Author Topic: Offer from landlord  (Read 3422 times)

lightmyfire

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Offer from landlord
« on: August 25, 2016, 02:25:53 PM »
I have been renting half of a duplex for the past few years. It's a great place, way below market on rent, with a very responsive landlord. I'd live there indefinitely if I could.

Unfortunately, my landlord's daughter was living in the other half and has had some health issues. She had surgery to remove a tumor caused from traumatic brain injury, and a subsequent stroke left her in a coma from which she recovered but remains semi-paralyzed. She will not be able to live on her own anymore. Due to this and other things, my landlord decided to put the house on the market. She asked me months ago if I was interested in buying it, but I didn't think I could afford it at the time (it's valued at more than 200K on Trulia, not sure yet what she's asking for it...I only make around 40K, though I save almost half my income because my rent is only $600). I just heard from her again that the realtor is coming to look at the property tomorrow, and wondering again if I'd like to buy it. She says she'd give me the down payment, and closing costs would be folded into the rate. I have no idea what the rate would even be as I have not been pre-approved for a mortgage. The other stipulation is that she'd want me to leave her daughter's side as is, but she thinks Section 8 would pay me for it.

My questions for you all:

1) Is this just too good to be true? As much as I like my landlord, couldn't she make a better deal out of this some other way? I am not quite sure why she's making me this offer.

2) Should I get pre-approved for a mortgage just in case?

3) Does that Section 8 thing sound legit? I know nothing about that.

4) What else am I overlooking? I did my homework on home ownership several years ago, but had kind of given up on the idea. I would like to keep living in my city and potentially this house until I FIRE, but I still don't really like the idea of tying myself down with property.

If it's a legit deal and solid "investment," it seems like it might be worthwhile. Thoughts?

lightmyfire

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Re: Offer from landlord
« Reply #1 on: August 25, 2016, 02:42:05 PM »
Update: She is asking 199K (down from 229), which would be negotiable for me.

therethere

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Re: Offer from landlord
« Reply #2 on: August 25, 2016, 02:51:25 PM »
Some reasons why they'd be interested in selling directly to you.

1. Its a pain for all parties to sell a house when there is a renter in the unit. Either they'd have to wait until you get out to show it empty and eat the payments while its showing. Or they have to schedule all showings with you, hope you keep it show ready, etc.  And the new owners can't move in until your lease is over, unless they negotiate some type of cash for keys with you.
2. They won't have to pay the 6-10% or whatever real estate commissions. Easier and quicker sale too.

FLBiker

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Re: Offer from landlord
« Reply #3 on: August 25, 2016, 02:55:46 PM »
It couldn't hurt to get pre-approved.  And what does she mean about giving you the down payment, exactly?  20%?  That seems crazy generous to me.  I don't have a lot of real estate experience, though.  I've bought one house and sold zero.

marty998

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Re: Offer from landlord
« Reply #4 on: August 25, 2016, 03:01:13 PM »
Sounds like you've struck gold. But still do your due diligence and get a building/pest check done.

You don't want to find out afterwards there are structural issues that need attending to.

bacchi

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Re: Offer from landlord
« Reply #5 on: August 25, 2016, 03:03:35 PM »
1) Do the number work with property taxes? 50% of the property will be owner-occupied, which might help with taxes.

2) Yes, get pre-approved for a mortgage. If the seller's terms don't work for you, you can pull out the bank's card as a trump.

3) Section 8 is assistance for those making below a certain income. It could work but there might be a loooong waiting list. Does the daughter already receive Section 8? What about SSI?

If the daughter isn't already receiving Section 8/SSI, how will that side be paid? From the landlord/mother or...?

The other concern would be about rent increases. Your costs will remain relatively steady except for property taxes and maintenance. Can the rental side support 50% of the costs? What about in 5 years?

J_Stache

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Re: Offer from landlord
« Reply #6 on: August 25, 2016, 03:05:20 PM »
I'd make sure to look into any issues related to landlords daughter.  Are there any improvements required by law that you will have to perform as the daughter's new landlord (i.e. ADA compliance)?  These may not have been an issue for your landlord as this was a daughter, not  a tenant. 

lightmyfire

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Re: Offer from landlord
« Reply #7 on: August 25, 2016, 03:06:01 PM »
It couldn't hurt to get pre-approved.  And what does she mean about giving you the down payment, exactly?  20%?  That seems crazy generous to me.  I don't have a lot of real estate experience, though.  I've bought one house and sold zero.

Yeah, it seems crazy generous to me too, which is why it hit my "is this too good to be true?" alarm.

lightmyfire

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Re: Offer from landlord
« Reply #8 on: August 25, 2016, 03:09:18 PM »
I'd make sure to look into any issues related to landlords daughter.  Are there any improvements required by law that you will have to perform as the daughter's new landlord (i.e. ADA compliance)?  These may not have been an issue for your landlord as this was a daughter, not  a tenant.

The daughter isn't living there now. I need to inquire into this more. I don't know why she'd want to keep her daughter's stuff there if she doesn't intend to move her back in, but maybe that's the plan now. I think for now the daughter's living with her.

lightmyfire

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Re: Offer from landlord
« Reply #9 on: August 25, 2016, 04:23:24 PM »
Another update: I already managed to get pre-approved over the phone. I'm slightly surprised as I thought the debt to income ratio would be too high. I am meeting with my landlord tomorrow to discuss things further, so if you think of more questions I should ask her, please let me know!

SwordGuy

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Re: Offer from landlord
« Reply #10 on: August 25, 2016, 06:17:53 PM »
It's all about the cash flow, the condition of the property, and your cash reserves.

What can the other side rent for?  Particularly section 8.   Why was the property under-market on rent? 


According to https://www.drcalculator.com/mortgage/, a $199,000 mortgage at 3.25% for 30 years would run you $866.06 a month for P&I (Principal and Interest).   Taxes and insurance will vary with your location so you'll have to look them up.

The 1% rule gives you a general idea on profitability.  1% of $199,000 means the property would need to rent for $1990 a month.  If you keep paying $600 a month for your side, that means the other side has to rent out at $1390 - and that's probably just to break even on a monthly basis.   That probably won't include setting aside money for future repairs like a new roof, hvac system, etc.

Personally, I would be *really* thrilled if the rent was 2% of the cost to purchase and refurbish.  I'm getting about 1.6% on my properties which is enough to make me happy.

Speaking of repairs, do you have the cash reserves to handle a $10,000 dammit expense early on?   

Check out Frank Gallinelli's book on Real Estate  https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189 for examples of how to calculate the numbers the right way.


lightmyfire

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Re: Offer from landlord
« Reply #11 on: August 26, 2016, 08:23:44 AM »
It's all about the cash flow, the condition of the property, and your cash reserves.

What can the other side rent for?  Particularly section 8.   Why was the property under-market on rent? 


According to https://www.drcalculator.com/mortgage/, a $199,000 mortgage at 3.25% for 30 years would run you $866.06 a month for P&I (Principal and Interest).   Taxes and insurance will vary with your location so you'll have to look them up.

The 1% rule gives you a general idea on profitability.  1% of $199,000 means the property would need to rent for $1990 a month.  If you keep paying $600 a month for your side, that means the other side has to rent out at $1390 - and that's probably just to break even on a monthly basis.   That probably won't include setting aside money for future repairs like a new roof, hvac system, etc.

Personally, I would be *really* thrilled if the rent was 2% of the cost to purchase and refurbish.  I'm getting about 1.6% on my properties which is enough to make me happy.

Speaking of repairs, do you have the cash reserves to handle a $10,000 dammit expense early on?   

Check out Frank Gallinelli's book on Real Estate  https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189 for examples of how to calculate the numbers the right way.

These are really good points that sum up my hesitations. I don't know if I could get enough back in rent, from Section 8 or otherwise, to make the transaction worthwhile. I know I can negotiate down quite a bit from the 199K price, but probably would not be able to rent the other side for more than 1K. I think the only reason my rent has remained so low is that she prioritized having a good reliable tenant over profit, but I don't think my side could rent for more than 8 or $900. That's barely scraping the 1% rule. Also, because this was not something I was planning for, I do not have the cash reserves I would like to have in this situation. I could always take money out of my Roth, but would really prefer not to do that.

poppan

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Re: Offer from landlord
« Reply #12 on: August 26, 2016, 09:53:22 AM »
Have you clarified what she means by "giving you the downpayment"? If the sale price is 199k, she would "give" you 40k and write up a contract for 159k?

What is her expectation in return for the gifted down payment? That you would rent to her daughter, indefinitely, under Section 8? (That's kind of what it sounds like to me.) We had a local story recently where someone made a "verbal contract" with a bakery worker that she could "live there for life". The property then went to a daughter, then to a grand-daughter, and finally to two great-grandsons. The bakery worker was still living there at age 96 and paying nearly no rent at all (compared to fair market value). The two great-grandsons got infinite flak for attempting to raise her rent and there were pro bono lawyers volunteering to uphold the "verbal contract" their great-grandmother made. 

I would clarify what the down payment gift is and what the landlord's expectation in return is. If it is for her daughter to be able to live there for life on Section 8 funding -- the deal makes sense to me from her end. She pulls $159k cash out, her daughter has a place to live forever, and she trusts you not to screw her daughter over.

I'm not totally sure the deal makes sense for you. If the above is true, then you are paying $159k for one free side and one side with a lot of conditions.

lightmyfire

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Re: Offer from landlord
« Reply #13 on: August 26, 2016, 10:37:04 AM »
I'm not totally sure the deal makes sense for you. If the above is true, then you are paying $159k for one free side and one side with a lot of conditions.

Yep. I will clarify when I speak to her this afternoon, but that's my understanding at this point.

lightmyfire

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Re: Offer from landlord
« Reply #14 on: August 29, 2016, 11:30:02 AM »
Well, it turned out to be an easy decision. Apparently my definition of a down payment (20%) and her definition (3% FHA nonsense) don't really mesh. I was relieved, honestly.