By Peter Daoust
All over Southwestern Ontario in cities like London, Woodstock, Brantford, Paris, Kitchener and Cambridge, out of town buyers – mostly from areas like Toronto, Mississauga and Brampton – are purchasing new houses and townhouses on spec with the sole intentions of doing flips.
It all sounds so easy. First you follow the roadside signs to a homebuilder’s trailer and sign an offer to buy. Make sure you bring your I.D. and make sure you ask about the $5,000 free appliance offer. Then you must follow further builder’s instructions to make a series of small extra down payments. That’s no big deal, it’s just how it works. Let’s hope you have the money to do it or room on your credit cards. The agreement will state a closing date off in the future, like 18 months away. It’s that simple. Over that period resale prices should jump up 10 or 20 per cent. Conventional wisdom seems to tell us that.
Then you wait and do nothing except do a final walk-through and then close the deal. It helps if you know a good mortgage broker. It also helps if you spring for the one minor upgrade of putting in a gas hookup in the kitchen for a gas stove. Some buyers expect that and sometimes it can make or break a deal. Then resell the house and take the profits and go somewhere else and do it again. Some purchasers are now on their second or third successful flips. What an easy way to quickly get ahead in life!
But sometimes unexpected wrinkles pop up. If you buy one of these units, sometimes you must wait a year or two until the market prices reach up to your expectations. This means you may have to rent it out for a short period to help cover the carrying costs. To find a good tenant, some buyers turn to Kijiji and others to the services offered by real estate agents. New houses and town homes for rent are now regularly popping up increasingly on the MLS system, sporting remarks in the fine print of the listing such as, “Please give credit reports with score, employment letter / stubs, lease agreement, non-smoking policy, references and no pets please.” So, what if the rents collected do not totally cover the cost involved in carrying a new property?
You just have to hope for the best. No stains on the carpets, no oil stains on the driveway, no hockey puck dents in the garage door and no dropping of frying pans on the ceramic floors in the kitchen. No matter what kind of lease you write up, the tenants will always have the right to cook and some people like to cook up a storm.
The concept of having tenants in a brand-new house for a year might be somewhat difficult to get your head around. You also must hope the new tenants will report back to you on such issues as sump pumps not working properly and window wells clogged up with debris. It is not nice to get a midnight call about a basement flooding.
On the flip side, new tenants often must put up with all the inconveniences of having construction activities and mud or dust all around them. With no sod on the ground, dust bowls may blow up quickly.
So, what’s with the picture of the row of freeholds at the top of this article? Do you notice a few things that are missing? Where are the fences, the decks and the landscaping? We took this picture from the street and it shows one- and two-year-old finished freehold units in Brantford, Ont. Similar pictures could have been taken in towns and cities all over this region.
Who is going to foot the bill for the much-needed fences, decks and landscaping? This is an issue that often squashes deals being done by real estate agents who are trying to get them leased out. For many “flippers” these are all minor concerns, which will somehow work themselves out over time at someone else’s cost.
Tenants’ best interests are never really taken into consideration. Tie your dog up to a stake in your rear yard with a rope that is less than 14 feet long. Pets are not supposed to part of this equation anyways. Wheel your barbecue out into the driveway to use it. Living in new units like this often comes with several compromises. If you’re lucky and one of your immediate neighbours is actually an owner, you might benefit from a partial fence going up.
In London, which is where I sell real estate, there are now more than a dozen brand new executive houses for rent on the MLS system with rent prices typically in the $2,000 to $2,750 per month price range. Yet that is only part of the story. Many more units are posted for rent on Kijiji, Facebook or on the Toronto Real Estate Board and access to show these units is accomplished with the use of keys placed in lock boxes. While these rental prices may seem to be a good deal, there is always the worry of the landlords putting up for sale signs near the end of the leases or asking to put a family member into the house.
It’s a jungle out there. Everyone knows that new projects will sell out quickly, sometimes even before a shovel has hit the ground. Builders understand they are selling to captive audiences who are not big on spending too much money on costly upgrades. At the same time, builders take comfort in having firm sales posted on their books just in the off-chance that the markets decide to tank. Smart builders also play the game of pricing their units defensively in the hopes of not giving away excessive profits to the speculators.
Buyers like to play the game of being one of the first to sign up as new customers in the hopes that their new builder will be constantly changing their asking prices upwards.
As for the exercise of paying out commissions to agents who want to register new buyers’ names with them, that gig in many new projects is now over. Builders now don’t need an endless wave of new buyers because they continue to pour in off the streets. In this environment cutting out the middleman makes perfect sense.