Home renovation television series have many people buying into the idea that “flipping” real estate is quick, easy and profitable. Buy a relatively inexpensive property in need of a little work, renovate it, and then sell for double the price. In truth, it’s a far more complex business.
“The first trap that so-called flippers fall into is excessive optimism,” suggests Yvan Cournoyer, author of Les Flips, a book about real estate flipping, and an investor in numerous flips. “People often underestimate the cost of the materials and labour required to renovate, as well as the time it takes to resell the property. And above all, they overestimate the resale price of the renovated property.”
A study completed by the firm JLR estimated that between 2009 and 2013 flips of single-family homes gained an average of 30 percent, while flips of condos gained an average of 13.7 percent—not excessively large, once you factor in all the costs.
Anyone interested in flipping a property should be cautioned to do their homework before investing.
How much should you spend on a house?
“It all depends on the project,” answers Yvan Cournoyer. “If only cosmetic work needs to be done, paying 25 percent less than the value of similar properties in the neighbourhood should lead to a profitable investment. If major work is needed, the target is probably 35 percent below the market rate.”
Yvan Cournoyer uses these rough calculations. “You have to factor in five percent each for the cost of acquisition, possession and resale. So if you’ve bought at 25 percent below market value, you can make 10 percent profit,” he explains.
Those figures are all estimates, cautions Yvan Cournoyer: “The longer you keep the house, the more the costs escalate. These costs include mortgage interest, insurance and so on.”
Where to look?
Yvan Cournoyer suggests choosing a neighbourhood or borough and becoming an expert in it. “The only way to know if a property is really a good deal is to know all about that particular area,” he says.
It’s a good idea to choose a neighbourhood close to home. “This kind of work requires many visits to search for the right property, and once you find what you’re looking for, many more visits to manage the inspection and purchase, and to supervise the renovations and resale,” he explains.
Exactly what type of house should a prospective flipper look for? A foreclosure? “Not necessarily,” says Yvan Cournoyer. “An owner might want to sell quickly for many different reasons, such as a recent divorce, an inheritance or a job-related transfer. It’s important to remain abreast of all potential opportunities either by working on your own or with the help of a real estate agent.”
Can renovations be done without a licensed contractor?
“If the owner doesn’t live in the house but aims to resell it, the answer is simple: none at all,” says Éric Périgny, president of Réno-Assistance. “You need a licence—either a contractor’s or general contractor’s licence—or access to the services of a licenced professional.”
The reason? “It’s to protect the public,” explains Éric Périgny. “The next owner of the home will be happy to know that the renovators didn’t cut corners.”
Even if the investor-flipper lives in the home, there are limits on how much renovation work they can do. According to the Régie du bâtiment du Québec website, an appropriate licence is required to undertake any work on a building destined to use natural gas, oil or electricity.
In short, real estate flipping isn’t as easy and lucrative as you might think. You have to be willing to put in the time and effort—and not be afraid to take risks.