This is the second in my renovating for profit series. My focus in this post is on understanding market value and pricing. A key component to the profitability in the renovation for profit business is understanding price and value. There is a very distinct difference between the two.

Open up the weekly Real Estate News or go to Realtor.ca and you will see a selection of properties with the owners asking price clearly displayed. The numbers you are seeing on that page are not the market value, but rather the starting price in a negotiation for the purchase of the house. When you are in the business of renovation for profit, the listing price should have very little meaning for you when buying.

When buying you must consider what the market is willing to pay for the house you are purchasing once the renovation is complete, or its post renovation market value. Work backward from that value to arrive at the optimum purchase price. To know what a renovated home is most likely to sell for you need to know the actual purchase prices of houses in your area and you need to follow the market to keep track of where the market is trending. My website at www.calgarypropertyprice.ca can help you keep track of the market in your neighbourhood.

It is also advisable to get a Comparative Market Analysis done on the property before you buy it. I can provide that service free of charge to clients who use me as their buying agent.

Moving backward from the probable market value of the renovated home, you want to subtract your costs and expenses to arrive at the best purchase price for the house. These will include the cost to carry the mortgage for the amount of time you expect to be working right up to the time it takes to sell the property, your cost of materials, cost of labour, trades, real estate fees and, most importantly, a margin for profit. If you are doing this for the first time it is a very good idea to talk to someone who has experience. I would be more than happy to help clients who want to take on this challenge.

What happens when the seller won’t move on their price? Walk away. You are going to put too much time, effort and money into a project. It must be profitable. There are plenty of opportunities. Never fall in love with a house.

When you purchase a house to renovate for profit there are four major considerations. What is the current market value, what is the cost to complete the renovation, what will the property sell for once the work is complete and where the market is trending. Needless to say, you want to get in and out of a project as quickly as possible. The faster you work, the lower your cost to carry and the less you are influenced by trending in the market. If you base your purchase price on the future market value and there is downward pressure on value, you could end up with little or no profit. The quicker you complete the project, the less likely it is that any possible downward trending will affect your yield. The housing market will trend. Prices go up over time, but there are points in time where house prices fall back and there are times where they flat line.

If you are buying and selling houses, you want to know what the market is doing. If you are following the market, any time can be best time to buy if the right property comes along. You have to find the right property and you have to be aware of your margin and what a project will yield. It is difficult to make profit selling a house in a falling market, but with the right property the worst case will renting it out until the market improves.

Searching for a property to renovate for profit? I am never too busy to help in a property search.

Jim Perks

This is the first in a series of blog posts where I want to focus on flipping properties. I define flipping as buying homes, renovating and then selling for a profit. There are good profits in this activity, but there are also a number of pitfalls and I hope that these posts will help some would-be flippers avoid problems, prevent loss and increase profits. Since I began working in the real estate industry, my life has taken a number of turns; I have experiences, both good and bad, and have learned many lessons along the way. Through research and an understanding of the business, I have built on my knowledge and I feel that I can help people by sharing what I have learned.

At the start of my quest in real estate I visited with a very successful businessman who made his living flipping and renting homes he had renovated. Unfortunately, I walked away from that opportunity for an education thinking I would be OK just finding a property and fixing it up. Had I paid closer attention to what he was doing, I would have been more successful on my first attempt.

My expert has about 20 homes in his possession at any one time and lives at the edge of his line of credit. From the outside looking in, it looks risky, but he is able to mitigate his risk by sticking closely to the basic principle I am going to share with you in this post. If you pay attention to this lesson, you will make more money flipping houses!

Before you begin down the road to fun and profit, you need to define what it is you are going to do. Today’s blog is all about the word “SPECIALIZE”. There are many different avenues you can follow when you flip properties and by focusing on a specialty you will learn exactly what you need to do to make money, then profit many times over from that knowledge.

Going back to my expert, he specializes in single family homes in a specific price range that are in a certain group of neighbourhoods. He knows how and when to buy and how much profit can be realized from each home before he buys it. He understands the buyers’ needs and wants in his neighbourhoods, the best price range for maximum profits and which streets are better choices. He has become so familiar with his product that he has all but eliminated his risk of loss.

When you have specific knowledge of a niche market and understand the needs of the buyers in that market, you will significantly reduce the risk of errors and increase your profits. If you are flipping in a neighbourhood that does not have hardwood floors as a standard in most homes, you will not profit from putting hardwood in your renovations. In fact, those hard wood floors will end up costing you money and eating into your profits. Likewise, if top of the line appliances are not an expectation in your neighbourhood, you would be wasting money putting top appliances in your renovation package. The list goes on and on. You could be spending money unnecessarily in your renovations and losing out at the time of sale. On the other side of the coin, your neighbourhood may demand hardwood, completely modernized kitchens and baths as well as open concept living. If you don’t provide these in your renovations, you homes will take longer to sell and sell for less money. Knowing and understanding your buyers helps you achieve the maximum profit from each project.

I know of a home in an estate area that has been sitting on the market now for several months. It is on an incredible view lot with a stunning mountain view. Based on its size and location, it is priced right for the neighbourhood. I believe it is not selling because the owner decided to cut costs on the renovation. Laminate floors, some obvious DIY finishing and low end appliances all contribute to the problem. Buyers are looking for hardwood floors, top craftsmanship and high end appliances in this estate area and are immediately disappointed when they walk in the door. No matter how great the view is, they can’t get past the poor quality of the floor they are standing on. In the buyer’s mind all of these deficiencies bring into question the quality of the home in general.

So many people decide they are going to flip a house and do not realize this most basic principle. They buy a home and go to work renovating without any understanding of the market they are working in. They cut corners in their spending or put too much time and money into their projects. I did my first home this way and paid the price. In order to realize the maximum profit in a flip you have to know and understand your buyer. You have to know when it is necessary to spend on the upgrades and when certain features are not an expectation of the buyer. When you reach this level of understanding, you will truly profit from your efforts…. learn before you earn.

For the typical owner in today’s real estate market, the next step up on the property ladder is about a 50% increase in value. This number holds true for most couples in North America. For example, a move from a $200,000 home to a $300,000 home is a typical value increase. The step up is a change of $100,000, or 50% of the value of the first home. From there, the next step up may be to a $450,000 home and then maybe to a $650,000 to $700,000 home or more.

There are three main influences that facilitate stepping up to the next rung on the property ladder and three motivations that can put pressure on families to increase the size of their home. Facilitators are those factors that provide the financial capability for the move up and motivators are factors that encourage the move.

The first facilitator is increases in salary due to an advancing career. Having more disposable income gives the owners an opportunity to buy a larger home or a home in a higher valued location. The second facilitator is the increase in home equity with the relative change in market value due to inflation. Although this factor has been significant in the past few years in Canada, we will probably see home equity increase at a slower, more normalized pace in the foreseeable future. The third facilitator is the increase in equity due to mortgage reduction over time. As the owner pays down the mortgage amount, the relative equity in the home increases.

It is logical to assume that these three facilitators will converge to create a positive buying situation at a point of about 25% of the value in the move up home, as this would be the required amount for a down payment to step up the property ladder. Unless there is this convergence, the move up is not likely. Of course there are unknowns, such as inheritance and windfalls that can facilitate a move as well.

Motivators are the factors that trigger the desire to make the move up the property ladder. The first motivator acting on the majority of families is the need to increase living space due to a growing family. In most cases, the first move up the property ladder is motivated by the growing size of a family. The second move is motivated by the aging of family members and their need for more personal space.Teenagers need more room and they need privacy…so do the parents!

The third motivator is less obvious and it involves the desire to simplify living arrangements because the children have moved into their own homes. This move is often into what is called the “Jewel Box” home. It is fewer square feet than the previous home, but it is finished to a very high standard. Hardwood, granite, high end cabinetry and finishing throughout the home are typical of the jewel box. Although this move may not be an increase in value and equity may be recouped from this move, it is considered the last rung at the top of the property ladder.

From personal relationships to job transfers, there are many other reasons to move and many different motivators. The property ladder is just one reason owners look to change their living situation. It is a normal process that most Canadian families go through. Moving up the property ladder should be a positive experience and bring the buyer satisfaction in knowing they have made the right decision about their new home. For many Canadians, their home is their biggest investment.

Contact me if you are thinking about making a move up. I can provide you with the real estate services you need to make a successful transition from you existing home to your next home on your way up the property ladder.

Jim Perks