Selling property TO your tenants???

Question

hello everyone,

My wife and I just purchased our first 2 rental properties for about $20k each from the same distressed seller. They are both currently rented for $750/month to tenants who seem to be taking care of the places and my intention was to hold these properties as long term rentals but, when they asked me about paying rent ahead 3 months with tax return money, it got me thinking. What if I could get them to purchase the properties from me for $50k and use that tax return money as a down payment on an FHA loan? I would offer to pay all closing cost involved. My agent is going to make a cost sheet for me to present to them that would show they could have a mortgage payment of around $350 if they purchased my properties.

My questions are:

1) is there any way I can go about making sure they will be approved for the loans before I bother presenting them with my idea?

2) what kind of inspections will need to be done for an FHA loan as they are not in the greatest condition?

3) how can I make sure they will appraise for $50k and be FHA approved?

4) if they do not choose to purchase them, will they in turn be upset knowing that my carrying cost (as they see it) is only $350 leaving me with huge profits?

PS. These are the only properties we own other than our personal home and we bought the rentals outright with cash so I have no mortgage.

I thank you in advance for any advice.

Bill Gulley · Answer

As to condition, appraisals sway from really tough to a tad harder than conventional. I've seen loans held up for some pretty minor issue, like a small pencil size hole in a window screen! Peeling and chipped paint, splash blocks missing, lose gutters, cracked glass window even in an out building had to be repaired. If you think the place is not in good condition my guess is that it won't pass FHA on a purchase at 97%!

As David mentioned there are other high LTV loans, bond money may be available at your bank. But, again you'll issues with condition, bond money and many non-profit partnered loan programs usually have HUD funds attached or states will follow HUD/FHA guidelines in (by choice and at times by requirement).

Best way to find out would be to have the property inspected and get a punch list (to-dos) for any high loan to value loan. Understand that no one just gives money away and making a mortgage at 97+% is doing just that if there is a loan default early in the loan, the condition of the property is a major concern in getting as much as possible from the collateral.

If your tenants qualify you might finance it, going through a mortgage originator and having the loan serviced. You might finance all, most or even part of it behind a bank loan too.

As to what your tenants will think.....why would that be a concern? Better explain that the mortgage payment isn't real cost of homeownership, there will be taxes, insurance, maintenance and something for reserves to cover larger unexpected expenses. Ask if they expect interest on their money in savings at the bank, then shouldn't you get a return on your equity and ask if they work for nothing, should you get paid to manage rentals? I don't see an issue. :)

James Wise · Answer

See if they would consider buying before you give them a price breakdown.

David Krulac · Answer

@Jeremy S.

Welcome, from Harrisburg.

Without getting into the exact numbers of your expenses, i would casually ask the tenants if they have any interest in buying the property. You could frame the question with a compliment about how good they have been as a tenant (if it is true).

To go FHA, they will need 3.5% down but you can give them up to 6% seller help with closing costs. Their mortgage and total debts must also fall into the FHA guidelines.

If they can't qualify for FHA, they might be able to get into another program at a local bank. There are available 3-5% down programs that are not FHA.

Steve Babiak · Answer

Some renters prefer to stay renters for various reasons, one of which is they feel more comfortable that the landlord is on the hook to do the (more serious) repairs rather than themselves.

The fact that this tenant is pre-paying rent for 3 months gets me to thinking that they aren't so good with managing finances themselves; they are getting a pretty big tax refund (giving gov't free loan) and are probably afraid they would just blow that money if they kept it (rather than maybe collecting some interest by saving in a bank account).

Elizabeth Colegrove · Answer

@Jeremy S.

I would mention it to them and than leave it alone. If they are interested they will take the ball and run with it. I have found that there are a lot of reasons tenants are tenants and not owners.

I personally would be worried about them seeing the cost of ownership if they are not truly serious. There have been mentioned on here of flipper having trouble with resell because zillow shows how much they previously paid. I personally would be worried that the same issue might present itself if you presented them with a cost work sheet and the deal fell through.

Jeremy S. · Answer

thank you for all of your replies. I will casually mention it to them to gauge interest then I will speak with the mortgage consultant at my local bank.

David Krulac · Answer

We've sold rentals to the existing tenants but for one reason or another it happens much less than I would expect. Sometimes its the money, job situation, or just a rental attitude. I like the idea of selling to an existing tenant. that means that I don't have to paint the property or stage it for sale, I don't have to show it, I don't have to advertise it and I don't have to pay a commission. A four year tenant bought their house and I told them they had a four year test drive and were more familiar with the house and any prospective buyer off the street could possibly be, and that they more about the house than I did because I never lived there.

One time I offered a house to an existing tenant who was financial capable of buying and was excited to buy. When she talked to her children they told her she was "too old" to buy a house and that killed the deal.

Selling property TO your tenants???

Selling property TO your tenants???

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