Today’s Sydney Morning Herald has a breathless article about a flipper couple who bought, renovated and have for sale a Marrickville terrace. The underlying message: there’s profit in the renovation game.
My back-of-envelope calculations based on the article’s figures show they will lose around $43,000 on the transaction if they sell for the $680,000 mentioned – a reality more sober than Toby Johnstone’s writing.
Cathy and Antonio Leonardi bought the two storey in poor condition for $550,000. Stamp duty is $20,240 and they spent $105,500 on renovation. A selling agent at two per cent will cost another $13,512.
Let’s not forget the opportunity cost, the price of the money tied up in the project. The lowest conceivable figure would be the mortgage rate, currently 7.5%, on the $675,740 invested in the property for eight months. I make no allowance for State Land Tax which may or may not be payable, or legal costs or building permits. The un-billed labor contribution of the flipper couple is disregarded too.
Total cost to the happy renovators: $723,039. If they can execute a quick sale at their desired price they may contain their losses to the $43,000 mentioned. Delay or discounting immediately worsens their bottom line.
Australian house prices are falling. That and Stamp Duty make it very difficult for flippers to profit. Many renovation projects during the long boom were saved by rising land prices. That kicker is no longer available, as Mr and Mrs Leonardi are about to discover.
Don’t Buy Now!
ADDENDUM: Thanks to Sydney-side buyer-on-strike Luca, we now know the property was passed in at auction and is for private sale, seeking $749,000. If they are able to palm this off immediately at their desired figure, their toils will have made them a handsome $25,961 – a very poor return on risk and labor. Meanwhile, the interest expense clock is ticking, shrinking that tiny sliver of profit every day.
ADDDENDUM II: SOLD 21 May $720,000 So by my figuring, the Leonardi’s lost $3,000, eight months of time and every drop of perspiration they put into the place.
As far as RE Agents are concerned, purchase price was $550,000. Sale price $680,000.
Capital gain $130,000.
And that is how it is reported to the media.
They conveniently leave out all other costs.
It’s quite surreal at the moment. There seems to be a mainstream recognition that our economy isn’t quite as lucky as some thought. Almost every day I here of 100s or 1000s of planned/actual job losses. I wonder when we’ll see a bit uptick in unemployment? Some folks I talk so think that it’s impossible to have serious falls in house prices without serious unemployment. Well, it seems that it is on it’s way.
This is a really telling part of the article:
“What went wrong
In terms of returns, the Marrickville market isn’t as strong as it was.”
That’s right, there’s no magic pudding left.
So nice of Australias charitable flippers to take the hit and provide someone with a renovated house for the price of a dump! And they’re only going to get more & more generous, whether they like it or not :)
They deserve to lose money for that front fence alone. Totally out of character with the rest of the facade.
The Leonardi’s thought house flipping was an easy road to prosperity, how wrong they were! Sadly many others will learn the hard way