Think About Resale Value BEFORE you try to Fix and Flip
With the strong real estate market conditions and low interest rates, the number of investors in the Collingwood real estate marketplace seems to be reaching an all time high. Many people are looking for opportunities to “fix and flip” a property for a handsome profit.
The reality is that it is not nearly as easy as you’d think based on all the HGTV shows we see. While the pay-off can be there in the perfect set of circumstances, it can also be a financial nightmare if you don’t do it right.
When doing a fix and flip, there are a number of soft costs to factor in beyond the purchase price and renovation costs. Here’s a list:
- Land transfer tax on your purchase
- Legal fees for your purchase and sale
- Real estate commissions when you sell
- Potentially a survey and/or title insurance
- Possibly appraisal costs
- The cost to carry the property for things like the mortgage, taxes, utilities and insurance for every day while you are renovating and awaiting a sale
When looking for the ideal property to renovate, ask yourself if the sale price you hope to realize at the end is in line with neighbourhood values. It’s hard to sell a $500,000 home in a $300,000 neighbourhood.
Is it structurally sound and are you qualified to make that assessment? A home inspection is critically important and don’t assume that you know the costs to make structural changes. You may also need a building permit and/or need to comply with various municipal requirements before making changes.
Are there alternatives? Most people want to tackle projects like these for the purpose of wealth creation and really, there are many ways to achieve that goal. For example, it may be more rewarding to buy a home that just needs some spit and polish as they say. You can do a great deal with rehabbing the landscaping, cleaning, painting, new trim, flooring, new lighting and countertops to transform a tired home at a reasonable cost. Sometimes, adding an income suite can add instant value if it can be done at the right price. You may then wish to keep it as an income property and consider a sale or further upgrade in the future.
Going into any purchase decision is best when you do so with your eyes wide open. Commit to writing down the costs on paper before jumping in so you really know what to expect. If it comes out on the plus side, then you can have confidence that you’ve minimized risk and improved your chances of meeting your fix and flip goals.