How to approach your tenant about purchasing your property.

Question

After my nightmare experience with some really bad tenants, the tenant i replaced in February 2012 has been nothing but pleasant. She is a executive interior designer for a major bank and she remodeled my kitchen. She hasn't been a day late with her rent payments for the past 12 months.

Her credit score was in the 560s and I took a chance on her as she told me that her ex-husband ended up ruining her credit score after the divorce.

Looking back now, everything she said seems be true and I think her credit score should be 800, not 560.

Last December when i visited my tenant in Chicago, I asked her if she had any interest in owning the home she is renting and she told me she is interested. I told her to work on improving her credit score and we can discuss the progress. Her lease ends in February 2014 and we don't have a lease option contract. What steps can i take to move in the direction of my tenant purchasing my rental? I am open to having the home appraised and selling it to her for whatever it appraises for. I am also open to funding some of her down payment if she doesn't have enough to put down 20%.

Also I am now living in Atlanta and i want to keep all my rentals local, and sell my Chicago property. Any advice would be appreciated.

Thanks,
James

Rob K. · Answer

James  Park Appraisals seem to be somewhat subjective. Rather than have it appraised and sell for that price, I would comp the property out and try and sell it at its upper range of value. If it doesn't appraise, you could always come down on the price if you so choose.

David Krulac · Answer

James  Park

I'd sell ASAP.  The $5 cash flow from 1,000 miles away would be strong factors in my decision.  Sooner rather than later.

Take her, by the hand if necessary to a mortgage broker/lender and get her pre-approved.  see what she can get approved for.

You should be able to come up with a reasonable value without an appraisal, but if you really want one go for it, though it will costs you $300 to $400 probably.

Agree that FHA is the way to go.  But as a fall back position you may need to give seller help.  FHA allows up to 6% seller help.  Or you may need to provide a seller second mortgage, or even a seller first mortgage to the buyer.

You have caught a big fish on the line, don't let it get away!

James Park · Answer

Thanks Rob,

The cook county taxes are so high that I am only cash flowing $5/month. On top of that i would not have the 6% commission to list the property with an agent and can sell the property as is.

I don't mind giving my tenant a good deal as she really is a good responsible person trying to back on her feet after a divorce. I just don't know how much cash reserves she has and if she will qualify for a loan. Is it inappropriate for me to ask her how much cash reserves she has on hand. I am open to funding part of her down payment and/or closing costs from the sale of the property. Going forward, I want to keep all my rental properties in the Atlanta metro area.

Should i wait until the end of my lease in 2014 to bring it up to her again or do i need to be proactive to line her up with a good FHA mortgage broker who will qualify her.

What is the professional way to move forward on selling your rental property to your tenant. I was very shocked to see that my home looked like a model home when i visited her last Dec. I realize this is a very very rare tenant.

Jon Klaus · Answer

You might make contacts with mortgage brokers and introduce her to one that can take her application.  Look for someone who does a lot of FHA since the down payment could be 3.5% and you'd be allowed to pay her closing costs.

William Bannister · Answer

I would match your tenant up with her local credit union or banker that is willing to give her a little of his time to help her with knowledge to build up her credit and savings towards buying your home. Sometimes brokers that make loans will make for time for this however today not that many loans are being sold on open market like pre 2007. The bottom line is getting her to get dti low and saving up is the best quick fix. The other thing would to ask her to pull her own credit and determine if there is anything that needs to be corrected or worked on before sitting before a lender. 
  There is a little tact when discussing this issue as you want to make sure before you waste your time in her matter of credit that she really wants your home. I have put in time on tenants only to see them fix credit then buy another home. 
   I know you will have to have her show a credit score of 680 or better to do anything decent in the world of finance.  a little trick is if she has a few credit cards and  one has a higher balance on one or closer to being maxed out then the other. You then transfer balance from one to other to reduce the usage to under 30% of both credit cards. This is a way to boost score fast. The obvious way is pay it off. Tell her not to close acct if she pays it off, though since it can appear that acct was closed on her. 
  If you think she will follow through then this is the time to make sure any problems with property are taken care of too so it will pass inspection when you sell to her.

Bill Gulley · Answer

James  Park. I think you need some peace of mind so I suggest you be proactive on this, sounds like a great tenant. Yes, get her to a MB ASAP. Since there is no Realtor involved, it would be great if you could go with her, but at least be on the phone when she gets there. You need to have her give your permission to know some details saying you are willing to assist in her expenses and possibly helping with the financing.

Then the MB can disclose her ability to finance and you can work out your deal to fit those needs.

But first, you need a sale price, pull comps that you can show her and justify your price. In doing so, you can tell here you'll assist and the sale price may not be her real cost. I'd not use the short sale comps, one, they are distressed sales and secondly, could be you'll be closing in the future (explain later), you can go down in price, but it's hard to go up later on.

If she can't swing a loan now, consider doing a Contract For Deed with here, check with an attorney in her area. This should allow her to feel like she is buying (and she will be) and you feel like it's sold.
Her CFD will be underwritten as a refinance for the future loan and clsoed as a purchase. The MB should be able to look at the time required to get her into a financing position. Yes, there are due on sale issues, if you get to that point, search here for the installment sales and Subject-to as well as Option transations and we can go from there.

I suggest you get after it, one way or another, you need to sell and she wants to buy....why wait?  Good luck

David Krulac · Answer

James  Park

imho, sell now.  Your premise is that the value will be higher in 2014, nobody knows if that will be true or not.  People might have been saying the same thing in 2007, "the values will be higher next year."  Nobody including me has a crystal ball.

There is no time like the present.  Interest rates are at historic lows, but with the QE infinity, and the national debt, it seems plausible that interest rates will be much higher in the future, when that is I don't know.  But if the interest rates are higher in 2014 and then your tenant doesn't qualify for a mortgage, you may have missed an opportunity to sell.

A good friend of mine is a serious full time real estate investor told me that he never sold a property at a loss.  I know that some of his properties are underwater and if sold now would sell for less than the debt owed on them.  But since he isn't selling anything, he can continue to say he never had a loss.  I'm not too proud to say that I never had a loss.  The more deals that you do and the more risks that you take, and the more you are open to market fluctuations, the more likely that sometime you might have a loss.

If it were me I'd get the tenant pre-approved and get on the path to the tenant buying the property, next year the interest rates could be higher or the value could be lower.

James Park · Answer

David,

I purchased the home for $359,500 as my primary as a single guy back in June 2004. Recently there has been a short sale for $260,000 and another short sale listed for $299,900. The only reason i am cash flowing $5/month is due to the high taxes. Cook County raised property taxes while properties were falling.

I am thinking that short sales are not used as comps after 6 months? I believe that if i sell the property now, the appraisal will come out very low due to the 2 short sales. Am I correct on this? I am thinking that i would get a higher appraisal if i wait until the February 2014. She did mention that she has no intention to move... but if the home is vacant, it becomes a $2175 carrying cost i would have to pay out of pocket. That is my biggest fear.

She replaced the carpet and painted the walls, replaced all appliances to stainless steel, and has very nice furniture. The home looks staged honestly and I think i would be even able to sell the home with the tenant's cooperation. In 2011, I had a nightmare experience of this unit flooding the basement without insurance that cost me $15,000 out of pocket. On top of that nightmare i had really bad tenants. I know if i took some of that equity and reinvested in my back yard in Atlanta i would do much better than $5/month.

Should i wait til the end of the lease or be proactive?

John Mireles · Answer

Rather than leave the valuation up to an appraiser, I'd bring in two to three real estate agents familiar with your area. Let them know that you're thinking of selling and would like to know what price they put on the property. I did that with a rental property I owned. Two came in fairly high and one came in way low. I ended up selling it to my tenant at a discounted rate from the upper end. The agent's cut would have been over $40,000 so that gave me some wiggle room to lower my price to the tenant. We both ended up winning since we both ended up saving some money.

Steven Hamilton II · Answer

James  Park,

I'll PM you a mortgage broker in my area who is very good.

-Steven

How to approach your tenant about purchasing your property.

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