  A lot that already has the curb cutaway for parking has more value than a home where the builder would need to apply for permission for parking from the municipality.

Such permissions are never guaranteed to be granted and it can be an expensive and time consuming process to get neighbour agreement to remove street parking due to the addition of a driveway on the lot.  If a builder goes to the effort of getting legal parking on the lot, it definitely adds value to the property, but the seller must expect to get a bit less.

These are the main factors that influence the value of a property where the house on it is not worth keeping.  Building lots do exist in many parts of the GTA and it can be a rewarding and satisfying way to get the home you want, in the neighbourhood you love.  If you’re considering such an option, we’d love to help you move forward.