Buying from my Landlord

[Camrin Roczey]

Hi everyone,

I currently rent my home..here are the quick details:

• Bedrooms: 3
• Bathrooms: 2
• Year Build: 1989
• Comps: $500k
• Current Rent: $2600
• Location: Santa Clarita, CA

I have the advantage of knowing a lot of inside info about how/when the house was purchased, bc I actually know the former tenets who were in the house when the house was sold...they were allowed to stay as the new owner simply took the place of the previous landlord. 

The current landlord (my landlord) bought the home on a short-sale back in 2013 for $330,000.  He never saw the house, never inspected it, never rehabbed it, just bought it as-is and continued taking payments from the previous tenet.

About 1 year ago (August 2018), my wife and I moved in and started rented from the landlord.

While it has been nice renting this place, and the landlord has made things really easy for us, the truth is that the house is severely out-dated esthetically and could definitely use some upgrades functionally.

For example, the kitchen is filled with ugly yellow-brown cabinets, tile countertops.  The bathrooms all have the same ugly colored cabinets.  The fireplace is made of ugly red brick.  The closet in one of the guest rooms leaks from the ceiling anytime it rains.  The fence in the backyard is starting to rust and fall apart. 

In general, the entire house could use a makeover.

I've met the landlord several times, and he is extremely nice.  My feeling is that this house has been an easy, and passive, cash flow generator for him, but he is not interested in rolling up his sleeves and taking the time to rehab it in order to increase its value.

However, he has hinted to me that he wants to sell the house as well as his other rentals.  I personally think he's getting older and wants to rid himself of the managerial responsibilities of having rental units, but thats just my guess based on a couple of conversations we have had.

I, on the other hand, am only 27 and would love to put some work into the house in order to increase its value and perhaps turn it into a rental property of my own in the future.

My problem right now is that I do not have enough funds for a down payment. I could potentially come up with enough for a 3.5% FHA loan, but with the mortgage insurance tacked on, the payment would not make sense, I'd rather just rent it.

My thought right now is to extend an offer to the landlord that I will take over the house as-is and pay retail price.  (comps are showing about $500k), if he agrees to finance the house to me using a wraparound mortgage.

Although I have $0 down, he is seeing these benefits:

• Receiving full retail price for a house that would probably sell under retail under a traditional sale
• I will cover all closing costs
• He does not have to pay a real estate agent to list and sell the house (3% savings right away)
• He's saving at least 2 months of vacancy ($2600/mo) compared to if he were to sell the house by listing it with an agent, or attempting to find a new rental tenet.
• He's saving any money he'd have to spend to list and market the property for sale or rent
• With the wrap mortgage, he will actually receive more than the sale price because I will pay interest each month in addition to the principal payment.

With tax and insurance included (there is no HOA or Mello Roos) if I continued paying the $2600/mo he'd see a little over 2% in interest, would be freed of any obligation to the home, and would still enjoy some nice cashflow until I could refinance and cash him out.

I'd be open to his terms if he wanted to put a clause in the contract requiring me to cash out within 3-5 years, although I'd of course prefer if he didn't.

Does anyone here have any experience in a deal like this?  Does it sound realistic?  Anything I'm not thinking about?  Any comments or feedback?

Thanks everyone!