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
