We purchased our first investment property in a foreclosure agreement. It was our first introduction to a motivated seller. The bank did not want to own residential real estate and was anxious to get rid of the property. We bought it below market value and its rental income and value have doubled in the last 7 years.

Our current home was about to be listed because the owner transferred from Vancouver to Victoria. He didn’t bother to price his house higher than he had paid, since he just wanted out. We bought the property below market value and avoided a bidding war by keeping it before it went on the market.

These are just two examples of good deals we’ve made by finding motivated sellers. On the other hand, we have also found that some of the most motivated sellers were motivated because they wanted to get rid of their junk property. In the same vain we always say “No down payment 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 salesperson I’m talking about a “pinball.” HAS pinball it’s someone who bought the property, fixed it up and is now selling it… and wants to get rid of it fast. When she finds a fin that she’s itching to sell, she’ll often find someone who has cut back on the job just to do it, and she may find herself spending a lot of unexpected money on repairs and unexpected problems.

Now, I must mention that not all properties that are spruced up and flipped will be done with a lack of care and concern for quality. But, you have to be very careful when buying a fixed and overturned property.

We made the mistake of buying from a pinball machine in Toronto. It was a one-property land mine filled with shoddy work and the cheapest possible materials. The worst example of this was telephone wiring that had been used instead of electrical wiring, and yes, it melted and started to sputter because it was not the right grade for electrical currents. Fortunately, the lights had stopped working, prompting us to find an electrician to start drilling the walls before a fire started.

The property had all the signs of being a cheap fix, but at the time we didn’t know what could go wrong. We ignored the signs and bought the property from Mr. Flipper who was so helpful he even helped us get financing.

In addition to spending $25,000 to completely rewire the house, we had to re-plumb the basement and completely refinish one of the three bathrooms. The basement flooded thanks to tree roots dissolving the clay pipes and clogging things up. We had to dig up one of the basement bedrooms and the entire front yard (which we just landscaped a month earlier) to get to the pipes. While the plumbing work was being completed, we had to put our tenants up at a nearby hotel for $200 a night each.

 
We renovated the main floor bathroom because the tiles were cracked and it was frustrating to deal with an awkward 5 inch step to get to the sink and toilet. We discovered that lazy plumbing practices had created the 5 inch “step” that the toilet and sink had been on…and the cracked tile was due to tile being laid on top of tile!

 

Red flags waved 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 well priced
• It was located in a perfect area for a rental property close to downtown Toronto and steps from the subway,
• And he had a good rental income from his three units.

We were too new to the investment game to realize what trouble we were about to get into because this motivated seller was motivated to get rid of his shitty property BEFORE he was responsible for cleaning up the mess.

When we tell this story, many people tell us smugly, “Well, that’s what you get for not having the property inspected by a professional.” The problem is: WE HAVE INSPECTED IT!

The wiring is BEHIND the walls. The cables are not visible unless you drill holes in the walls. Faulty plumbing is not visible unless you get under the floors or send a camera down the pipes, and other things seemed minor on the surface but were serious once you tried to fix them.

That said, we were still at fault and could have avoided this big mess because there were warning signs and we ignored them.

Here’s the big lesson we learned: If there are things on the surface that look poorly done, then the things you CAN’T see are almost certainly even worse. When the finishes and work you CAN see are of high quality, the things you can’t see (like plumbing and electrical) are more likely to have been done right. here are some warning signs to watch out for:

• An investor who wants to sell because he wants to invest in something else. This is not a red flag; but it would prompt us to ask more questions. The reality is that many investors will keep a property forever if it makes them money. So if this property no longer fits in their portfolio or is not making them money, try to find out why. Is something changing in the area that you should know about? Is it a problem you can fix, like bad tenants or bad management? There are many reasons why an investor might sell, and many of them are legitimate, but try to find out if there is a reason you should be concerned or if it is an opportunity to solve a problem.
• Someone who says they ‘have to sell’ but turns down any offer below what they paid or below what they think it’s worth.
• Someone who bought the property, renovated it and is eager 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 and refurbished it was to make a profit on the investment. This may mean that they cut corners to save money and it definitely means that they will try to get the best price for the property. Trust your gut; ours was giving us warning signs on Toronto property, but we didn’t listen. We love that property and even lived there for a few years because its location is great, but the property issues 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 will take a LONG time before we can get that money back. We’ve even put it on the market a couple of times to sell it, thinking we should recoup our costs, but we never got the deals we wanted, which is why we still own it today. And while it’s a good source of money, it still gives us trouble.

My point is not to say that you should never buy from a flipper, or that all flippers will do a poor job at a renovation, but in most cases a flipper probably isn’t the motivated seller a real estate investor is looking for.

As a real estate investor, you will find the best opportunities buried within the problems. Motivated sellers have problems. They are motivated by their situation, and that situation is an opportunity for you to solve their problem and make a better deal because of them.

There are many reasons someone might be motivated to sell their home: illness, job loss, divorce, moving, and even too much debt, among other reasons. In these situations, you’ll find a motivated seller who NEEDS to sell, and they’ll sell at a lower price just to solve your problem (or give you better terms on the deal, be it seller financing or longer due diligence periods, etc.) .

In MOST cases, someone who has bought a property to fix it up and turn it around is not motivated by the reasons you want as an investor. They will NOT accept a lower price because they have costs to recover and profits to make. It doesn’t mean that every home fix and move is going to be a money pit, like the Toronto triplex we bought has been. It simply means that as a real estate investor looking to maximize cash flow (which means minimizing your purchase price and then maximizing rent and minimizing expenses each month), buying from a pinball is the least likely to produce the best offer. It can also result in the purchase of a problematic property, if you are not careful.