Much Ado About Fixer-Uppers
You’ve seen these listings before: “handyman special,” “diamond in the rough,” “as is, where is” or “investment opportunity.” These are the properties experienced home flippers are always on the lookout for, but first-time flippers beware, the fixer-upper is not designed for faint of heart.
In a perfect world, the coveted “fixer and flip” could hold the key to a nice return on investment, but buyer beware – unless you are a seasoned contractor, a DIYer, or an experienced investor in this genre of real estate, the “fixer-upper” can quickly become the “fiscal downer” in no time.
After the myriad of HGTV reality home improvement programs hit the airwaves with a vengeance over the last decade, the fixer-upper market has become an attractive niche for many want-to-be real estate moguls. Isn’t it incredible how a dilapidated house can transform into a showhome in a one-hour episode? Unfortunately, reality tv is often so far removed from reality, that for first-time, inexperienced fixer-upper buyers, the harsh reality of what lies beneath the floors and behind the walls, can see a vision of profit turn into a nightmare of loss.
A wise philosopher once said, “knowledge is power” and this could be the greatest piece of advice to the newbie real estate investor. Working with a trusted realtor, a highly recommended experienced contractor and a home inspector, should be the non-negotiables for making a flourishing real estate portfolio a reality.
On the flip side, many a fixer-upper investor has boasted about their impressive returns, but do they ever mention the downside of the fixer-upper flip?
First-time buyers beware of the many variables to the fixer-upper/flip equation. For example: what is the current climate of the local real estate market, are interest rates stable or on the rise? What about labour costs and the availability of construction materials? So much to consider, particularly during a heated market where inventory is low, prices are inflated, and heated bidding wars with no home inspections included could prove disastrous. A wise contractor once said, “proceed with caution”, followed by a wise realtor who said, “a home inspection condition is non-negotiable.”
Financing a fixer-upper could also prove challenging and may require creativity and trusty contacts in the industry, particularly if the property is going to be renovated and flipped vs. renovated and rented, or renovated and resided in by the owner. Rates can vary for each scenario, and on top of that, so many hidden costs can begin to add up – from closing fees, commission fees, and of course taxes. The CRA has clear rules on how they will tax a flip, and depending on the “intention of the fix-up,” capital gains come into play. Of course, if things don’t go as planned, and they rarely do, then profits will be disappearing faster than Houdini as tax and mortgage penalties and interest begin to add up, as well as the costs of carrying the property if it doesn’t sell in the forecasted time.
That being said, does an ideal fixer-upper scenario exist? It does if the property needs only cosmetic work, such as paint, flooring, updating fixtures, lighting, etc. All a far cry from structural changes, updating kitchens, bathrooms, plumbing and wiring, roof, HVAC, and the list can go on for miles.
Best advice for buyers still dreaming of the fixer-upper flip: do the math, seek expert advice, and proceed with caution.
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