Discount on price due to existing lease?

Question

I'm currently looking at a property that is rented out to a tenant, with the lease ending March 2015. The rent is below market ($1050 when you could easily get $1200), due to the fact that the current owner knows the tenants personally (current owner is tenant's boss). I was wondering if the owner would be willing to take a discount on the price due to the fact that we won't be able to move into it right away, and because we haven't vetted the tenants whatsoever.

The market in my area is hot right now, but I think that since I'm taking a risk with an unknown tenant, this should be reflected in my offer price. Do you agree? If so, what % would you use to account for this risk?

The market in my area is hot right now, but I think that since I'm taking a risk with an unknown tenant, this should be reflected in my offer price.  Do you agree?  If so, what % would you use to account for this risk?

Tim L. · Answer

@Albert Bui @Brie Schmidt - Thanks.  That means I will have to  get the tenant out (peacefully of course), or do non owner-occupant financing.  I'll definitely keep this in mind moving forward.

Albert Bui · Answer

@Brie Schmidt Yes the primary occupant has to move in within 60 days for conventional, VA, or FHA loans.

On FHA and VA loans there is a document that states you'll need to live there 12 months min, while on conventional I have not seen any thing regarding a specific time frame so as long as you move in and do intend to live there as a primary that should be sufficient enough. No one knows the specific time you'll need to live there as a primary for it to qualify other than "intent to live there as a primary," per say but I would recommend min 12 months and filing at least 1 years tax returns linking your 1098 (interest paid form) to your schedule A on your tax return (1040). This at least allows you to show that you did have a primary dwelling in that particular year of purchase and you took interest deductions against the property (paper trail).

I get the above question a lot by borrowers so that is my default answer for it, but ultimately I guess the borrower can do whatever they want.

Brie Schmidt · Answer

@Albert Bui - Thanks for explaining!

Brie Schmidt · Answer

@Tim L. - I am pretty sure a OO conventional loan has the same 60 day requirement,  Right @Albert Bui ?

Tim L. · Answer

@Brie Schmidt - That makes sense.  And thanks for the tip about FHA.  We plan on using conventional for this one, and living in it for a year or so while we save up for the next one.  Offering the tenant cash to move out would also be a good option, but I want to try to get this under contract before exploring those areas.

Brie Schmidt · Answer

@Tim L. It is like going to buy a car and getting mad at the dealership for putting wheels on it and demanding a discount because it has wheels.

It is an investment property and some will already have tenants and some will not - it is just how it is.  But it is not a negotiating tool and in a hot market you will be making accommodations for good deals.

FYI - If your loan is a FHA loan you have 60 days to move in so you would need to offer cash to get him out of pass on the house

Tim L. · Answer

@Brie Schmidt - Why not?  Would it make a difference in negotiation?  Or do you see a problem down the road if the tenants find out that they caused the owner to lose money on the deal?

Brie Schmidt · Answer

@Tim L. -  Taking over a tenanted property is very common.  You need to understand the tenant screening used to make a decision, but I do not see it as a negotiating tactic

You can offer whatever you want.  But I would tell him you are offering x% less because he has a tenant in there

Brie Schmidt · Answer

@Tim L. - Oops.  I would NOT tell him you are offering a lower price because he has a tenant.

Tim L. · Answer

@Brie Schmidt  - Thanks, I'll give that a shot.