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As Toronto’s real estate market continues its wild run, it’s not just potential homeowners who are having trouble finding affordable properties. For infill developers and resellers – otherwise known as flippers – bidding wars and wild-eyed buyers are making it hard to turn a profit rehabilitating broken homes.

“For years, improving distressed properties was our sole focus,” says Bill Crilly, a structural engineer who runs 3 Stones Custom Homes with general contractor Chris Lawrence. The company focuses on what Mr. Crilly calls “dilapidated houses that no one would want to live in,” in the downtown Toronto core, completely gutting and restoring stately, 100-year-old brick houses and outfitting the insides with luxe, contemporary design touches.

In the past year and a half, the duo has found itself regularly outbid and for the past few months has found itself entirely without a house to fix up. In early fall, for example, they tried for a house on Euclid Street, near Bathurst and College, that was listed at $960,000. 3 Stones offered $1,035,000, planning to spend around $200,000 on a six-month fix and sell for about $1.5 million.

The house sold for $1,220,000, almost $200,000 more than they were willing to pay.

“The thing is, we bought and restored the house right beside it, we know what it needed,” Mr. Lawrence says. He says the eventual buyers are in for an unpleasant surprise if they think they can get away with a cosmetic renovation. “We planned a complete gut right back to the studs.”

Renovator/developer Chris Lawrence inside a current project. All photos by Matthew Sherwood for The Globe and Mail

“It used to be that for houses in such terrible shape, most buyers would say ‘no way,’” says Michael Wacholtz, a Realtor with Keller Williams whose clients include 3 Stones and another renovation company, Imeneo. “Now first-time buyers, and even move-up buyers, are realizing they have to consider these places. They’re becoming the competition.” Buyers who plan to live in a house are willing to risk more than renovators, says Mr. Wacholtz, because they aren’t operating on a tight time frame: They can stick with a property until its value has risen high enough for them to recoup what they spent.

Also contributing to shrinking profit margins are eager first-time flippers who drive home prices up in bidding wars without having done the rigorous calculations more experienced builders know are necessary. “They get a quick baptism in terms of how much things will cost,” says Michael McCann, an agent with Royal Lepage, who says the builders he works with want to turn a 15 to 20 per cent profit. “Permit costs are up, material costs are up – I’ve seen a lot of people run out of cash, then be forced to sell a partly renovated house after they’ve lost their shirt.” Three Stones just considered buying a partially finished house on Lisgar St., west of Dovercourt, but were wary of the potential hassles of fixing somebody else’s sloppy work.

'People think they’re going to get a deal with a bank sale or an estate sale. That’s not going to happen. Banks don’t ever lose money.'
Real estate agent Michael McCann

Experienced flippers know their math, says Jeff Reed, a carpenter and contractor who flips houses and also teaches seminars on how to do it properly. He focuses his own buying and selling east of the Don Valley – concentrating on one area cuts down on transportation costs, and allows renovators to develop expertise in home types and potential buyers – and is currently fixing up three properties in East York. “It’s one of the cheapest areas of the city in terms of the ratio of the size of the house to land size.”

An ongoing relationship with suppliers and tradespeople is another advantage that long-time renovators have over newbies. “You need to have a team – if you’re hiring all new trades, it will take double the time,” says Mr. Reed. Loyalty among crew members is crucial, so in order to keep its tradespeople employed, 3 Stones has recently made what Mr. Crilly calls a “lateral move,” working for existing homeowners rather than buying properties outright. With contractors still at a premium in the city, they can’t risk having their workers move on to other companies.

Mr. Reed says he wins most of the bidding wars he gets into, but the increase in selling agents setting offer nights to provoke bidding wars means he's often competing against weary buyers who aren't as calculating as he is. “If someone wants to spend emotional money, absolutely, I’ll walk away,” he says. Instead, he’s become ruthless about sourcing new projects, sending out staff to canvass streets and chat up potential sellers, often snagging houses before their owners can think about listing them on MLS.

Mr. Reed has also started renting out a renovated home for a year or more, earning back his building costs while waiting for rising prices to flesh out his profits. “That also has issues, though, banks are very nervous about income properties,” says Mr. McCann. “You have to be ready to put at least 20 per cent down, and have six months’ income on hand for when the unit is empty.” Three Stones is considering getting into the income property scene, and in the meantime is also doing some building for television sets.

TV might be the problem – Mr. McCann says that American flipping shows have fooled Canadian buyers into thinking there is fast money to be made. “People think they’re going to get a deal with a bank sale or an estate sale,” he says. “That’s not going to happen. Banks don’t ever lose money.”

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