Mom-and-pop house flippers exit market as rising costs and uncertainty take toll

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Real estate firm Engel & Völkers says mom-and-pop house flippers have entirely left the market, blaming rising costs from construction, interest rates, taxes and elevated housing prices.

Those costs, which have cumulatively escalated in recent years, have literally priced small investors out of a market that for years was thriving.

That’s left this particular aspect of the market in the hands of bigger players and developers. 

 

Much market uncertainty means more education needed

 

Andrew Carros, chief operating officer with Engel & Völkers, who is based in Vancouver, says people today have to be more educated if they’re going to be house flippers because they’re taking a higher risk with the uncertainty in the market and the rising costs and taxes. “There’s a lot of uncertainty in our economy. There’s a lot of uncertainty in every market.”

Carros explains that, of course, the effects of COVID have changed people’s perspectives on what they’re looking for. “I think people made their lives a lot more personal but in Vancouver, in particular, we started noticing a real trend moving away from casual house flippers. We’re not talking about your developers here. We’re talking about people that are doing it as a hobby, or a way to make some extra income or do something fun with their family.”

 

Change with foreign buyers’ taxes

 

He notes the change happened when the foreign buyers’ taxes came into Vancouver in 2017. “There were opportunities in other cities, but if you look at Vancouver’s market we’re usually first in and first out when it comes to how the market trends.”

Carros continues, “When that happened, the manipulation from the government to try to force prices to come down obviously changed the tone of the economy quite drastically, and in Vancouver, I think the narrative that anything can happen really scared people, the casual consumer. 

 

A way to move on and up

 

He says that mom-and-pop house flipping was a nice way for people to live in a home for a few years, do a renovation and then move their family to another property by taking the assets from what they built in the flipped property to “keep moving forward and moving up in the market.”

“It’s stalled out a little bit, unfortunately,” says Carros. “In the last two years, we’ve noticed that shelter costs have gone way up, energy costs have gone way up, holding costs on interest rates have gone way up.”

 

The gap: Shrinking and unpredictable

 

A severe lack of inventory in the market has increased the prices of lower-end homes, Carros explains. This means the gap between what someone pays to purchase and renovate a home, and the higher price they get once it’s flipped isn’t big enough anymore when you consider all the rising costs. 

Plus, “The government has made it very clear that their mandate is to try to stop people from inflating the price of real estate, so they’ve come down hard on capital gains, flipping homes, taxes you have to pay when you come in and out,” he notes. 

“And I think the bigger, greater concern is that the predictability of what might happen in the time that you own that property to when you flip it is unknown. With elections, they just keep throwing out policies that are meant to help affordability but unfortunately, when we look at what’s happening, I don’t think it’s having its greatest effect.”

 

What makes a successful flipper today?

 

Carros says the first thing a potential house flipper needs is cash — and that’s the hardest thing for most people as they don’t have the money to put into a house project. If they’re borrowing, with interest rates elevated, it just becomes harder to do. 

To control costs, flippers must also be very organized. If people can put work into their own property, it helps with cost savings. They have to have a plan and target the areas that make sense to get the most on their return.

Patrice Grouleau, with Engel and Völkers in Montreal, adds that today’s flippers are the pros: professional builders navigating a market where hiring a general contractor can quickly eat into your profit margins.

 

Higher rates and uncertainty = fewer mom-and-pop flippers

 

Christopher Alexander, president of Re/Max Canada, says as soon as interest rates started going up, the market saw fewer and fewer mom-and-pop investors getting in, whether it was to acquire more for their portfolio or to start flipping.

“And it makes sense,” he notes. “Because a lot of times, people will buy a house whatever the cost is and then go out and borrow (money) to pay for the materials to do the flip. So when rates started rising, the margins on those projects got smaller and smaller,” he explains. 

In addition, he points out the uncertainty added to the mix. “It was hard to determine how long it would take for a property to sell or what price it would sell at, but for so long in much of the country you had pretty decent predictability. It’s impossible to have a crystal ball in this business, but there was a good chance if you bought a house today, fixed it up and renovated it, you could sell it for more tomorrow. That’s disappeared since the spring of 2022.”

 

Making a comeback in Calgary with economies of scale

 

Joel Semmens, a realtor with Re/Max Real Estate (Central) in Calgary, says the local market in the past decade has been fairly stagnant with house prices. 

“There just weren’t many people flipping houses because the market was declining; it was not on an incline. (Now), this is the type of market where you start seeing that kind of activity again because we’re in a buoyant, upwardly mobile trajectory of a market,” he explains.

Semmens is seeing groups of people working on multiple properties at once. “I see the guys that are like mom-and-pops in a way because they’ve got their whole family working for them, three to five at a time.” He notes, “They’re doing five (properties) at a time, so there’s an economy of scale in terms of getting the trades, and they pick the same stuff (for renovating the homes).”

 

Government deeming rule for flipped properties

 

The 2022 federal budget introduced a new deeming rule, effective January 1, 2023, for flipped residential properties, including rentals. The Government of Canada’s website says this is “to ensure that profits from the disposition of flipped property are taxed as business income” and “profits are subject to full income inclusion”. 

About the rules for reporting profits from flipping, it goes on to say: “The profit from property flipping is fully taxable as business income and does not qualify for the 50 per cent capital gains inclusion rate or the Principal Residence Exemption.”

 

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