Should I ask current renters if they want to buy our house?

[fallstoclimb]

We're accidental landlords, rented out our suburban home last year to try living in the city.  We love it and have no interest in moving back to the suburbs anytime soon.  Plus, the numbers on our rental house don't work out from a profit perspective.  So, we've decided to sell at some point in the next couple of years, to avoid the capital gains tax.

Our current tenants are pretty good, and their lease transitions to month-to-month in May.  When they moved in they seemed to love the house and they indicated they would rent until they were ready to buy themselves.

What would be totally ideal would be to sell to the renters so that we don't have to pay realtor costs, don't have to deal with showing the house, etc.  Seems like a win-win too, because we would sell it to them at a lower price than they'd get otherwise.  But, I'm a little nervous about spooking them into moving out suddenly and leaving us in the lurch if we tell them we're planning on selling.

I think it's probably worth the risk, but I'm wondering if anyone has other advice on this?  Are there any other factors I should consider before telling them we've decided to sell?

[rab-bit]

Obviously I don't know your renters' financial situation, but if you do decide to discuss this with them, be prepared for them to possibly ask you if you'd be willing to hold the mortgage.

[fallstoclimb]

@rab, what does that mean?

[rab-bit]

They may ask you to act as the lender if they think they'd have trouble getting a bank mortgage.

[GizmoTX]

If the rental goes month to month, you are very likely to just get a month's notice.

I'd offer them a buy deal without telling them that they are out; tell them they get first shot at it before you decide to put it on the market. Make sure you have run comps & that your price really is a win-win for both parties. You can bet they will be doing the same. They will likely expect a mortgage payment to be equal or less than the rental after property taxes, so much also depends on your area & rates.

You'll have to decide if you need the proceeds up front or if you can carry their mortgage. If you carry it, make sure the house reverts to you in the event of non-payment. Either way, you'll need a good real estate attorney for the sales contract & closing.

[CowboyAndIndian]

I did something like this.

I had a tenant who had been renting for about 4 years. We were buying our forever home and wanted to sell this rental to pay for it.

Made a deal with the tenant, who loved the house. We came up with a price looking at comparables. Gave them about 5% less than the price. So, both of us ended up doing very well. I got top dollar price (after 5% commission) and they got a house for 5% less than they would have paid for it. Win, Win!

[Fishindude]

Why not?
They would be the ideal buyer in my opinion, they know what they are getting so there shouldn't be any haggling over inspection discoveries, etc.
Just give them an "as is" price with some consideration for the savings from not using a realtor.

Bought our first house like this.   Rented it for a year, then purchased it from the landlord, good deal for all.

[GrayGhost]

If you do indeed want to sell the house, this could be a great opportunity to you. Here's how I would sell the deal to your tenants...

They get to stay in a place they love
They have the same responsibilities for maintaining the property/yard
They have more rights WRT improvements, decoration, paint, ETC
They get to pay much less each month towards a mortgage
And they get to have a nice tax writeoff and build up some equity

The pluses on your side is that you don't have to market the house and try and come up with a mortgage payment while it sits empty, and you don't have to pay a realtor.

Some have raised the concern of them asking you to hold the note... I wouldn't worry about that too much, as they'll likely try and involve a bank before going that route. However, if they do mention seller financing, come back to this thread and let's talk more.

[fallstoclimb]

Thanks for all the responses.  I'm still a little unsure about how/when to ask them.  Should we give them lots of time to think about it before the lease is up, or wait a few months?

If they're interested in buying it, I'd love to sell it to them this spring (although I'm not sure if they'll be ready with the down payment). If they don't want to buy it, we might wait until next spring to sell, although that's primarily because I feel bad kicking them out of the house after just one year.  But, we won't buy another place ourselves until we get the house sold.  I guess I have a little more thinking to do.

[Michael in ABQ]

I'd bring it up now. Let them know you're considering selling and that you'd like to give them the first chance to buy. If they're not interested then let them know that you won't be renewing the lease but you'll give them plenty of heads up for when it does sell so they're not left scrambling to find a new place and you're not left with a vacant property while it's being marketed.

We rent and our landlords have let us know that they plan to sell within the next year or two. We're not interested in buying it and they know that they'll probably need to do some renovations before they sell it. It's better for them to have a tenant paying rent while they try to get it ready to sell than be sitting empty, costing them money.

[clarkfan1979]

and they don't have to move. Moving will probably cost them each 100 hours of their time and $1,000 for a moving truck and gas.

[RedefinedHappiness]

My renter just approached me about buying. He is one of three renters and one is moving out. We have been communicating about potential move out date for this spring (one renter is getting married and moving out). I told him to give me heads up and told him I could be flexible on timing since I would likely be selling after they moved instead of finding new renters.

Posting to read rest of this as I consider my response. Seems like a no brainier, but need to understand all of the risks, how to set comps, etc.

[fallstoclimb]

Reviving this thread with some updates:

The tenants are interested!  But, their timeline is uncertain, and they proposed extending the lease at a higher rent with an option to buy in order to have more time.

I'm real concerned about the effect of the tax bill and rising mortgage rates on home values, so I'm very hesitant to agree to this, although it would also give us another year of equity in the house -- roughly 6K.

I'm also having trouble setting a firm price.  We bought the house in 2013 for 300K, I ballparked current value at maybe 330-340 based on some recent sales - but there's not much given the time of year so not a lot of data to pull from.  The tenants seemed to think this was reasonable and of course I promised them 6% less.  We also reached out to a realtor and asked her to run comps, rather than do that she just ballparked the value for us at 370-390K.  I don't believe her at all, looking at recent sales there's no evidence of this and I think she's just trying to get our business, but of course I don't really know.  Reached out to another realtor too with no response, I'm having trouble finding someone to run comps without getting the commission.

I'm debating between just moving forward with the 340K price, waiting until spring sales pick up a bit to get a better sense of prices, and/or paying for an appraisal of the property.  Thoughts?

Any input would be greatly appreciated!

[GizmoTX]

An appraisal is a good idea, & it will include comps.

[Michael in ABQ]

I would second the idea of getting an appraisal. In a real estate transaction the appraiser is the only unbiased party. Everybody else has a personal and financial interest in having the price be higher or lower. It will probably cost anywhere from $350 - $500. Don't be afraid to call around to a few local appraisers to find one familiar with your area who will provide the information you're looking for. A typical residential appraisal these days is not really created to be readable by the general public. Usually they're done on forms using codes to describe things and it's all abbreviated to fit on the form. Find someone who can do it in a narrative format or a more general purpose form that is readable to a normal person.

[Fishindude]

Let your renter / buyer get an appraisal if it's important to them.
I would not waste your money on it.   Go with your gut at $340K and don't worry about it if that number makes you happy.
Eliminating the realtor is an immediate 6% savings, an extra $20K in your pocket.

I wouldn't cater to your renter too long if you really want to sell it.   If they need another year that would be a red flag to me, probably can't get financing?