Different Types of Sellers in Real Estate Investing

I have done a lot of deals with a lot of different sellers over the years and, in general, you can fit them all into one of four categories. You have to decide what type of investor you are and then find the right seller for you. For our purposes we will assume that you are either a flipper or a long term rental investor. Then, if you are a long term rental investor, do you want a building that is already fixed up, full of tenants and that you can buy turn-key or are you looking for a building with some issues that you can fix up? As you look at properties try to find the proper match between yourself and the seller.

  • Seller has a nice property, wants a lot for it: Here we have a seller who legitimately has a nice property and has priced it at that level. If you plan on flipping the property then you do not want this property; as there is nothing to improve on and there will be no left over profit. You would also pass on this property if you want to rent it out but you like your buildings beat up and mismanaged. If you want a turn-key property then this is the type of property you want. You just have to run the numbers and make sure they still make sense on this specific building.
  • Seller has a so-so property, wants a lot for it: These sellers come out especially in hot markets. They think their property is the greatest thing around and price it way too high. The problem is that the building isn’t the greatest thing ever. No matter what kind of buyer you are it is REALLY hard to deal with these sellers. If a seller isn’t realistically matching the condition of their building with their price then there is not much you can do. You just need to move on or wait until the market gives them a dose of reality and they adjust their price properly.
  • Seller has a so-so property, priced accordingly: This seller has taken an objective look at their property, realized that there are some warts and has priced it properly for the market. You can work with this type of seller. These are the properties that you are looking for as a flipper. As a rental investor who likes to add value this one works for you too. The only way this doesn’t work is if you want a turn-key product.
  • Seller has a nice property, pricing it too low: Scoop these up as fast as you can as they don’t come around too often. Just make sure you do your diligence to ensure that there isn’t some hidden issue that would account for the low price. Sometimes, though, people just need to sell something quick.

As an investor you get yourself into trouble if you try to force a purchase with the wrong property. You fall in love with the property and force the numbers to work or you deal with the wrong type of seller for your needs. Be honest with yourself. Understand who you are and be specific about what you are looking for.

Then you have to fully understand which of the four types of sellers you are dealing with as you hunt for prospective properties. We automatically assume that if a property is for sale then the seller is willing to work with you. That is not always the case. Don’t try to force a round peg into a square hole. You will save yourself a lot of time, frustration and money.

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For Sale by Owner – The Pros and Cons

You are looking to buy a new investment property or sell an existing one. Should you use the services of a realtor or go it alone and sell it yourself (For Sale by Owner or FSBO)? I have experience with both scenarios so perhaps I can help you with that decision.

When I first started out and was doing fix and flips I used a realtor every time. However, often my profit after all costs and commissions was only five or ten thousand dollars per flip and the realtor was making ten to twelve thousand. Plus that was in addition to the ten or twelve thousand he made when we bought the property!

That didn’t seem fair so after a few flips I decided to try to sell the properties myself. Since the seller typically pays realtor commissions it still made sense to use a realtor when I bought new properties, but I was looking to save money on the sale.

I went out and bought some professional lawn signs with my logo, name, contact info, website and email. I set up a website specific for selling my properties. I held open houses every weekend. I had flyers printed up and delivered to every home in the local neighborhood by the post office. I advertised in the local community gazette / magazine. In short, I think I did everything as well as could be expected. I advertised my open houses on line and in the newspaper.

Unfortunately, I never had a great deal of success. Giving up three or four hours each Saturday and Sunday every weekend, to sit in an open house, was not a lot of fun. Usually the only visitors were the neighbors who were curious to see what you did. When I did receive an offer it was usually extremely low, often insultingly low. The thinking from the prospective buyer was that I was saving all of the commissions so the value of the house should be lowered to reflect that – and then some.

In the end I went back to using a realtor on all of my purchases and sales. The key is to partner with the right realtor. Make sure you have one that is experienced in investment real estate. I would want to make sure they have done some investing themselves. The right realtor will find you some amazing properties. A great realtor will make you a lot of money over time. I also don’t quibble or try to negotiate their rates anymore either. I just factor their costs into the budget to make sure there is still more than enough money for me.

If you buy to rent out long term then this is a moot point anyway. This would apply more to those of you that are flipping. I would still try to build up a list of potential contacts who buy the type of properties that you are selling and try to sell the property by yourself as soon as you start renovating. If you are unable to sell the property by the time you are done the renos then you can always go back to your realtor.

The type of market plays a big part as well. In a seller’s market (where there are more buyers than sellers) you have a better chance of success with a FSBO vs. a buyer’s market (where there are more sellers than buyers).

As much as I grimace every time I right a commission check to a realtor, I realize how much they do for me and how much I have made over the years as a result of partnering with the right person. He has paid for himself many times over.

Please read more about this in Comparing Real Estate Strategies

Water Issues Inside Your Buildings

When I do renovations and run into something nasty, chances are it is the result of a water issue. Soiled carpets, mold, fungus, rust stains and spongy drywall are usually all the results of a leak. Water can come from a variety of sources. It can get in from outside with rain water coming in from a leaky roof, a broken seal around a door or window or a crack in a foundation. It can also be an internal source like a problem with the wax seal around a toilet, a crack in the pipes underneath a sink or a busted water line. Nothing causes damage like water.

To minimize costly expenses I would recommend a few things to you. Before you buy a building get a professional inspection done – always! No exceptions. Walk through the building with the inspector and take care to look at the ceilings in every room on the top floor and along where the ceiling and the walls meet. Look for water stains. Press the drywall to see if it is spongy. These would be signs of a leaky roof. Have your inspector go up on the roof to review the shingles or whatever the roofing material is. Look for any obvious holes or penetrations and the general age of the roof.

Look inside the cabinet under the sink in the kitchen and every bathroom. See if the cabinetry wood appears to be rotten or spongy which would indicate the sink drain is or was leaking. Check how solid the flooring is around toilets and tubs / showers for the same reason. Review the ceiling on the floor below any bathroom for signs of past leaks. If the pipes in the property are copper or galvanized look for signs of rust or past leaks.

Check for spongy drywall or warped casing around any windows in the property. Also see if any of the caulking or seals are missing around any window. This is where water can easily come in. In the basement check for signs of water on the concrete or along the walls or floors which would point to a crack in the concrete foundation. Check the age of hot water tanks and boilers as well to see how long it will be before they need to be replaced. An older tank could develop a crack unexpectedly and lead to a flood.

Water that sits too long can cause mold or fungus to grow. In colder climates water freezing and thawing can expand and contract and cause wood or concrete to expand leading to problems. Water that builds up over time underneath the building can cause the footings / foundation to sink.

After you take possession of a property I would suggest putting a shut off valve on every sink and toilet, if they are not already in place. In case of a leak these valves let you quickly shut off the water to that one spot instead of having to shut off water to the entire property. I would also replace any old toilets or at least re-seat them on a fresh wax seal.

It is a lot cheaper and easier to do some preventative repairs as opposed to redoing drywall and flooring after an accidental flood. When a flood does occur you can typically save carpet if you pull it up and dry it right away. The foam underpad will have to be thrown out as will any hardwood / laminate flooring. Wood expands when wet and doesn’t come back into shape.

Water can cause a lot of problems in any property. An ounce of prevention really is worth a pound of cure in this situation.

Please read more on this subject at Comparing Real Estate Strategies

Real Life Monopoly

The following story illustrates in a fun way what real estate has come to mean to my family and me. It also shows just how much the game Monopoly imitates real life real estate investing.

We were on a family vacation about a year ago and were playing the board game Monopoly. There was my wife and I along with our three children who, at the time, were aged 14, 15 and 17. None of us had played for at least ten years.

The youngest was kicking butt and taking names. She owned almost everything, had homes everywhere, and was in the process of converting those homes into apartment buildings (basically the stage where I am at in real life). The middle child was getting very frustrated as he moved around the board, invariably landing on something that he either couldn’t buy or was owned by somebody else.

At one point, he snapped and said, “I hate this game.” I saw this as one of these teachable, parenting moments and said, “Hold on now. Who are you in this game right now?” He looked at me for a bit, not knowing what I was talking about. Finally, it dawned on him what I meant and he replied, “One of the renters that live in your buildings.”

“That is right,” I said. “And who is your sister?”

He thought for a moment and then said, “She is you.”

“You bet. So who would you rather be right now—you or her?”

“Her, of course, she has all the money.”

“That is right, but why does she have all the money?”

“Because every time I land on her properties, I have to pay her money and she has most of the properties.”

“Excellent,” I said. “And that is the way it works in the real world, too. If you can own assets that earn you money on a regular basis, over time you can become quite wealthy.”

I was quite pleased with myself and we continued to play the game. Of course, teenagers being teenagers, they grumble and complain whenever I ask for help working in my real buildings. They also make fun of me every time I buy a new building and say that I am having a mid-life crisis (no blonds or Corvettes for me; only brick and mortar).

However, one day, as they get older, I hope they will see some wisdom in what the old man was trying to do. For you in your real estate investing life you can draw something from Monopoly as well. Owning a rental property and having tenants pay the expenses and then pay down the mortgage is a really good retirement plan.

Please Read More About This in Cash Management in Real Estate.

Furnishing a Rental Apartment Suite

By placing some nice (not high-end) furniture in your rental property and renting it out for a few extra hundred or even a few extra thousands of dollars a month, you can create some substantial extra income over time.

You can even go into one of the large furniture stores, buy that furniture on credit, and put off the actual payment until sometime in the future. “Do Not Pay Until…” You can take the extra income from the renter, save it and use that to pay the furniture bill when it finally does come due. That means you don’t even have to pay for the furniture out of your own pocket.

Be careful with this strategy though. Think about who needs furnished apartments and then think about whether that person would rent from you.

In general, people who rent furnished apartments are usually only in town for a short time before they return back home, or maybe they just need to rent while they find a permanent home. Business people who are in town for a short contract, people who just moved to your area who need a place for just a few months, college students on a short study program, or certain people on government assistance are all examples of people who might need furnished apartments.

It is rare that you would rent a furnished place for years to the same person, as the tenant would save a lot of money by renting a non-furnished apartment and buying their own furniture. As a result, the turnover with this strategy is higher than with normal rentals. You will get more money in rents but your vacancy rate will be higher. And it will take more time and energy to manage. You will spend more on advertising too.

Business people on short contracts, typically, either want a house with a garage or want to live in an apartment within walking distance of their office. If your property is beyond walking distance to their work or only has on street parking, you may have trouble renting the property. If you are catering to college students but are not close to the school or not close to public transit, you will also have trouble.

To make sure you will have success before you commit, try running a test ad for your place before you even go to the trouble and expense of buying furniture. If you get a lot of calls, then you may be on to something and can go ahead with it. Conversely, if you get no response, that tells you a lot, too.

You also have to make sure that you can charge enough extra to pay off the furniture in a relatively short period of time. Spending a few thousand to fully furnish a house and only being able to get an extra $100 a month isn’t really worth the trouble. Just remember not every property is suitable as a furnished property. But if you do have one this can be an excellent strategy for raising extra income.

The next question is how much should your rent be. I have one condo that I rent furnished. While it has never been empty that does not mean that I have not come close, having rented it on the last day of the month a couple of times. The typical rental period is between four to six months with the longest being nine months and the shortest being one month. I was able to rent it for $2,500 for that one month.

One strategy would be to try and rent the suite for $2,500 every month with a short term, one month lease. However, that requires a lot more time and energy to manage. I prefer to rent it for a bit less and for longer periods to relieve the stress in potentially having an empty suite. $1,990 seems to be the sweet spot for this particular unit.

I have spent a few extra dollars in advertising than I normally would have, plus I have to pay for all of the utilities including cable and internet. With furnished suites, you can’t really expect the tenant to go to the trouble of setting themselves up with the local utility company for one month. Over all, though, I have certainly more than paid for the cost of furnishing.

I let the tenant bring their own sheets, pillows and pillow cases as well as their own towels. This is for the sake of cleanliness. You also have to vette your tenants a little more carefully. You don’t want somebody that will introduce bedbugs etc. into your building. I still make each new tenant fill out the same application and pull a credit bureau before I will accept them.

As mentioned above, it will take more time, energy and money (advertising and utility costs) to make sure your property is always rented. In addition, your vacancy rate will be higher (I have been lucky thus far). You have to factor that into your decision before you go ahead and buy a bunch of furniture.

Please read more at Cash Management in Real Estate Investing.

Watch Your Spending on Multi-Unit Renovations

We usually think of leverage as only applying to mortgages and purchasing property. One thing that I have learned over time is the positive or negative power of leverage when it comes to renovating multiple suite buildings.

The power of leverage can hurt or help you when dealing with renovations. For example, let’s say you are fixing up a single family home, your budget for a new bathtub is $200 and you end up paying $250. Obviously, you have gone over budget by $50. On a single purchase this won’t be that big of deal. But if you are renovating a 20-unit apartment building and overpay $50 per tub, then suddenly it is a $1,000 problem.

A few of those thousand dollar problems can quickly add up to you being seriously over budget. The opposite can happen, too. If you can buy your tubs for $175, then you now have saved $500 in total over 20 units. This becomes very important the more renos you do and as you start to scale up and get bigger.

This has happened to me, both on the good side and the bad, on every multi-unit renovation or new construction project that I have ever done. There are so many people, services, materials and fees that go into renovating a property that overpaying, just by a little, on each one can seriously affect the final cost.

So while you might think to yourself, “It is only 50 dollars”, remember you have to pay that much for each suite. Try the best you can, with every trade or supplier, to get the lowest price possible.

That is also why it is so important to get the budget right in the first place, before you buy the property or before you start work. Be honest with yourself. Know your own strengths and weaknesses when it comes to negotiating and purchasing.

Another technique to keep costs down is to use the same material all of the time and then buy in bulk. What you don’t use for this job you can use on the next. Try to use the same flooring, paint (both quality and color), lighting and plumbing fixtures, tiling and cabinetry, for example, on all of your jobs. This not only allows you to buy in bulk and save money but it also makes repairs and maintenance easier later on as you don’t have to try and remember what you used at what property.

Please read more about this at Comparing Real Estate Strategies.