Dane county: Tenants want to buy, how to establish a price?

Question

I posted this previously in another forum but haven't received any responses and I'm hoping to get some input from people familiar with the local market. The goal is to find a price that is fair for both parties.

I own a condo in a 55+ senior complex near Madison (village of Black Earth). This is a small complex with only 10 units, self-managed by the owners. I would like to sell and the couple who have been renting from me for the past 2 years would like to buy. They can't currently qualify for a mortgage, but have been told they will qualify in 8 months.

I think it makes sense to extend their lease until then as they are excellent tenants, and based on past sales history of these units it could take a year or more to sell even if I listed it with a realtor.

This will be my first experience selling a property rather than buying, so I'm happy to have any and all advice, starting with how to establish a price.

Should I pay for an appraisal? Ask for opinions from local realtors, but make clear I will not be listing the property? Should I agree on a price with the tenants now, or wait to establish the current value in 8 months when they are ready to apply for a mortgage?

Based on watching prices in Madison and surroundings for the past 2 years, I think it's worth $90-100,000. Redfin values it at $103,865 and Zillow at $111,349. I think Zillow is too high, but of course I'd be happy if it's really worth that much! It's difficult to compare to other properties since the complex is limited to seniors and is in a rural area.

My mother bought this condo new in 2004 for $119,900. Between 2004 and 2017 when my mother passed away, sale prices of similar units in the complex declined considerably.  In 2017, a realtor recommended a listing price of $79,900. Since 2017, prices in the area have increased considerably but as far as I know only 1 unit in this complex has been sold during that time: 997 SqFt 2 bedroom unit with 2 car garage sold for $125,000 in 2018. Mine is a 707 Sqft 1 bedroom unit with 1 car garage. The property tax bill for 2019 says the total established fair market value is $89,200, so very close in price per SqFt to the property sold in 2018.

Aaron K. · Answer

I'd discuss it with the tenant, it seems like you may have gotten a bit too excited about the prospect of offloading the property.  In my experience when a tenant says they want to buy your property they either want to buy for way less than it is worth or they can't qualify for the loan anyway.  8 months is a long time and unless you see a precipitous drop in prices in your area it is probably best to establish the price when they're ready, because 8 months could easily turn into a year, and someone who can't qualify for a $100k mortgage has some improvements to make.  I probably wouldn't pay for an appraisal, but you might get a BPO or something for 1/10 the price of an appraisal if you aren't comfortable establishing value on your own.

Chase Binnie · Answer

Don't pay for an appraisal (costly). Don't use the "market value" on your property tax bill (inaccurate).

Talk with a local realtor to get a price analysis. Then you can see if the tenant is in the same ballpark.

8 months is a long time to wait for a closing date so I'm not sure I'd sign an offer contract yet. Do you have a good relationship? I'd make an informal agreement with them that you'll sell to them and lock in the final price 2 months before the sale.

Or..If you own the property without a mortgage, you can offer them seller financing with +/- 10% down and then take payments directly until they can get bank financing within 12 months or so.

Another note - if you need a realtor's help for this (but don't want to pay the full listing fee), you can ask for help with only the contracts or closing coordination.

Gwendolen Rowe · Answer

Thank you Account Closed! I am leaning towards offering them something like this.

If I do owner financing, I'm thinking it would be necessary to pay for an appraisal first because the buyers would need that proof of the price being "correct" when they go to refinance. Does that sound right?

Account Closed · Answer

An appraisal is not necessary in this situation.  An appraisal is designed to show value to a business, like a bank or mortgage company.  It is just a person's opinion of the value.  You can create your own opinion of the value without involving someone else.  I would start negotiation with  a friendly conversation and start it off as something like "Zillow says it is worth $111k, but they aren't always correct.  You guys should figure out how much you are willing to pay and let's talk again soon."

Maybe their best friend is a real estate agent who will give them an opinion for free, or maybe they will also come to the same conclusion as Zillow.

Once they come up with a number then you consider their offer and negotiate from there.  You aren't obligated to accept their number, but in a similar way they (nor you) are obligated to accept an appraiser's number either.

Account Closed · Answer

I would recommend to carry back a mortgage for 1 year.  They can refinance into a conventional mortgage in 8 months or so.  Take a 10% down payment now and carry the balance of 90% as a note at market rate interest, others might have a good opinion on this but I use 8% interest for loans lately.

The reason I recommend getting this done sooner is that you might find the residents asking for small upgrades between now and then, carpet is showing wear, rooms need paint, appliances need replacement, etc.  Also, it sounds like their down payment can pay off some of your other debt.

Carrying back a mortgage is very straight forward and simple.  Don't be nervous about it, nor the sale.  In California we use title companies to transfer title, draw the docs to carry back the mortgage, etc.  If your area uses lawyers go that route.  They can walk you through the process.

Karen Margrave · Answer

@John Teachout Seriously? You think people because they're over the age of 55 are incapable of improving credit scores and qualifying for a mortgage? You have no idea what their situation is, whether they had an emergency, or something that caused a ding on their credit and for her to write them off would be a mistake.

@Gwendolen Rowe Real estate agents can't give legal advice, but lawyers can give real estate advice. Every state has different laws governing real estate. Some require lawyers to be involved, others not. Some places you can have the title company draw up all the paperwork including owner carryback notes, others require licensed mortgage brokers. Find out what your state requires.

As for values, if no other units are for sale it may be people just like living there and stay. The fact they like it so much means it may be an easily marketable property. However; depending on the area a one bedroom unit may be harder to sell as it offers less flexibility for guests, etc., but then again, because they are harder to find and there are those that can only afford one bedroom it may bring a good price per sq ft.

Unless you're doing the owner carry, you probably should wait until you get a little closer to sale to iron out the details and see what the market is doing.

Mindy Jensen · Answer

@Gwendolen Rowe, I would not use a real estate agent to provide document services. I'd use an attorney who specializes in real estate to handle the sale.

Aaron K. · Answer

@Gwendolen Rowe yes usually $50 or so but not every broker offers it.

Gwendolen Rowe · Answer

Thank you, @Aaron K.! Is this a usual service that is offered for a fee? Without an expectation of the property being listed with that agent?

Aaron K. · Answer

@Gwendolen Rowe Broker Price Opinion (BPO)

Dane county: Tenants want to buy, how to establish a price?

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