When Should I Offer to Sell My House to Tenant?

Question

A few years ago, I bought a house for my girlfriend and I to live in. Plans changed, we moved, and I ended up renting it out.

It's in Austin TX and appreciating very well. I lose about $100/month after expenses, etc.

I just rented it out to a really good couple in May. They wanted a 2 yr lease, I said 1 yr (because I need to be able to raise the rent). So we know they're thinking at least 2 years. The house is now worth $650k

I'm thinking about whether they might want to buy the place and when/how to broach the subject. Their lease ends in May. Has anyone else done this? Of course, I've heard of Lease Options, but those are usually better for lower appreciation markets / offered from the onset.

Thanks

Kraig

Bryan Devitt · Answer

Tell them you're going to sell it and you're offering it to them first. They say yes, you negotiate and sell it. They say no, you find an agent and put it on the market. Chances are if they wanted to buy a house 3 months ago, they would have done it. They will be pissed (rightfully IMO) for you leasing a place out and changing your mind so quickly but it is what it is. I am not sure what your state says about the lease being binding and if it gets transferred with the sale, but that is something you will have to look into.

Danny Webber · Answer

Kraig,I am in Austin and recommend the following based on your financial goals.1. Lease options are only good for 180 days. 95% never close- avoid unless they put up a large down payment, qualify via RMLO - do not exceed 180 no matter what on lease option2. Austin is a booming market- why not sell at the end of the lease?3. If you want residual income and not sell with no hassles/maintenance- look into a mortgage wrap . It offers residual income, good dn pmt, and no maintenance issues4. Look at creative ways to raise the rent, pet rent, lower deposit, etc... rents are superior to deposits because you never have to return them +/-Does this help?What part of Austin is the house in?

Danny Webber · Answer

The buyers normally want a discount totaling the Realtor fees if they know there is no Realtors involved. That is very common down here. I agree that if you can sell now, walk away with what you want then do it....We cannot predict the future and most economics/industry leaders are predicting that the housing market will cool off again.Also keep in mind that people that occupy a house never want to pay full retail for the property. The issue is that they know the house better than you, the issues, why it should be less. I am 100% confident you will run in to this.The easiest way to avoid these arguments is to get a full appraisal done prior to discussing an offer with them.Summary:1. get an appraisal if selling to the tenants or at the very least a full CMA with on site visit- not a drive by2. sell as soon as you can if you can get your money out of it you want3. be prepared for lower offers from tenantsDoes all this make sense?

Dennis M. · Answer

Id dump it in the open market .we are at the top so make hay while the sun is shining ! those renters may be wasting your valuable time with the prospect of buying it .

Kraig Kujawa · Answer

Makes a lot of sense @Danny Webber, thank you. CMAs on the East Side are all over the place, so it will definitely make for an interesting conversation. Their lease is up in May, with 60-day notice, so it seems like this is something I reconsider in March, armed with this info.

Bryan Devitt · Answer

If the lease is binding after the sale, then this discussion is very premature as a LOT can happen in the housing market over the next year (March, May, whenever it runs out) and then the numbers might not make sense to sell it.

Kraig Kujawa · Answer

hi @Danny Webber - thanks for the answers. It does helpIt's on the East Side. Agree it's booming. It also seems like Austin is slowing down. The property is probably worth $630k+ right now. It's very unique for where it is (near The Chicon). Reason Im considering selling at the end of the lease (March '19): I'm concerned that in another year, higher rates will make it harder to sell a property this expensive and another inevitable bump in terrible Texas property taxes will push the needed rent to a place that isn't feasible.I'm not familiar with a Mortgage Wrap, ill have to look into that.Kraig

Kraig Kujawa · Answer

Yep, that's the 'when' part. What youre saying is a good reason to wait towards the end of the lease to discuss with them. I would not sell the home until the end of their lease regardless.

Kraig Kujawa · Answer

I might. The thing is, if i sell it to the tenants directly, i will avoid 5-6% realtor fees. Which adds up to a lot