All Forum Posts by: Sean Kollee

Any Canadian renovators care to comment here?

I had a discussion with an accountant about the tax implications of house flipping.  Basically he sent me over a bulletin describing the 90% rule.  It said that if the house is a complete gut, or meets the definition of a substantial renovation, the seller MUST charge 5% GST just as if it was a newly built home.  I have attached the bulletin to this text.

In my market this would mean a likely tax hit to the buyer (well, its actually just going to come out of the sellers proceeds) of 30-40k.  This ruins the economics of many deals.  It would be quite easy to end up sending the government more of the profit than the flipper would keep for himself!  The essence of unfairness here is perhaps the land value of the house is 400k, and the renovated house is 300k.  So the government will collect 20k gst on land that simply has been transferred along with the added value of the flip.  Wouldn't it make sense for the government to only collect gst on the value added component of the project?

So, Canadian flippers, you must exceed this 90% rule often in your projects.  Do you collect gst?  If not, how can you avoid problems with the CRA?

Originally posted by @Larry Turowski:

@Erin Legler Nice job!

All you new investors, this is a good lesson on how to buy and the MAO formula (maximum allowable offer). The general rule of thumb is MAO is 70% of ARV (after repair value) minus repairs. This is a good example of MAO just being a rule of thumb because this deal didn't meet those standards and was still a great deal.

Erin thought the ARV was $185K. She said repairs were over $32K but let's assume she only budgeted $30K and just went over.

The MAO formula would dictate $185K * 0.7 - $30K = $129.5K - $30K = $99.5K.

If Erin had said, "Nope, doesn't meet MAO", she would have missed out on a great deal. She bought at $112,100. Let's do a reverse calculation to see what percent she bought at. Let X be the percent multiplier (typically 70% for MAO). OFFER = ARV * X - $30K = $112,100. So, X = ($112,100 + $30K) / $185K = 0.77 (77% !!!).

If she had actually sold at $185K her profit would have been $14K less ($185K - $199K = -$14K).  That's $45,689.20 - $14,000 = $31,689.20.  Not too bad!

And I'm sure she knew she was comping out low to be safe and there was a potential upside.

So you see, her MAO was 77% ARV minus repairs. Maybe there were other investors who thought that was too much and missed the deal. Again, nice job Erin!

While the ARV didn't meet the 70% rule, what is spectacular to me is the near doubling of the purchase price earned by conducting a full cosmetic reno. A major cosmetic reno, but nevertheless this was no gut job. Is this doubling a function that can only happen in the lower end market where the house purchased was barely six figures? I look at my market and a rough 1960 built house that sells for 400k to 500k, there is no chance it can be made to be worth 800k after a cosmetic reno. I suspect this rule works best below 150k, could be wrong. Any big budget flippers out there care to comment on the purchase price to ARV ratio?

If it wasn't a good buy at 230 why would it be a good buy at 190 + 40 ? Seems like a project where you would want to be buying at 190 less repairs. Of course I don't know your market at all. What does it rent for ? ( add some landscaping budget it looks rough).

I was able to locate a few before/after photos, however they are not from the same angle.  I guess another benefit of staging, it allows better photography.  For example, a pic of the bare master bedroom was really boring and didn't make the cut for the sales ad, but the post staging master looks quite good, and features prominently in our listing.  I think the lesson here is sellers, you should stage, but don't spend $10k.  

living room before staging

living room after staging

bedroom after staging (no before pic was just an empty room)

I should post some before and after staging photos and get some feedback on my staging efforts. Like I said in my earlier post I did a budget staging job and I think that after some furniture sales my net cost could be down to $1500. Bearing in mind I have three to sell, one the show suite sells I can transfer the material to the second unit, for free, compounding my savings.

Currently I am wrapping up a fairly upscale newly built three unit townhouse project (sub $600k per unit).  Given the soft market conditions, and negative outlook, sales are not what they once were just one year ago in terms of price or days on market.  It makes sense to show the show suite in the best possible light to impress the buyers, thus staging is essential, now more than ever.  

However, in the local market, the stagers have had a pretty good run of business and their fees are high, bordering astronomical.  My most legit recommended stager quoted $2000 for month one, and $1500 for each additional month.  This is just for the kitchen, living room and master bath in a two bedroom unit.  Given the slower sales I must be prepared for a lengthy staging timeline, my agent and I discussed this and he figured up to six months, or at least until the busier spring market in April.  This could cost up to $10k.  Side note, agents love staging, it is very expensive marketing that they don't pay for, so of course an agent is going to push for full on staging using the best company available.  Its not like my agent was willing to pay the staging bill in exchange for a listing agreement on the project.

So, decision time came to host the first open house a week ago.  We decided professional staging would be too expensive and eat into the diminished margins.  We scrambled around town looking for deals and using a few personal items, like a bedroom set with an old mattress the we repurposed for the staging with new linens, some new items like a sectional and table, and rugs and accessories we borrowed and bought.  The end product, while not as good as professional staging, is far better than not staging at all. Total cost was about $2k, and could be far less if we sell the items we purchased.  Likely we can recoup $500.  So the question is, could better staging earn back the $10k in cost in terms of faster sale or higher price?  Can staging actually make that much of a difference to entice an offer?  Or is average quality staging going to deliver just as much as a top quality staging job?  Thoughts???  At this time, we were able to attract an offer on one of the units, not nearly as high as I would have liked, but still acceptable.

option A) - contractor too busy to take this job, find another one.

option B) - contractor not excited about the profitability of the job, has many other better jobs lined up before yours, therefore see option A to deal with this issue.

option C) - putting together a number can be a lot of work, in fact if you were responsible for binding yourself to a number for a large amount of labour and material, you'd be sure to put some time into it.  So, see option A for why it is taking so long.  If already busy he may be working long days on jobs actually putting money in his pocket, rather than spending long office hours bidding on a job he may not get.

Strategy to deal with this:

1.  put together a really good list of materials and specs, so detailed in fact he doesn't need to do so much leg work to get a number back to you.

2.  go visit him and get a sense of how busy he is at some other site he is working on.  If he is looking like his capability is maxed out, find someone else because you can be sure your job won't get the attention it warrants.

House hacking is the technique to enter the Calgary market I would suggest. Even lease a house and rent it to your friends and learn landlord responsibility while living free, if that's possible. Buy a house like a foreclosure and fix the basement, rent the upper suite. That is quite likely the best way to enter a market like Calgary. Years later you can move upstairs and eventually exit the property and rent top and bottom, then refinance to buy another property.

30 k doesn't get very far even in a down Calgary market. You would need significant bank financing and even at a fixed rate of 2.4% it would be hard to find a cash flow property you could acquire. Best use of that money could be in a reit.

Attention Bigger Pockets builders.  You must be really pleased with your new build projects.  My spec homes always become my babies, despite my efforts to retain a sound business focus.  Anyway, here is my latest before and after of a recently complete show suite in a three unit townhouse project.

old kitchen - nasty

New kitchen - beautiful

old bathroom - extra nasty

new bathroom - extra nice

Any builders out there?