Selling property to a tenant - Good Idea?

Question

First off let me give you some background of the situation.

I purchased the property for about $70K and owe about $50K with monthly mortgage payments of about $280. I inherited the tenant from the previous owner and she has been in this property for atleast 5 years. She pays me $1150 in rent. I do not know her complete story (still have to ask) so I do not know why she has been renting and not buying....probably bad credit. Her uncle is a few doors down (I believe she is in her late 30s). She has been late on a few payments but she has always came through and got current in the 2 years i owned the property. As to not sugar coat this, with in my ownership, she has probably been late on rent about ~50% of the time but again has always paid in full within a couple weeks of the due date.

So this is what I'm proposing, so let me know if you have any concerns or if there is any additional due diligence i need to do...

The property is worth $140K fixed up. I was going to offer her the property for $120K (0% down), 30 year, 6%. This comes out to be about $720 per month. Adding in $80 / month for PMI and $350 for the property taxes, she will be paying the same amount she is now, building up equity and I still get paid. I was thinking about putting a caveat in the agreement of sale / mortgage, that after 7 years (which BTW is when i would pay off my loan if I applied all remaining income (not including PMI) to the principle and is when she would cross over into the 10% equity in the house) that she would refinance and buy me out. I would of accumulated ~$50K in interest, get ~$110K at time of refinance, help her building credit, and not have to worry about the house (too much).

What are your honest thoughts? Good idea, bad idea, how should I make this work, or should i hold course and not change anything..keep her renting?

Ryan Dossey · Answer

@Dave Saveri My initial glance is that she's been late 50% of the time. A foreclosure is a bit of a different beast vs an eviction. Secondly if she is having a hard time 50% of the time paying $1,150 what do you think would happen when she gets hit with a serious repair? Unfortunately a large portion of our residents operate on pay check to paycheck margins where a simply repair... Garbage Disposal for instance would go unfixed. Something like a Hvac repair or roof... They would have no way of ever fixing it. We find one of the large reasons folks rent is that they like having a "cap" on potential expenses and the ability to move if you and I don't do a good job of providing clean housing.

Anthony Dooley · Answer

@Dave Saveri The fact that she rents instead of owns is really not your problem. She has bad credit because she doesn't pay on time. Not just the rent, but with everything in her life. She is probably in default on some old bad debt as well. I wouldn't loan her anything. The property is cash flowing well, so I would keep it.

Brett Goldsmith · Answer

The 0% down part is very unappealing to me. I'd want someone to put some serious skin in the game for me to carry a note especially since it sounds like they wouldn't be a bankable indiviual otherwise. Also, good point by Ryan; Sounds like you may run the risk of having the house not taken care of properly and then a possibility of needing to foreclose. I'd consider just renting it out or based on the numbers you are saying, sounds like it could be a wise investment to fix it up and sell it? All comes down to your personal goals and capital needed to accomplish them.

Bryan Devitt · Answer

I don't see any upside to this at all. Right now you're getting your rent payment every month (and late half the time) and you can increase it with the market. You would be handing her a gift of never having a rent increase as long as she (hopefully) takes care of the place? There is a TON of risk and you get nothing out of it. If you want to sell it, then sell it, but don't do this half in half out crap IMO

Amy Beth · Answer

I would not do this with this tenant since the tenant is late too much. I would continue renting to the tenant or if you want to get rid of it then I would wait for the next lease renewal period and not renew the lease. Once the tenant moves out clean up and repair the home and put it on the market.

Marco Petit · Answer

I personally would lease option it out to her with $0 down with a purchase price of $140k at the end of 7 years. I would make it a condition of the agreement that it is her responsibility to take care of all maintenance and repairs so at this point they are an auditioning homeowner. If she pays on time, I would credit $100-200 towards the purchase price to nudge her towards paying on time and I would hold the right to raise her rent to market rent each year. Like someone said above, if they stop paying, an eviction is a lot easier and quicker than a foreclosure depending on the state. Make sure this arrangement is closed with an attorney to make sure you protect yourself and all of your t's are crossed and i's are dotted. Good luck!