For a long time, flipping homes has been something that many people want to do but only a few succeed at. The country house flip, or more popularly known, “the farmhouse flip” is a new-ish trend sweeping the internet.
Hundreds of YouTube Channels and websites are dedicated to just this. People buying dated and sometimes run-down country homes and farmhouses, renovating them and re-selling them for a profit.
A new HGTV show, ‘The Farmhouse Fixer’ will, similar to other HGTV shows and online “house hacking” trends, likely push the popularity of the trend even further. All these shows make flipping seem like a fun and easy way to invest in real estate. Maybe it is in parts of the U.S., but, here in Canada, things are quite different.
So, as a way to bring people back to reality, or at least provide a warning to those who want to tackle this endeavour … we are offering some point of advice and some recommendations.
Before we jump into those though, let’s start off with a big disclaimer, shall we…
I’m not a big fan of flipping homes to try to make a quick buck. In fact, we often tell people there is no “get rich quick” method to real estate investing. And we’ve often recommended clients look at alternatives to flipping when exploring ways to invest in real estate.
Yes, a good few have been successful with flipping properties. However, they often have big budgets and a tried and true method to follow. It is not for the faint of heart and it can be INCREDIBLY risky.
If you are buying a farmhouse or country home with plans to renovate and “flip”it, you should be buying the home because that’s where you want to live for a few years while you fix it up. That should be your strategy. You should not be getting into this to try and turn around to make money in six months or a year. Anything can happen, many things can go wrong and you should be very careful.
With that out of the way, let’s dive.
In today’s market, most homes come with a hefty price tag. Even if you’re not competing for it against multiple other offers, country homes still do not come cheap.
Even if you are looking at buying a teardown. Sellers know a good chunk of the value can be asked for the land, no matter how many improvements need to be made to the property. They aren’t wrong. Land is a finite resource, and land in a good location even more so.
However, banks do not see it the same way. Traditional lenders will not provide financing for the entire property if the majority of the value is in the land. Often times if a traditional A lender is willing to loan you money for a vacant land property, they can ask the buyer to provide 50% of the downpayment. More detail would need to be discussed with your mortgage broker.
We’ll cover the location in more detail shortly. But, to wrap up, you want a house that is in a higher-end area where you can warrant asking for your higher price in the end. Something not too rural. You should expect to pay a minimum of $850,000 for a property in a great location, even for a property that needs work.
To state the obvious, you will need a good budget for renovations.
This is where having the knowledge of renovations, renovation costs, or having an experienced and reliable contractor who can give you quotes is necessary. You don’t want to go into a project blind without having an idea of what things may end up costing you.
Depending on the house and what is needed, you might be able to get a Principal + Improvements mortgage to help with some of the renovation costs. However, there are so many caveats to this. You’ll need to discuss this with a mortgage broker first. If you are getting into a major renovation, then principal + improvements will likely not work. Instead, you may need to look into getting a construction loan.
If you can avoid doing some big ticket items like the roof, utility systems (septic, cistern or well repairs or installations), that is ideal. This leaves more capital to invest in the cosmetic aesthetic, and this is where buyers can become emotionally motivated by how beautiful the home you are selling is. Although necessary, no one’s breath is taken away by a new or well functioning septic system. Ideally, you want to focus your budget on kitchens, bathrooms, changing the layout or adding additions.
Once you start ripping away at walls, flooring and ceilings though, sometimes you run into surprises. Not the good kind either. Things like mold, water damage and old wiring that may have been missed earlier now become evident.
This is where the contingency fund comes in…
Have a contingency fund. Things will go wrong, you will go over budget (especially if you haven’t done this before) and can run into issues that may not have been apparent during your home inspection (if you were lucky enough to do one before your offer was firm in this market). The older the house, the more true this will be.
Country homes can have odd utility systems to contend with as well. Making sure septic, well or cisterns are in good working order before you buy the home would be absolutely necessary. Running into issues with these items can get very costly very quickly.
Remember To Account For Other Costs
Aside from the renovation costs, you will have ongoing monthly expenses as well as other miscellaneous costs.Mortgage, utility bills, taxes, lawyers fees, realtor commissions (when you sell) and possibly capital gains tax could apply as well.
You might be wondering how it can even be called a flip, then, if you have to hold the property for this length of time.
That is just the thing. There is no get rich quick option here, especially with country homes. This is why we say you need to want to live in the countryside and want to get into a major renovation project to do this. The market can change, projects can take a lot longer than initially expected and you may have to stay put for a while.
Your method should be more along the lines of buying a primary residence to fix up, hold for a little bit and sell at a profit in the future. This seems to be a more successful method for “flipping” a home. Both in terms of financial successes and keeping your mental sanity as well.
For the property to be considered your primary residence you typically need to have lived at this home for 1 year to 18 months. There may be other requirements so definitely have a good accountant to help you.
The first time you do a project like this, you shouldn’t have any issues or owe capital gains taxes when you sell. However, if you were to start moving consistently every year, CRA will likely catch on to what you are doing and question you as to why you are moving so often.
As you know, real estate can be a fickle beast. The higher-end market can be volatile and is the most sensitive to external factors like government policies, interest rate changes, lending regulations and other economic influences.
Also, there is no timing the market! As such, you want to be flexible with your plan.
If you purchased a country home to fix up in 2016 and saw what was happening in 2020, you might decide that now is a good time to sell. And you’d probably be right. Had you tried to sell in 2019, perhaps you wouldn’t have done as well on the sale price as you could have today. Which, by the way, was not what most people thought during the first part of this year when COVID reared its ugly head.
In fact, during my research of property “flips” in the Greater Golden Horseshoe, I saw numerous listings that came back up for sale in 2020 after not selling in 2019. Many sold for the same asking price, some sold for more. This is a prime example of why patience is key.
I don’t have a crystal ball, you don’t have a crystal ball and neither does a HGTV host. You have to be flexible and react to the market you’re in. If you see things slowing down, or something catastrophic has happened, stay put. Don’t sell and wait it out. You want to try to react to things as you see them and act accordingly as best you can.
Time in the market is ideal! Not only to avoid capital gains taxes but also for appreciation as well. In a perfect world, you want to hold properties for some time so you can let appreciation do some of the heavy lifting for you.
It seems that gone are the days of buying a cheap property in a prime, popular area. You just can’t find a property in a popular area for cheap enough to do the flip at a lower price range.
Judging from recent sales, the”farmhouse flip” doesn’t work in cheaper, overly rural areas… as you might expect. Typically, in the Greater Golden Horseshoe, we saw a purchase of $700,000-$850,000 in 2017/2019 and a resale for $1,200,000-$1,500,000 in 2020, depending on the property and location.
Aside from the right price, you need to be selective about the type of country home you choose. Naturally, you want to choose a home with potential and ideally property that has something special about it. A distinct feature that makes it stand our or perhaps a beautiful lake or escarpment view for example.
You see, living in the countryside is still somewhat of a niche lifestyle that not everyone is up for. Going too rural limits the number of buyers that your property will appeal to when it comes times to sell. On that note, you also don’t want to buy an acreage that is too large. The most popular property size seems to be in the .5 to 10-acre range.
When you take your home to the market, you need to make an impression.
Buyers have to see the value in your increased price. Did you just throw any old laminate flooring down, add in some new lights, painted and now want $400,000 more for the house? That is a recipe for failure.
Buyers have their agents go back into the property history, look at the original images and see where you’ve added value. They are very informed these days and to be frank, expect close to perfection, especially at the higher end price points.
Your aim should be to wow buyers.
By this I mean do something that stands out from the rest of the homes on the market. Accentuate unique features like original beams, stone or brick walls, or gorgeous views. You could also try vaulting ceilings, opening up ceilings completely to expose trusses (if possible), adding in an addition with large windows or glass walls, maintain the character of the house while adding modern twists, opening up walls or adding in new doorways to change the layout as well as changing the exterior, to name just a few examples.
Adding special features like fireplaces, cozy exterior seating areas, outdoor kitchens, modern sheds or studios to a country property can really help too.
When one truly adds value to design, convenience and lifestyle features to the property, this is where most flips have success.
If you’re a savvy real estate investor you will know that choosing the right location is one of the most important factors for investing successfully.
As I have said, and if you had seen our examples, successful country home “flippers” saw most success when they purchased a home in a popular country home location. Again, in a location that is not too rural. As a good gage, about an hour’s drive to Toronto seems to be the sweet spot.
You can consider looking in areas like:
Unless you are a contractor yourself or are a very handy person with an eye for attention to detail that borders on OCD, don’t do the work yourself. Hire a trusted contractor to help you!
I know… Instagram channels and websites with “easy house hacks” showing you how to create faux wainscoting are fun but this is not the time to test out your woodworking skills. If time is of the essence for your project you definitely want to know what you are doing. Or hire someone that knows what they are doing.
You could though give project management a go instead of hiring a project manager. Again, though, you need to have a good eye for detail.
Shoddy work is noticeable, especially in a luxury home. If you even utter the words “Ehh, no one will notice”… they will. Or at least a realtor with a good eye will notice and getting your top end price at that point will be more difficult. When I am showing a client a renovated home, I don’t even want to see a bad grout or tiling job let alone work that has clearly been done by an amateur. I know that sounds harsh but a buyer paying a premium for the property will want – and deserves – to be handed over a home that has been impeccably finished.
Flipping homes takes an incredible amount of knowledge and skill. This will be even more so if you are trying to flip a country home.
As I have already mentioned, there is no get rich quick method here. Yes, it seems that more people these days want to live in the countryside but you are still dealing with a niche product especially when you factor in the size of the property and price. Don’t forget, it is a smaller pool of people that can buy a 1.5 million dollar home in the first place, and not all of those looking at this price point and going to want a home outside of a major city.
If you decide to tackle a country home flip, do so because you are passionate about renovating homes, love country living, and will be ok financially no matter the outcome.
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