April 22, 2008
Title: Thinking of flipping? Think again.
Sub-title: The costs of buying and selling a home are greater than you may realize.
The recent downturn in U.S. real estate prices and the accompanying worldwide credit crunch are causing increasing concern. To help forestall the effects of economic sluggishness in our leading trading partner, the Bank of Canada this week cut its overnight rate by 50 basis points to a three-year low of 3.0 percent. The central bank also lowered its economic growth forecast for the rest of the year.
This has created somewhat of a conundrum for Canadian homeowners. Many have benefited from large increases in their real estate wealth in recent years. However there are signs that real estate may be slightly overvalued in some markets, particularly relative to rental costs. So what should they do?
For those convinced that real estate prices are in for a rough patch, one idea for them would be to get rid of their homes and then rent a place for a few years. Then when prices are lower, they could buy another property.
However while television shows with titles like ďFlip this House,Ē often give the impression that getting rid of your old digs can be a relatively straightforward and profitable, nothing could be less certain.
The costs of flipping
While many Canadian homeowners love doing mental gymnastics regarding how much their real estate wealth has increased in recent years, capitalizing on those increases is no easy thing. In fact, when looked at soberly, the costs of temporarily disposing a home and then buying another at some future point, can be daunting. Some examples:
Real estate fees. Although real estate fees have been coming down from their traditional six to seven percent levels in recent years due to the advent of discount brokers, they still represent a major cost of flipping. For example paying an agent a five percent commission on the sale of a $300,000 home will run you close to $15,000.
But that is just the start. Donít forget, that when you buy a new home, its market value will immediately plunge by another five percent. Thatís because if you want sell it the day after you buy it, youíll have to hire another agent, which means that youíll be on the line for another commission payment.
ďSparkling upĒ costs. To get full value when you sell your home, youíll need to sparkle it up. Commons costs include a fresh coat of paint, fixing or replacing old fixtures, upgrading landscaping and so on. At its worst, major renovations, including kitchens and bathrooms, may also be in order.
Furthermore, sparkling up costs canít be measured in dollars alone. Youíll also need to spend untold hours negotiating with and overseeing contractors. The worst part is, that once all the freshening up is done, your place will be so much nicer, that your urge to move will plunge.
It gets worse. If you are a true flipper, at some point youíll want to do buy a new house. When you do, expect you and your partner not to find all the ďsparking,Ē done by previous owners to your taste. So in your first year in the new home, youíll probably undo some, if not all of those changes. And of course thatíll cost you even more money
Welcome taxes and moving expenses. Moving costs may not seem like much. But they add up, especially if you have to carry an extra mortgage for a couple of months because you canít quickly sell your old property at an attractive price. Furthermore, many neighbourhoods charge special taxes or fees when you buy and or dispose of a new property there.
Quality of life. This may not seem like a big deal, but quality of life carries a real cost. A move to another neighbourhood, may involve stepping away from friends, contacts and so on. This may not be a big deal to parents, who will, more often than not, keep their same work contacts and who can hop into a car and see old acquaintances whenever they want.
However for children itís a much bigger challenge. Many kids are not of driving age. For them a move means being almost entirely cut off from social networks. If the move involves a change of schools or sports teams, the loss of friends, contacts and coaches, with whom kids often have lifelong relationships, can be even more dramatic.
Got your timing right? One of the big challenges of a flipping strategy is that for it to work, youíll need to get your timing right. And that is easier said than done.
For example real estate experts have been saying that housing price increases in Canada would flatten out for at least two years. However those who listened and sold their houses would have missed out two of the largest increases in house prices in recent memory.
The other problem is that frankly, house prices donít fall very often. According to the Canadian Real Estate Association, the last time the average price of resale homes fell in Canada was in 1990. Even then the drop was of less than five percent. Whatís more, one year later prices had bounced back to where they were at the end of the previous year.
No one knows what the future holds. And Canadian house prices could in fact one day suffer large drops. But it is highly unlikely that they will ever decline so far, that flipping the property, by selling it, and hoping to buy it back at a cheaper price, will ever be an effective strategy for most people.
Investment advisors often tell clients that one of the best strategies for stocks is to just buy and hold Ďem. Itís a philosophy that, for many years, has also paid off big time in the real estate market.
Peter Diekmeyer is Bankrate.caís economics columnist.
|© 2008 Peter Diekmeyer Communications Inc.|