Economics of Flipping

Yesterday my wife and I stopped by an open house just one block from our own home. The house for sale was purchased almost one year ago now, for approximately $210,000 (it was listed for $230,000). The obvious intention of the purchasers was to renovate and flip the house.

For approximately the next three months, we watched the new owners driving in and out with a pickup truck, hauling junk, and renovating like crazy. The house was placed on the market about six months ago.

The online listing looked good. They had redone all of the kitchen cabinets, and created a beautiful master bedroom suite on the whole 2nd floor. The master suite included cherry hardwood, a spacious bedroom with 3 dormer windows, and a large bathroom with a corner jacuzzi and standup shower. Original list price, $345,000.

Now, you might be thinking that there is something fishy going on. Why is the house still on the market after six months? Here are some of the major mistakes made by the owners:

  1. Incomplete renovations
    • Almost all of the doors, windows and some of the flooring were left original (50-years old).
    • The main floor bathroom remained untouched… and ugly.
    • The basement was untouched, and remains useless.
  2. Shoddy workmanship and cheap materials
    • Drywall and kitchen finishing’s were not well-done.
    • Exterior was largely untouched and has a very cottage-feel.
    • The upstairs shower enclosure is very inexpensive, but it is paired with an expensive showerhead.
    • The bathroom tile is the cheapest variety and looks quite mundane next to the high-gloss cherry hardwood.
  3. Bad planning
    • The bathroom is not well-thought out, the toilet is in an odd spot in the open in the middle of a wall, there is only one sink when most couples prefer two.
    • In the kitchen… they reused 20+ year old appliances.
    • The cook top is located in the corner of the counter, where it is less accessible and also sits underneath the upper cabinets.
    • Furthermore, because the appliances are old, I think future buyers will have trouble finding new appliances to fit the custom openings.
  4. No curb appeal
    • Slate tiles were used to cover the walkway up to the front door, this looks nice. However, the garden work is atrocious. Bad stone combined with mortar that blends in makes it look like they built concrete terraces for the garden.
    • The siding around the dormers was kept plain white, and looks dated.
    • The roof shingles were left green… it just doesn’t look good. The house needs a colour scheme on the outside that doesn’t remind you of christmas.

In general, I think the owners of the house just missed their target market all-together. The idea to renovate the 2nd floor and turn it into a master suite was a good one. However, the execution was not consistent throughout the house. Also, a couple who would appreciate such a large space for themselves with cherry hardwood would likely want nicer bathroom tile, and newer appliances. Furthermore, the outside looks like it is suitable for your grandparents, so I don’t believe it will attract younger buyers.

They have lowered their price to $299,000 now, but I still believe it to be overpriced for the neighbourhood. We purchased our house for $330,000 a little over one year ago, and it is larger, has a much larger kitchen, a much larger yard (we’re on a corner lot), an attached 2-car garage, and a 3-bedroom basement apartment (that conveniently pays our mortgage P&I). Thus, I think they will still have trouble selling at the reduced price given the above points.

On another interesting note, I would estimate that holding on to the property for these six months will have cost them about $10,000 in mortgage payments, utilities and insurance. So, I think it is very important to find the right price quickly rather than holding the property for too long and slowly lowering the price. Otherwise, the monthly expenses quickly cut into your potential income!

I also wonder if this house would have been better to flip over into a student rental. I live close to the university, and I think that lowers the quality of prospective buyers. However, the rental market in this area is booming, so I think the property would have been better to convert into a 6-7 bedroom house rented to students. The gross income would be up to $3000/month, with a net cash flow of approximately $1000/month depending on the mortgage terms.

On the bright side, the real estate agent was informative, young and friendly. He showed us a data sheet for a $128,000 quad-plex currently renting for $2000/month! Very cheap, but apparently it does need some work such as a new roof (not surprising at that price).

All in all, the timing was perfect. We were able to critique the flip, see many different examples of what not to do, make a new contact, and find out about a potential investment opportunity. Not bad for a Saturday afternoon.

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2 thoughts on “Economics of Flipping

  1. You make some excellent observations. I think there is (or was) a fad of “flippers” who saw a TLC episode or two and decided to make a go of it. There are also people who have no experience building new properties and find out the hard way that there’s more involved than they originally thought. Of course everyone has to start somewhere, I suppose.

    We are looking at moving into a slightly larger place, and this past weekend we toured a duplex “built” by two people who owned some land and wanted to do something with it. Like you described in your post, these two people also made some mistakes in the selection of materials. The most glaring defects though were cosmetic issues with the finishing work: oversized holes in the sheetrock for electrical outlets (that the face plates don’t cover), poor spackling work, drywall nails that are quite visible with only paint to cover them, no Cat 5 cable pulled for a computer network, etc.

    It’s understandable that anyone selling a property is looking to turn a profit if at all possible, but they would do well to prioritize certain elements of the (re)design and not skimp in the wrong places.

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