How would a landlord respond to an offer to purchase from a tenant?

Question

I'm currently 18 months (1 year lease, 6 months on month-to-month) into a SF lease.  I've never missed/been late on a payment and we've taken very good care of the property as it were my own (probably better than any tenant before hand as well).  I've been wholesaling but I'm now interested in purchasing a property of my own as a landlord.  I've considered purchasing a multifamily to live in and rent out the other unit(s), but that won't work for my young, growing family.

I've recently considered reaching out to my current long distance landlords to make an offer to purchase the property I currently lease.  They've made comments leading me to believe they have been upset with the current property management company and seems like they would fit the mold of a potentially motivated seller.  The property is in a fantastic area where rents are typically $1000-$1200/month for a typical 3/2.  ARV's for this property are around $135k-$160k.  There's some deferred maintenance on the property as well.  If purchased, I'd hold it for a 6-9 months until we're able to find another house that's larger for my family to live in, then add this property as the first to my portfolio.

My question is, as a landlord/investor, what would be the general thoughts when receiving an offer to purchase a property from your tenant?  Any insight would be welcomed.  Thanks.

Elizabeth Colegrove · Answer

@Ivan Jenkins

I own 2 properties in summerville (Charleston Suburb) with a third in contract waiting on 3rd party approval (short sale).

I would not buy it for 6-9 months and than move. I would buy it and live in it for 1 YEAR as you would qualify for personal property financing. Lower interest rates than investor and only 5% down instead of 20% for a conventional loan. This is a much better way to leverage your money. We try to buy as many "personal property" houses that we want for investing as legally possible. This allows us to spread our money farther.

We found out the hard way that SC Taxes are HIGH. In the area we live that works out to 3% for investors. It is only 1% for personal property. Check you area and see if there is a difference. Summerville, SC is the ONLY place that I have seen this. We own in 3 states. If you have the same issues, Make sure you add this into your numbers.

Is the house "depressed"? We bought  our houses at 90-99k when they were sold at 135-160k brand new 8 years ago. We are finding that now that the short sale/foreclosures are gone, values are rapidly increasing. This is create for appreciation. This is horrible for our tax bill. I expect our tax bill will jump $500-$900 in the next few years.

Currently the house we paid for 90k for in SC tax bill is the same as our 250k house in Virginia Beach. They are both investments!!

Below is a *rough* idea on what your mortgage will be based on my numbers in Charleston. I am NOT a mortgage broker, this is JUST food for thought. I use mlcalc.com as my calculator.

Taxes- $4,050

Insurance- $1200

Interest Rate at 4.5%

Mortgage- $1,142

Plus we have a $125 HOA fee. So check that out too!!

If your rents are only $1000-$1200, in some cases you would be losing money.

Again PLEASE CHECK OUT YOUR AREA, this was the first area that we invested. While we are doing great in appreciation our cash flow is not what thought it would be.

Bill Walston · Answer

@Ivan Jenkins  to answer your actual question, I think this is the perfect scenario for you to reach out to your long distance landlords.  Not only that, your offer could/should involve owner carry - after all, you have an "on time payment" history with them.

And @Sean Kuhn and @Andy Collins, how are you making the determination that this property will not cash flow based on the info given? You have no idea what the expenses  and debt service would be. The cash flow, or lack thereof, will be determined in large part by the deal Ivan negotiates with his current landlords.

Ivan Jenkins · Answer

@Andy Collins

My minimum deal standard is to net $100/door/month cashflow after all financing, taxes, management, and maintenance costs.  My numbers tell me that this property will accomplish this for me with a lot of the similar figures that you provided in your post.  THANKS for that last note as well, I never thought about leveraging my status as a good tenant.  AWESOME suggestion!  I'll tread lightly though.

@Bill Walston

I've considered the owner carry option as well, not in much detail however.  I'll look into this more throughly as it may be very viable.  Some of my first deals were structured with creative financing well seller carryback.  I can't believe I gave up on it soon.  Will revisit, thanks for your input as well.

Account Closed

Thanks for your thoughts.  Its good to know that my landlord won't potentially ignore an offer to purchase from a tenant.

Elizabeth  Colegrove

Thanks for your insights.  I love to hear the numbers!  All this talk of taxes pushed me to go back and look at the numbers for my property.  The taxes on this property as a non-owner occupant have ballooned this year to about $2400($200/month) this year (compared to $1500 in 2012).  This appears to be mostly related to the 20%+ increase in market value the county has tagged on to this property from the previous year.  Comps do not support this assessment.  I pray you guys are doing well in the Summerville market, I grew up nearby.  The market for tenants in the military is still strong in that area.  If you ever look to pick up a few properties in the Upstate of SC, I'd be happy assist.  Thanks again.

Account Closed · Answer

Ivan,

I concur with Bill. This is a perfect scenario for you to approach the landlord. As a landlord, I would be open to it if I want to sell it.

Good luck.

Andy Collins · Answer

If you can get it as an O&O that makes a lot of difference, the cash on cash return would be much better with 5% down instead of 20-25%,  and you'll save about  .5% in interest.

P & I on $115k at 4.5% for 30 would be just under $600, taxes are the big question, here they would be close to $4k a year,,that would make the deal not work for me, because cash flow would be very, very low.

Now I am basing this on about $135k in the deal, including buying and rehab,,obviously the price would be the biggest factor,,,but you are in a perfect situation to ask the landlords about buying,,in fact I would approach them saying your considering moving out because you want to own a house.  With a house under lease to a good tenant, its hard to sell, if that tenant is moving out, it changes everything.

Andy Collins · Answer

I agree with @SeanKuhn,  I don't see the property cash flowing with rent of $1200 or less, and an ARV of $135k+.

In some areas rentals don't make financial sense, in that neighborhood, they don't.

You will hear people say you should be getting 2% of the ARV for rent, in the neighborhoods I have rentals that isn't possible (the only way you could do that here is in war zones).  For a property to 'fit' I have to have a minimium of 1.2%,,hopefully more, but thats sort of my cut off.

I'm in Texas and we have high property taxes, so if you have lower property taxes you may be able to cash flow with a smaller percentage, but always look at cash flow, If a house won't be cash flow positive with a good return on investment, it won't work as a rental. (that's not to say it might not be a prospect for a flip, that's a totally different formula)

andy

Ivan Jenkins · Answer

My thoughts exactly Sean.  Those are the ARVs in the area, what I would pay for the property wouldn't be north of $90k.  What are your thoughts, would you be open to receiving an offer from one of your tenants? Thanks.

Sean Kuhn · Answer

To me personally the ARV is too high for the amount of rent you'd get. Around here 1000 to 1200 dollars in rent is accomplished with a 80 to 100k house. I would wait to find a better deal.

How would a landlord respond to an offer to purchase from a tenant?

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