Buying Rental Property from Motivated Sellers

The Motivated Seller
You Don't Want to Buy From

by Julie Broad

We bought our very first investment property in a foreclosure deal. It was our first introduction to a motivated seller. The bank didn't want to own residential real estate and was anxious to get rid of the property. We bought it under market value and it's rental income and value has doubled in the last 7 years.
 
Our current home was just about to be listed because the owner got transferred from Vancouver to Victoria. She didn't bother to price her home any higher than what she'd paid, as she just wanted out. We bought the property for under market value and avoided a bidding war by scooping it before it hit the market.
 
These are just two examples of good deals we have made by finding motivated sellers. On the other hand, we've also found that some of the most motivated sellers were motivated because they wanted to ditch their piece of garbage property! In the same vain that we always say "No money down doesn't mean it won't cost you" we also say that a "motivated seller may be motivated for the wrong reason"!!
 
We'll call the type of motivated seller I'm talking about a "flipper". A flipper is someone who bought the property, fixed it up and is now selling it...and wants to get rid of it quickly. When you find a flipper that is anxious to sell you often will find someone who has cut corners on the work just to get it done, and you may just find yourself spending a lot of unexpected money on repairs and surprise problems.
 
We made the mistake of buying from a flipper in Toronto. It was a land mine of a property full of shoddy work and the cheapest possible materials. The worst example of this was the telephone wiring that had been used instead of electrical wiring - and yes, it melted and started to spark because it wasn't the right grade for the electrical currents. Thankfully the lights had stopped working, so it triggered us to get an electrician to start punching holes in the walls before any fires were started!
 
The property had all the signs of being a cheap fix up, but we weren't really aware of what could go wrong at the time. We ignored the signs and bought the property from Mr. Flipper and he was so helpful that he even assisted with getting us financing.

In addition to spending $25,000 to completely rewire the house we had to redo the plumbing in the basement and totally renovate one of the three bathrooms. Shown to the left, the basement flooded thanks by tree roots dissolving the clay pipes and plugging things up. We had to dig up one of the bedrooms in the basement and the entire front yard (which we had just landscaped a month before) to get to the pipes. While the plumbing work was being completed we had to put our tenants up in a nearby hotel for $200/night each.

The first picture below shows the main floor bathroom we renovated because cracked tile and an awkward 5 inch "step up" to reach the sink and toilet were frustrating to deal with. We discovered lazy plumbing practices had created the 5 inch "step up" that the toilet and sink had been on... and the cracked tiles were as a result of tile being laid on top of tile! The next picture is of our front yard after they dug it up to get to the pipes.

The red flags were waving in our faces but we didn't really recognize the signs and looked the other way. The property had so many good things going for it:

• It was priced right,
• It was located in a perfect area for a rental property near downtown Toronto and steps from the subway,
• And, it had good rental income from it's three units.

We were too new at the investing game to realize the trouble we were about to get in because this motivated seller was motivated to ditch his crappy property BEFORE he was responsible for cleaning up the mess. 

When we tell this story so many people smugly say to us "Well, that is what you get for not having the property inspected by a professional". The issue is: WE DID HAVE IT INSPECTED!
 
Wiring is BEHIND the walls. The wires aren't visible unless you punch holes in the walls. Bad plumbing isn't visible unless you get underneath the floors or send a camera down the pipes, and other things seemed minor on the surface but were serious once you tried to repair them.
 
That said, we were still at fault and could have avoided this big mess because there were warning signs and we ignored them.
 
So - Dave and I want you to avoid buying a disaster property from another Mr. Flipper so here's some warning signs to be aware of:

• An investor that wants to sell because they want to invest in something else. This is not a red flag; but it would prompt us to ask more questions. The reality is, many investors will hold onto a property forever if it's making them money. So, if this property doesn't fit in their portfolio anymore or isn't making them money, try and figure out why. Is something in the area changing that you should know about? Is it a problem you can fix, like bad tenants or poor management? There are a lot of reasons why an investor might sell, and many of them are legitimate, but try and figure out if there is a reason that should concern you or if it's an opportunity to solve a problem.

• Someone who says they 'have to sell' but refuses any offers below what they paid or below what they think it's worth.

• Someone who bought the property, renovated it, and is anxious to sell it. There are a few reasons why this is a red flag, but the biggest one is that the reason this person bought it and renovated it, was to make a profit from the flip. This can mean they cut corners to save money and it definitely means they are going to be trying to get top dollar for the property. Trust your gut; ours was giving us warning signs on the Toronto property but we didn't listen. We love that property, and we even lived there for a few years because its location is fantastic, but the property's problems have cost us over $50,000 in five years. Even though it puts over $500 a month of positive cash flow in our pockets, it's going to take us a LONG TIME before we ever make that money back. We've even put it on the market a couple of times to sell it, thinking that we should recover our costs, but we never ended up getting the offers we wanted so we still own it today. And, while it's a good money maker, it still gives us problems.

We don't have good electronic pictures of the electrical wiring that was discovered behind the walls but I think the pictures will say more about what we went through than I could ever describe!

Published February 8th, 2009

Update February 10th, 2009: We received some reader mail about this article. You can read that email and the response here: Upset about the Article:The Motivated Seller You Don't Want to Buy From.  

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