Nestled in an East York neighbourhood where single family homes line a suburban-looking street one sticks out like sore thumb. The once small one-bedroom bungalow is gone and in its place a cement foundation and wooden skeletal outline of a first floor that appears abandoned.
According to city and real estate records, the home was bought in August 2021 for $825,000, with the buyer receiving building permits the following year to tear it down and build a modern four-bedroom, five-bathroom property with a finished basement and garage. The buyer then sold the property in the spring of 2023 for almost $1 million, the project unfinished.
The new buyer continued with the project, but last month, it was put up for sale again for $999,000, this time as a power of sale, according to the listing history on property data site HouseSigma. The listing record shows it sold for $1.15 million on Sept. 12, but a week later it was relisted for less money, though that listing was quickly suspended.
Today, the incomplete home sits with a metal fence barring any passersby, with construction materials strewn across the front lawn.
This is just one example of a home flip gone wrong.
Home flipping picked up steam during Toronto’s pandemic-era red-hot housing market, so much so that a recent Re/Max report found renovations and rebuilds to be “one of the most underestimated factors behind escalating housing values.” But when the market turned, many of these renovators and builders found themselves in trouble.
Experts say the days of quick flips and soaring home prices are over for now, and speculators who jumped into the market at the height of the pandemic hoping to make a quick buck when interest rates were ultralow are now paying the price.
Not only have construction, labour and materials costs soared, but renovators have been pummeled in recent months by high interest rates and dropping home prices. Those factors — along with carrying loans for a vacant property — have left many speculators with no option but to sell at far less than they hoped, in some cases at a loss of hundreds of thousands of dollars.
While many home flippers can take the financial hit, a growing number of investor-owned properties (some of which are renovated and flipped) are entering into a power of sale — when the lender takes over the home to sell it and recuperate costs after the homeowner fails to pay the mortgage.
The impact on the real estate market in terms of dropping home prices is minimal, but hopefully people will stop seeing real estate as a “get rich quick scheme,” said real estate lawyer Matthew Gibson, founder of M Gibson Legal based in Hamilton.
“We saw many people enter the space with no experience during the pandemic and saw it as a fast way to make money but didn’t realize the cost, the time, and the risk,” Gibson said.
“And when the market goes upside-down they’re out $50,000 to $100,000 of their investment and can’t afford to sell it or rent it out for enough money.”
‘It’s a risky strategy’
Over the last two years a larger portion of Gibson’s law practice has been dedicated to lenders who have provided loans but aren’t getting their money back. Some of the borrowers are investors, which include home flippers. Many have loans from private lenders (which aren’t heavily regulated in the same way like the major banks are) providing high-interest mortgages more easily to borrowers.
Home flippers who are unable to make a profit, and lose equity on the investment, get into trouble when they can’t pay back their mortgage, Gibson said.
“It’s become a very substantial part of my practice,” he said, adding he now has five to 10 power of sale cases every month, whereas before the pandemic it would be up to two cases a month.
“For those looking to flip a home, or force appreciation (increasing value to the home by renovating it), it’s a risky strategy,” said Mike Heddle, broker and team leader at Royal LePage State Realty. That’s because in real estate the asset isn’t “very liquid,” meaning it takes time to sell and is an expensive asset to acquire, he added.
Home flippers that have been in the business for a long time and have built up equity are able to weather the storm, he said, but new players are left in the dust. If someone has many real estate assets they can often refinance and draw from equity in their other properties to bail themselves out of legal trouble. But for those without other assets find themselves in unstable financial situations.
“Inexperienced investors lose great sums of money and are not fiscally responsible,” he said. “There are serious and significant financial consequences if not handled properly.”
Graeme Hamilton, a Toronto-based insolvency trustee with Spergel, is working on a file where two properties were bought by an investor to renovate and turn into student housing, which didn’t work out.
The properties were put up for sale, while the investor struggled to pay the monthly mortgage amount, he said. Eventually, the properties sold for a loss and the investors were on the hook for the shortfall of $325,000.
Hamilton’s client was able to take equity out of existing assets to arrive at a settlement with the lender that was satisfactory to all parties involved. “If this was the investor’s first flip it’s unlikely they’d have enough money saved up to settle with the lender, or enough equity to pull from,” he said.
He added home flippers also often have various lines of credit to pay for the renovations and labour costs, adding to their debt load. “If this were the case they’d be looking at some type of insolvency and likely a bankruptcy chain of events would happen.”
Home prices down 17 per cent from the peak
In the GTA, home prices have fallen by 17 per cent since the February 2022 peak, according to the Toronto Regional Real Estate Board (TRREB).
Some regions in the GTA have fared worse, with King City seeing a whopping 43 per cent drop. Brampton also saw a staggering 23 per cent loss, and Pickering trailed closely behind with a 22 per cent drop. Toronto has seen an eight per cent price decline since the peak, with detached homes continuing to support high prices and strong demand from buyers to live in the city.
Right now investors looking to flip homes don’t have enough of a margin to make a profit, said Cameron Forbes, Re/Max Realtron Realty broker.
“Interest rates are beginning to come down so it will be more favourable to renovate or flip but the costs that go into a flip have gone up substantially,” he said, adding that some who bought at the peak held onto the property and just rented it out.
“If they don’t have to sell they won’t but if they do, they have to sell at a loss.”
In Richmond Hill, where average home prices have dropped by 11.6 per cent since the 2022 peak, two neighbouring homes were bought in 2021 for $2.6 million each. Renderings show the homes were going to be torn down to make way for a midrise building, but that didn’t happen. In 2023, one of the homes sold, posting an $845,000 loss and other was put on the market to lease but that listing was later suspended.
Could the pandemic frenzy of home flipping return?
The Bank of Canada has begun it’s interest rate cut cycle with three consecutive cuts since June with more to come, a move that will attract more investors, experts say. But until home prices run up drastically again, the pandemic home flipping frenzy may not materialize for some time.
The drop in home prices and slow sales activity might strike some “fear” in real estate investors who consider different investment vehicles.
“Housing is not meant to speculative, it’s supposed to give people a place to live,” said Forbes. “It’s not the stock market.”
What the slowdown in the housing market has done is weed out inexperienced home flippers, who likely won’t return to the market any time soon.
“This isn’t for the faint of heart, and people do need contingency plans if the project doesn’t work out,” said Hamilton.
“Many people overpaid for their real estate in the pandemic and the next year or two will be a challenge for them if they weren’t financially stable.”
