Real estate flippers have gone rogue in Canada’s hot real estate market over the past couple of years. But with today’s slower sales and home prices plummeting, it’s time for a reckoning. Clark Cai counts many such real estate flippers—investors who buy properties to resell for a quick profit—among his clients. He is a sales representative at Chestnut Park Real Estate Ltd. Brokerage in Toronto, as well as co-founder of Winchester Design and Build Ltd., a company specializing in real estate and land development. Along with his realtor partner Will Zang, they guide the flippers, who typically sell the properties after major renovations, on the interior decorating process, including advice on exactly what changes will make a home more appealing to a particular market. As realtors, they can also help clients find the right kinds of homes and neighborhoods that are good flipping prospects. “Investors don’t know the market as well as we do because we work with the resale side,” says Mr Cai. “So we’re bridging that gap between designers, architects, engineers and the market. I can tell them that in this neighborhood, it’s good to add another bedroom on the second floor, or that according to the last 10 sales, projects with a waterfall staircase have worked very well. This translates into obtaining maximum resale value.” When home prices in Toronto continued to soar last year, Mr. Cai began advising his investor-clients not to buy anything with the intention of flipping and just watch to see what’s marketable. Currently, given the decline in home prices—down 19% in Toronto compared to February 2022, according to the Toronto Housing Market Report—combined with high construction costs and competition for increasingly expensive traders, Mr Cai says he personally wouldn’t bank on doing a resale flip for the next year or two. “The math doesn’t make sense right now for a turnaround,” says Mr Cai. “We are finalizing everything on the properties we bought a year or more ago. Some investors may decide to rent out their property short-term or simply hold onto it. We are still deciding on one that has just been completed if we will release it in September [to sell] or wait until next spring.’ Mr. Cai says he expects to see some deals come through in the next six to 12 months because some homeowners won’t be able to refinance and will be forced to sell. However, anyone looking to buy at this time should look for something that produces income such as a rental property. “Rents are high at the moment and demand to rent is high,” says Mr Cai. “If the market picks up in the next couple of years, you can always start the renovation and turn it around afterwards. The supply of housing in Toronto and the GTA is extremely low, so I can’t really see how the price drop will be endless.” Matt Francis, broker and managing partner of StreetCity Realty Inc. Brokerage in Stratford, Ont., believes there are still opportunities for investors, regardless of whether it’s a serious seller’s market, as it has been for the past two years, or if it’s turning into a buyer’s market. But the falling market has created problems for investors without deep pockets. “Just as some people bought not knowing they were going to complete a reversal in a really, really profitable seller’s market, others bought at high prices at the end of that boom and the market collapsed on them,” Mr Francis says. “If they went into this hit with the mindset of putting all their eggs in one basket and having to sell it at a high price, then they’re in trouble. But, if they have enough money in the bank that they can say, “it’s okay, I’ll just rent this house out,” that’s fine. The rental market is huge.” However, “some of them may need the equity to do the next property, which may put them on hold for a while, depending on their particular financial situation,” says Mr Francis. “But if they can get a tenant in there for a few years until the market starts to pick up again, then they can sell and take their profit.” While Mr. Francis says he is not overly tough on renovating for profit, he is tough on flippers who hide or ignore important repairs. “Buyers will always be drawn to these newly renovated properties with ‘of-the-moment’ styles such as white kitchens and gray floors,” says Mr Francis. “But buyer beware of these remodeled for sale, flipped homes to make sure the bad money—for furnaces, waterproofing, insulation and roofing—has been spent. You will eventually have to pay that ugly money or it will lower your sale price when you sell – and that goes for flippers too. “I’m much more of an advocate of creating wealth for my clients, rather than making a quick buck. Buy, renovate, refinance, rent and keep. We need people to renovate old houses. That makes our housing stock better and it’s good for our economy.” On the other hand, contractors and tradesmen definitely have an advantage over the investor flipper who needs to hire people to do the renovations. “The successful flippers are the contractors or tradesmen who have made it through this turbulent market and are doing this as a side income,” says Mr Francis. “The guy who has to hire the contractor can’t turn around as quickly as the contractor or tradesmen who can do the work themselves and have better access to materials. “Because they know they’re going to do another flip, they can buy in bulk and store materials until they’re ready to build their next home.” In addition to shortages and rising costs of building materials, labor costs are rising due to high demand, making renovations more expensive. It also means contractors and tradespeople can “be more selective,” he says. “If I choose five jobs, I will accept the person who is willing to take me up on my offer. This in no way suggests that contractors and tradesmen are benefiting from the lack of availability. It’s fair work.” So, is it financially smart to buy a house that is already renovated if you want to flip it? “No, because you bank in the market there,” says Mr Francis. “I’d rather be careful and err than overestimate [the market] and harm your financial results”.
