Thinking of flipping? Think again
By Peter Diekmeyer • Bankrate.com

The recent downturn in US real estate prices and the accompanying worldwide credit crunch are causing increasing concern. To help forestall the effects of economic sluggishness in our leading trading partner, the Bank of Canada this week cut its overnight rate by 50 basis points to a three-year low of three percent. The central bank also lowered its economic growth forecast for the rest of the year.

This has created somewhat of a conundrum for Canadian real estate investors. Many house flippers have benefited from large increases in their real estate wealth in recent years. However, there are signs that real estate may be slightly overvalued in some markets across the country, particularly relative to rental costs. So, the time for flipping may be at an end -- at least temporarily.

Because while TV shows like TLC's Flip That House often give the impression that turning a run-down house into a real estate gem is a relatively straightforward and profitable, nothing could be less certain.

The costs of flipping
While many Canadian homeowners love doing mental gymnastics regarding how much their real estate wealth has increased in recent years, capitalizing on those increases is no easy feat. In fact, when looked at soberly, the costs of temporarily disposing a home and then buying another can be daunting.

Although real estate fees have come down from their traditional six-to-seven-percent level in recent years due to the advent of discount brokers, they still represent a major cost of flipping. Even paying an agent a five-percent commission on the sale of a $300,000 home will run you close to $15,000.

But that's just the start. Don't forget that when you buy a new home, its market value will immediately plunge by another five percent. That's because if you want sell it the day after you buy it, you'll have to hire another agent, which means you'll be on the line for another commission.

Renovation costs
To get full value when you sell your home, you'll need to sparkle it up. Common costs include a fresh coat of paint, fixing or replacing old fixtures and upgrading the landscaping. At worst, major renovations, including kitchens and bathrooms, may also be in order.

Renovation costs can't be measured in dollars alone. You'll also need to spend untold hours negotiating with and overseeing contractors. The worst part is, once all the freshening up is done, your place will be so much nicer that your urge to move will plunge.

Welcome taxes and moving expenses
Moving costs may not seem like much. But they add up, especially if you have to carry an extra mortgage for a couple of months because you can't quickly sell your old property at an attractive price.

Furthermore, many neighbourhoods charge special taxes or fees when you buy and/or dispose of a new property there.

Timing is everything
One of the big challenges of a flipping strategy is that for it to work, you'll need to get your timing right. And that is easier said than done.

For example real estate experts have been saying that housing price increases in Canada would flatten out for at least two years. However those who listened and sold their houses would have missed out on two of the largest increases in house prices in recent memory.

The other problem is that frankly, house prices don't fall very often. According to the Canadian Real Estate Association, the last time the average price of resale homes fell in Canada was in 1990. Even then the drop was less than five percent. What's more, one year later prices had bounced back to where they were at the end of the previous year.

No one knows what the future holds. And Canadian house prices could in fact one day suffer large drops. But it is highly unlikely that they will ever decline so far that flipping the property by selling it and hoping to buy it back at a cheaper price will ever be an effective strategy for most people.

Investment advisers often tell clients that one of the best strategies for stocks is to just to buy and hold. It's a philosophy that, for many years, has also paid off big time in the real estate market.

Peter Diekmeyer is Bankrate.ca's economics columnist.