To flip or not to flip?
We’re passionate about property at Hunter & Weaver. We’ve done our fair share of renovating “diamonds in the rough”, realising the potential of a house with good bones, enjoying the challenge of improving a poor floorplan, and seeing an old house regain its former (or unrealised) glory. So, it was with great excitement that we sat down recently to watch the first episode of Australia’s version of the American flipping craze, the channel 7 production of ‘The Aussie Property Flippers’.
The show took us through two renovations: a couple in Sydney who bought a rundown 70’s property in Baulkham Hills for $850,000 with a budget of $85,000 (our first thought was ‘good luck with that’) hoping to sell for $1,250,000+ in 12 weeks time; and a Gold Coast couple who bought an apartment in an older style block close to the beach for $336,000, with a budget of $20,000, and hoping to sell for $450,000 6 weeks later. The show took us through the usual trials and tribulations that are inherent in any renovation and illustrated why it ALWAYS costs more than you think it will and which is why we always recommend a contingency budget of at least 10%. The Sydney couple were delighted when their property sold for $1,315,000, a healthy $65,000 over their asking price even though their budget blew out to $145,000 (let’s face it, it was never going to happen with $85,000 anyway, and with the size of the renovation, they did extremely well bringing it in for $145,000). The Sydney couple took away a profit of $270,000 after costs. The Gold Coast couple fell in love with their apartment and decided to holiday let it instead. The bank revalued it at $480,000 allowing them to pull out the additional equity to do another flip.
So, a few things that we noticed watching the show. Firstly, the renovations were done in a tight timeframe. There was no mention of any council approval or body corporate approval process in either renovation, so let’s assume that they took care of that side of things. From a buyer’s agent perspective, we’ve come across a number of houses in our time where the work hasn’t been approved by council. It’s one of the first things we check when our clients are purchasing a property through us. Even if you didn’t do the unapproved work, any future council approvals can be impacted by past work from previous owners and then it can become your issue to deal with and rectify. Secondly, if you’re thinking about flipping you need to be realistic about your own skillsets and what you can and can’t do. Both couples saved a LOT of money by doing a large proportion of the work themselves, so if you’re not handy this is going to eat into your flip profit in a major way.
The third observation was the purchase price of both properties. The median price for houses in Baulkham Hills as at February 2017 was $1,100,000 and the median price for units in Coolangatta was $485,000 (source: CoreLogic). Admittedly, allowing for TV production, the properties could have been purchased 6 months ago, but even then the median price in Baulkham Hills was $1,085,000 and $460,000 in Coolangatta for units. This means that the couples bought the properties 22% and 27% respectively below the median price, and that’s good buying!
As the old adage goes, you make money when you buy, and that’s certainly true in both these situations. If the couples hadn’t purchased so well, their profit margin would not have looked so healthy. For example, if the Baulkham Hills property had been purchased 10% below the median at $986,364 and they spent the $145,000 on the project, with buying/selling and holding costs the profit would have been around $95,000. That’s still a good profit but bear in mind most of the work was done themselves. If you aren’t so handy and you need to outsource some of the carpentry and trade work your profit can rapidly disappear. Also, tradespeople can be difficult to engage at short notice (especially in Sydney), and the flip timeframe could have blown out even further. There is also the inherent risks associated with flipping. The market could change mid-flip and you may be left with a property that you can’t sell for what you had thought, which means you might need to rent it for a while. Even though your intention is to flip, you need to have an exit strategy in place which takes into consideration the vacancy rates and rental yield and acts as a risk mitigation factor with respect to your investment.
A number of key lessons in this first episode – we’re looking forward to what next week’s episode brings even if it does have the less than ideal airing time of 9.00pm.
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