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Wafa Momani and Sherif Fadali, partners and principles of White Orchid Homes, of Oakville, at one of their recent builds in Oakville on May 25, 2021.Glenn Lowson/The Globe and Mail

Fewer than six months after Sherif Fadali and Wafa Momani bought a high-priced teardown house in the Greater Toronto Area, a similar home across the street sold for about $500,000 less than what they paid.

“We bought at a time when, similar to the market we’re in today, houses were getting multiple offers and you could easily be outbid by half a million dollars,” recalls Mr. Fadali, construction managing director at White Orchid Homes Ltd., a Toronto-based design and build firm he owns with his wife, Ms. Momani, the firm’s principal designer. “All it takes is just a matter of weeks or months for the market to shift completely.”

Buying run-down houses to tear down, rebuild and resell is part of what Mr. Fadali and Ms. Momani do in their business. But even with their knowledge and years of experience, it can still be challenging to ensure a house they’ve targeted for teardown will be worth the money, time and effort.

It’s even more challenging for homebuyers who are new to Canada’s fixer-upper real estate market, where houses are bought so they can be renovated extensively or replaced with a new build.

In some cases, buyers choose a fixer-upper because it’s in a desirable neighbourhood and they have the financial means to bring it up to par with the rest of the area. For many buyers, however, a fixer upper is their only way to get into hot real-estate markets such as Toronto and Vancouver.

The partners have been in the house rebuilding/flipping business for six years, averaging one house per year.Glenn Lowson/The Globe and Mail

“I see a lot of first-time buyers, mostly young families, who want to get into the market now and maybe need to be close to the [downtown] core,” says Stan Stanchev, a realtor with Team 3000 Realty Ltd., in Vancouver. “Many of them have no choice but to buy a fixer upper because that’s what they can afford.”

While they may be more affordable, teardowns aren’t necessarily cheap. Christina Clavero, a sales representative and managing director at The Agency Realty Brokerage in Oakville, Ont., points to a small bungalow in Toronto’s Little Italy neighbourhood that sold last year for $1.8 million – more than $800,000 over its listing price of $999,000.

The 14 prospective buyers who submitted bids for the two-bedroom, one-bathroom property weren’t looking at the house, Ms. Clavero says. They were looking at the land and its surrounding community, which is known for great restaurants, shops, schools and easy access to public transit.

“We’re looking at prices for land go up exponentially because it’s so tough to get a good lot,” Ms. Clavero explains. “You’re still going to pay a good amount of money for a teardown because the value is there.”

So how can homebuyers avoid overpaying for a teardown that’s already high-priced to start with?

“Work with a real-estate agent who does a lot of deals in the area you’re interested in because they’ll have a good sense of what works, what doesn’t work and what will add value,” says Ms. Momani of White Orchid. “They should be able to say what you need to do to add value in the neighbourhood.”

The question now for them, is whether it is still profitable to tear-down and rebuild homes in this market, with house prices sky rocketing and building material prices on the rise cutting into their margins.Glenn Lowson/The Globe and Mail

In certain neighbourhoods, for instance, homebuyers expect to see heated floors in the master bathroom and basement. In other areas, panelled basements are common features.

This type of information is important for fixer-upper purchasers because when they decide to sell in the future, prospective buyers will compare their home to others in the neighbourhood, Ms. Momani says.

A realtor with experience in certain neighbourhoods should also be able to warn about common issues, such as flooding or termites.

At one property Ms. Clavero had shown to a client, a big issue was that the land was under conservation and all renovations would have to be approved by the local conservation authority.

“The realtor didn’t put this piece of information in the listing, probably because it would deter buyers,” Ms. Clavero says. “When my client and I were looking at the property, which was on several acres with a lot of trees, we overheard somebody talking about tearing it down. Which of course I knew could not be done easily because it was under conservation.”

Ms. Clavero says it’s a good idea to get a trusted contractor to look at a prospective house before making an offer. This is especially important when a house is expected to draw multiple bids.

Working with a contractor at this stage will also make it easier to plan and execute a teardown or renovation, Mr. Fadali says.

Those who buy and fix a teardown will likely get rewarded for their efforts.Glenn Lowson/The Globe and Mail

If buyers pay a high price for a fixer-upper home, most of them won’t have much money left to build or renovate. Instead of trying to get everything done all at once, Mr. Fadali suggests doing the work in stages.

“If you’re planning to add an extension to a small house, for example, there may be no point in renovating the kitchen now because you’re going to be tearing it down a year from now,” he says.

It’s hard to put a general price for renovating or rebuilding a teardown, but Mr. Fadali says a good starting estimate would be anywhere between $250 to $300 per square foot. This doesn’t take into account high-end finishes, such as tiles from Italy or a state-of-the-art kitchen faucet.

Even when they’ve received a budget from an architect or contractor, fixer-upper buyers should plan for potential overruns of 10 per cent to 15 per cent of the budget, Mr. Fadali says.

They should also plan for ways to help offset these costs, says Mr. Stanchev of Team 3000 Realty, such as building a nanny suite or a rental suite in the basement. “But if you’re going to do this, just be aware of bylaw requirements such as putting in a safety escape and fire alarms.”

Mr. Stanchev notes that homebuyers who go for a fixer upper tend to build or renovate aggressively in the first three years of ownership. “Then they get exhausted and maybe they will decide to sell it and go to something new that they don’t have to do too much with.”

Whether they decide to stay for years or sell after a short period, those who buy and fix a teardown will likely get rewarded for their efforts.

“If you built a nice product or did a nice reno you’ll make a good profit,” Ms. Clavero says. “And if you paid too much, you’ll probably need to stay longer and wait for the market to catch up, but in the meantime, you get to enjoy the house you built.”