Monday, November 5, 2007

Flipped right in half

I'm torn over flipping real estate. The entrepreneur in me doesn't fault anyone from making a buck on a service or product for which there is demand. But the ethical side of me finds fault in the facts that:
  • flipping artificially inflates property values because it temporarily removes units from the market reducing supply
  • flipped units are rarely subject to permits and inspections because most flippers are slapping paint, snap-flooring and tile over eyesores, not changing structure
  • flipped units come with no guarantees
  • flipping most often happens in tight sellers markets where subject to inspections can often be turned down because of hyper-demand and stupid buyers
Whenever we look through MLS we see empty units. Some are obviously the work of flippers, some are honest updates done by the previous owners. How can we tell the difference? Owners are less likely to do the work after they've bought and moved and more likely to do the work while they still live there. When we walk through a unit that is empty, has a new "kitchen, bath and flooring" including the aforementioned snap-lock flooring, stainless appliances, granite-look counter tops and $10 pot lighting, we can smell the flip.

What is a bear to do? Don't buy the flip job. Ever. The deal is in the sweat equity. Flippers, unless they happen to be contractors, rarely have access to the supply discounts. So this means they get their mark-up from doing the work on the cheap, doing it themselves, and selling for maximum profit.

You can beat them at their own game by not buying a flipped unit. If you must buy now, try and buy a good deal. Flipped units are never good deals. Buy the unit that needs cosmetic work. Do the work yourself. Take a vacation when you take occupancy and put a week into cleaning, painting, replacing worn flooring, getting new appliances and redoing kitchens and bathrooms. If the work you are doing is not structural, you can do it a lot faster than you think. Leave the finishing for last. But don't finish last by buying a flip-job.

If people stop buying the flips just because they look nice and start paying attention to the underlying economics involved, then the flipped units will sit, prices will come down and the 20-30% (our guesstimate) of properties that are currently sitting vacant will give the bump to the listings necessary to keep the downward momentum moving.

For what it's worth: we were in the US yesterday. Save yourself the time, don't bother looking there for good deals. All the numbers we were seeing in the malls were within $5-$10 of the ones we see up here. Even on the big ticket stuff. Real estate, that's another story. Anyone know if you can live in Blaine, Washington and work in Canada year round? If you can you can live for 50 cents on the dollar compared to White Rock.

21 comments:

roger said...

HHV

Glad you are back. I tried to prime the pump with a lowball discussion while you were away but no takers.

I think flipping in Victoria is over. The flippers sitting on a house now will be real nervous after last month's numbers and will just try and unload before they lose their shirt. Will others consider flipping in a falling market?

I am on the PCS system and have seen a lot of inventory coming on stream this week and very few sales in the James Bay, Fairfield and Oak Bay area in the 400K to 950K range. A number of big price reductions. The usual 10K ones but some 20-50K ones as well. I think we are on a roll here.

Here is my question of the week. The average/median prices in November 2006 were 534K/459K. If we drop to these numbers over the next few months, resulting in no year over year gain, will there still be the strong desire by the masses to buy??

People will realize that they are not getting rich quick and they are paying thousands a month in mortgage interest, taxes and maintenance for a capital gain that may not happen for years. The renters will now be the ones at the cocktail party talking about carefree lifestyle and more disposable income.

I believe this will be enough to start the ball rolling.

Comments anyone??

happy4 said...

Ya, glad you're back, HHV, I missed you too. Thanks for trying to stoke the fire, Roger - I didn't bother chiming in 'cause I had nothing new to add. I think I've already ranted enough about the big Homeowners Club and how "they" all want us renters to join. I'm not convinced, and think I'll do much better by renting in this city in the long term. Why would I want to spend twice as much each month and worry about whether my so-called investment was going to go up or down in value? Or have to have tenants in my home, reducing my effective square footage and privacy, to make it worth my while? I have a huge issue with $3000/yr property taxes - I purposely go on a vacation with that money each year and have a little "no property taxes for me" celebration on the beach.

I have a beautiful, modern ocean-view home with lots of privacy, and I gladly fork over the half-price rent cheques each month. I like to think I have more control of my investments if I'm not living in them. Isn't diversity the #1 law of investing?

Geez, there I go ranting again.

roger said...

The flippers that I hope get burned are the condo assignment flippers. They put down a deposit and then hope to assign the contract before the place is built. This speculative activity just drives up prices and adds to the frenzy. The MSM loves to report on these pre-sale events as well.

However, they are going to get burned big time!! Once things cool off it will be hard to sell an assignment when the developer is tossing in extras and lowering the price. Also assignee flippers have no marketing muscle since they lack the showroom and big newspaper ads.

I was watching a big pre-sale in Vancouver for condos to be completed in 2011. There will be a small fortune to be made in Vancouver selling crying towels and you can be assured demands for assistance from the government.

Anonymous said...

people i know have been talking about selling their places now and renting. I would love to do that. We do own a house and might put an offer on another one because we need the space. I am going to use a low ball figure.

roger said...

anon 12:42 wrote

We do own a house and might put an offer on another one because we need the space. I am going to use a low ball figure.

It is going to be tricky lowballing if you already own a house. The successful lowball needs a minimum of subject clauses - house inspection only. If you try adding financing or conditional on sale of your house subjects to your offer it is unlikely that your lowball will succeed. However , if you don't add the conditional on selling your house clause you could be left holding two houses in a falling market!!

We are also going into the slow Nov./Dec. season and this is a bad time to list/sell your house. You will probably get lowballed too.

people i know have been talking about selling their places now and renting.

Have you considered this option? You can rent some nice houses for less than the landlord's carrying costs. You don't have the pride of ownership but you will be ready to effectively lowball next year.

The downside of selling now and renting is the bears might be wrong and JMK, CMHC and the real estate agents predictions come true. Each of us has to weigh our options and do what feels right.

Anonymous said...

Low ball offers don't usually work. From my expierence in the past, the agent does not accept them or does not show them to the seller.

Best luck would be with a private seller.

But think about this. So you get the home for 5 or 10 percent under market value. Then the market tanks by 20 percent. Did you really get a deal??

roger said...

Heres another price reduction and the old MLS re-listing trick story:

2024 Allenby in Oak Bay

Listed Oct. 18 for 679K
Reduced Oct. 23 to 629K
Cancelled this morning and re-listed with new MLS# later today @ 599K

Someone wants out fast! Could it be a flipper?

Does this re-listing trick fool the other agents or is it just meant to hook the buyers using MLS.CA I am sure the agents would never tell their clients this is a new listing.

Hang on folks - things are changing!!

Aleks said...

"The downside of selling now and renting is the bears might be wrong and JMK, CMHC and the real estate agents predictions come true."

No, that's just silliness. Prices and rents can't stay diverged indefinitely, so either rents double or prices come down. The real downside is that it'll take a couple years for the market to settle, minimum. You have to decide how much owning is worth to you.

Right now renting is undoubtedly the better financial decision, but where you live is not a strictly financial decision. If you sell and rent, you need to be prepared to rent for a long time. The market here hasn't even started to correct yet.

roger said...

aleks said

No, that's just silliness.

When I said "The downside of selling now and renting is the bears might be wrong and JMK, CMHC and the real estate agents predictions come true." was recognizing that none of us can predict the future with certainty.

There will be a market correction at some point in the future - we know this from history. Anyone selling now and renting has to be emotionally prepared that there may some price increases before the correction.

JMK said...

The downside of selling now and renting is the bears might be wrong and JMK, CMHC and the real estate agents predictions come true.

Last I recall making a prediction was about 9 months ago when I predicted we'd be up about 8% for this year and down maybe 3% next year. That was a complete nonsense prediction based on how things behaved in 1995. However, the way things are going I'd stick with my prediction for this coming year.

Beyond that I've only argued that I consider a 30% correction pretty unlikely. There may be a long flat period, but I would be surprised to learn there will be that many desperate sellers who have to sell at a discount. I guess only time will tell.

Anonymous said...

My PCS list is full of empty flipper projects. Many were previously for sale 1-2 years ago (I have them in a 'removed listing' file). Prices of the current listing are generally at least $75k over the previous price. Some are starting to drop, but I don't see any signs of these homes going for under the last sold price. I have been amazed by the resilence of this market, although I can't fathom why people continue to pay these prices.

Anonymous said...

Roger,

It is a lateral move, not an up move from prime south Oak Bay to out of Victoria. We have 4 young children and need more space. Our babysitter lives with us too. We have cats and dogs.

We have been in the markets for over 20 year, Paris, Toronto and Victoria. We bought in Victoria 6 years ago when things were cheap and made money on our Toronto property and our first Victoria McMansion. We downsized and now need the space and want a few acres so we are moving out. Not far but out.

Anonymous said...

Most homes close to and over $1 million are selling for much less than asking ie. $100,000 less in most caes. Nothing is selling in Bear Mountain or the Uplands and the expensive Oak Bay homes are just sitting.

Anonymous said...

Roger,

I am wondering if we should not sit tight another year. Our Oak Bay house is signficantly nicer than the house outside the city (which will need work).

Maybe I should just get rid of a few kids.

hhv said...

if you do a downtown or vic west condo search you see MANY assignment of contract listings for condos in various stages of development. One is priced almost $40K higher than what you can actually buy the unit from the developer for. Crazy people doing crazy things.

Anonymous said...

I don't think a 30 to 40 percent correction is unrealistic.

Because:

The rapid escalation in prices over the last six year of some 130 percent has left a lot, A LOT, of room for people to drop there prices. If home sales slow and a person has to relocate to a less expensive city why not take a $200,000 profit rather that wait and hope for a $250,000 profit.

A bird in the hand?

roger said...

anonymous 6:06said

I am wondering if we should not sit tight another year. Our Oak Bay house is signficantly nicer than the house outside the city (which will need work).

There are several reasons why you might want to sit tight:

1. During a market correction the less desirable and less mainstream properties drop first. For example Gulf Island properties are really slowing down now and prices are dropping. High-end Sooke and Mill Bay are also slowing down. Mid-range homes in Oak Bay will be the last to drop drastically. (location, location,location is a truism)

2. During a market correction the high end properties have the biggest price drops. 10% of one million is 100k; 10% of 600K is 60K. Someone who sold and moved up would save 40K by waiting.

3. If you are buying a fixer-upper you will have trouble finding construction workers right now. Wait a year; when construction slows down you will get better quality work at a lower price.

Anonymous said...

Roger,

Thank you! You are right. The property in question is in Beaver Lake and we would have to stick a big addition on and put in an ensuit and do some tweaking and excessive landscaping.

Even though I am a property owner I am convinced the market is going to crash big time and my husband has been an analyst/broker in London, Paris and Bay street for many years and he is certain it is going to crash.

Many people in my cirlcle i.e. 40 somethings with young kids are really thinking for selling like now and renting.

Thanks for your advice.

Anonymous said...

The phrase "location, location, location" is a bit of a myth. A more accurate phrase would be:

"median neigbourhood income. median neighbourhood income, median neighbourhood income"

This is why you will see areas around Pandora and Quadra drop more heavily than properties in Rockland. Both being similar in location to the downtown core and city amenities.

A typical contraction begins in the starter home marketplace,like condominiums and the old war shacks, as these property owners are typically financially stressed.

Eventually, all neighbourhoods correct, but it is the lower income neighbourhoods that are first to expierence the drop and the last to recover. So that's why people feel that neighbourhoods such as South Oak Bay are the "safer" neighbourhoods to purchase properties.

Anonymous said...

agreed, but it's circular isn't it - Oak Bay looks and feels nicer than Quadra village because it's a rich area. It being rich makes it nice, and it's being nice makes it rich. The location, location, location mantra doesn't just mean distance in km from the city centre, it means everything to do with that location, from the neighborhood to the individual lot. I say it still holds.

Anonymous said...

You need permission and official status from U.S. Immigration to live there, just as you do from Canada to live here. If you sleep in B.C. fewer than 183 nights of the year, you will lose your B.C. health coverage. Health ins. in the U.S. costs many hundreds of dollars per month (that's assuming you have immigration status to live there). Enormous amounts of free info on all this available through North Vancouver tax/immigration advisor at:
http://www.centa.com/.
Comparing living costs in Canadian cities vs. U.S. sometimes favour one, sometimes the other depending on the pair. Income taxes are lower in the U.S. for higher income brackets and some states, like Washington, have no income tax, but social security tax rates are 55% higher than CPP and have a much higher wage ceiling and you must work a minimum 10 years in the U.S. to get any of it back in benefits at retirement age. Bottom line: there's no free lunch.