Flip of the Week #3

5398 Wakefield Beach Lane, Sechelt

and

The Law of Diminishing Returns

Strata townhouse listed on June 15, 2017 @ $699,900, MLS R2178419.

(5398 is the unit on the far left)

Wakefield Beach was the first big development in Sechelt to come on stream during the last real estate boom a decade ago. We were all intrigued as we watched it take shape as we drove past on the highway. It was the first to bring geothermal heating/cooling and living roofs to the Sunshine Coast. The project also established the reputation of Wakefield Construction, the developer, whose homes and projects are found throughout lower coast. Unfortunately, the company declared bankruptcy in January 2015 just as they were completing Phase 2 of The Watermark waterfront condo development in Sechelt Village. There are two threads that take an in depth look at the Wakefield development on my former posting site, VancouverPeak.com, and you can read them here and here (former unit owner).

The project’s first phase townhomes, duplexes and single detached homes went on sale in 2006 and sold out quickly. The second phase wasn’t so lucky and prices were slashed as the financial crisis of 2007+ took hold. Investors who bought in back in 2006 have seen a pitiful return-on-investment (ROI), if not an outright loss when selling, over the past ten years.

But, times have changed, right? We’re in a real estate boom and there’s money to be made...but, not that much at Wakefield Beach. Here’s the listing/sales history of 5398 Wakefield Beach Lane:

I’ve assumed the townhouse sold for list back in 2006 and as you can see they put it on the market ten years later at increase of 17.1% - a ROI of 1.7% per year which is absolutely pathetic compared to the stock market's return this past decade. The second flip was this spring and they listed at 13.9% on their purchase price. Now this investor made some money - about 11% before costs.

But, to turn around and put it back on the market after 2 months has me scratching my head.  After costs, the seller will be lucky to break even if it sells for list. I wonder if that sell back in in the spring actually fell through. However, the current listing pics show the unit empty whereas in 2016 and early2017 it was furnished although minimally in Feb 2017. It appears the current owner never inhabited the unit. Well, it’s a mystery.

So here is where the law of diminishing returns kicks in. Here’s a fairly simple definition I found:

“The law of diminishing returns is an economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain at a constant. As investment continues past that point, the return diminishes progressively.”

Real estate investing in a bubble appears to me to behave like a ponzi scheme. It's the first in and first out who make the money. Everyone after that gets chump change by comparison. It's so bubblicious. I’ll be keeping an eye on this list.