How to Structure a Sell of Your Rental to Your Tenant?

Question

I am not sure this is a unique situation, but it is to me with an existing tenant. Early this year, I found out that our tenant was wanting to purchase a home vs. renting long-term. I let them know that I would be open to selling the house they are currently renting from me for a market price if they would be interested in it. Several months go by and we receive an update from the tenant that they are having difficulty buying a house as they do not have the cash to purchase and their beliefs prohibit them from dealing with transactions that involve interest so getting a loan from the bank is out of the question.

They would like to know if I would be interested in selling the home to them for over a 10 year period that would not involve interest. I think there may be an opportunity here, but hesitant as I am not sure how I would go about structuring the deal. This may also be a bad idea and I can accept that as well, but thought that I would get your thoughts first.

Just some additional details/concerns/questions below:

- I currently have a mortgage on the property and do not yet own it free and clear

- What is a reasonable down payment that I should request of them 10- 20%?

- Since I am paying interest on the existing mortgage, do I need to charge a premium for the house in order to make this deal work? Do I continue to charge them rent and add the additional payment for pay down on the house and amortize that over however many years it may take for them to pay the house in full?

- Would I transfer the insurance premiums to the buyer and just be sure that my mortgage company continues to be the mortgagee on the insurance until I pay off the note with my lender?

- What happens if the buyer fails to continue to make payments. What happens to the down payment?

Thanks in advance! Eddie

Steve Milford · Answer

Check out the laws in your area. In my area I found, if I accepted that options payment, it actually counts toward the purchase and if purchaser/tenant stopped paying me then I would have to go through the foreclosure process and that options fee is legally refundable. The payment they make toward me is NOT rent, it is a payment on their mortgage based on the terms that we agreed on. In the end, seemed like more hassle than it was worth.A lease-option sounds great on YouTube, but I don't see the magic in them (after I read the legal fine print). Considering the scenario you are in and disclosed details, it sounds like the Buyer wants you to take the risk. My advice is to either make the deal more favorable to you, i.e. maybe a 50% down, point them toward down payment assistance programs in your area, and/or offer them seller credits for closing costs or down payment, and let them obtain their own financing. If they can find someone willing to cash you out, then they can have the house.If I sold to someone that wanted "no interest", I would just explain to them that the fee to using my equity to fund their loan has a cost, because I could potentially use the money elsewhere, and that cost is X. I used a simple mortgage calculator and on a $200,000 note, over 10 years with @ a 3% fee, this is a payment of $1,931 per month. If they got a classic 30-year mortgage it would be $843 per month. My 2 cents. Steve

Jaron Walling · Answer

@Eddie Sorrell What you're describing sounds just like a lease-to-own contract. I found a good article discussing how those work from the renter/buyers side. This type of deal can be very lucrative for the investor such as yourself. I would structure the deal with upfront money called an Option Fee. This allows the renters to purchase the property at what date you determine. It gives the buyers the option to buy or not buy but it guarantees a BIG upfront payment to you. There are buy and hold guys who's strategy is built around this. They remodel distressed property and list it just like that. You can have stipulations for maintenance and property repairs during the lease too. It's win-win for the investor and the buyer if they follow through and purchase the property. A lot of people simply cannot qualify for a conventional loan. It gives time to repair credit scores and lock in a house they always wanted. If they change there mind at _ date (option expires) you still own the property and most likely cash-flow the entire time. It’s a good idea to review the contract with a real estate attorney before signing documents with the buyer. I would do more research on this type contract. It could be a great idea for you. https://www.investopedia.com/u...

Andrew Syrios · Answer

It sounds like they're asking for seller financing, in which case it should have interest as any loan would. You should also get at least 10% down.Or you could do a land sales contract or lease option as well (which kind of sounds like what you're describing). I would not do that over 10 years though. It just binds the property for too long and who knows what the price will be in 10 years or what rents will do.

Dennis Wayne · Answer

I do these every month . You should do a lease option preferably or 3 years , my advice is don’t go clouding the title with recorded contracts if you have a mortgage on it . The other option is a contract for deed which I would insist on 7-10% interest if I financed it and ideally the down would be 20% but no less than 10% of full market value . Your state will have specific laws on this practice so it pays to do your home work when offering on an installment sale . If your not comfortable structuring this , call a local well versed RE attorney to draft the documents and walk you two through it so no one gets hurt . You don’t want a judge looking over your documents in court and considering you a predatory lender or mid construing an option as an installment sale

Eddie Sorrell · Answer

Thanks for the responses. In order to manage the risk has anyone created two separate agreements? Update the Lease agreement for a fixed term of say 3 years. Then create an option to purchase contract requiring a down payment that is non-refundable? If the tenant comes up with the money within the 3 year time period that down payment goes towards the purchase price we agreed on. If they no longer want to exercise the option after the 3 year period then I would keep the option payment?