Author Topic: Case Study: Selling Rental to Current Tenant  (Read 862 times)

primozaj

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Case Study: Selling Rental to Current Tenant
« on: June 22, 2019, 09:19:33 AM »
Bottom Line Up Front: My current tenant actually wants to buy my rental property.  Can I do this myself?

Backstory: In 2008, I bought and lived in the house for a year solo, GF moved in in mid 2009 and we got married in late 2010.  We continued living there until early 2014 when we found "our" house.  Tried to sell in 2014 but market was cold.  After six months of vacancy and pursing renters, we were able to get a tenant and she and her kids have been there for the last 4.7 years.  This was all pre-MMM.

Current story:  I live in "our" house but I am solo again as my wife passed away in late 2015.  Renter has been mostly great for the past five years, but this winter I decided to sell the house at the end of the lease on 30 Sept 19 (I did offer to sell to her at that point, to which she said she wasn't interested) .  Basically Iím at a point to get the house off of my balance sheet, so to speak.  My renter and I discussed the fact that I was planning to sell, which she said she expected, and later she told me that she was preparing to move out this summer.  This was a bonus for me because I wanted to get the house on the market before school starts in the fall.  Well, many tornadoes hit our area and the house/apt/townhome she was looking at was severely damaged and is no longer an option for her.  I donít know if that swayed her decision but, nonetheless, she came to me via email on Thursday saying that she would now like to buy the house from me and asked if I was amenable to that (I said yes).  In a later email she also tells me that she is taking a First-Time Homebuyer class (maybe at our local credit union or a church) and will start the process of pre-approval.  I hope a bank will pre-approve her because I am not at all interested in a lease/rent-to-own option as I want the property off my books (FHA probably wonít let this happen anyway).

Questions:
  • Is this really as easy as it seems or am I kidding myself?
  • Can I actually do this myself without a realtor, from a documentation perspective?
  • Where can I get the forms?  Which ones do I need? Does the bank/title company do most of the work?
  • Should I hire my realtor friend to help with the forms?  I donít want to pay 3% commission for this unless itís extremely worth it.  I also donít want to damage the friendship because I was going to hire her to put the house on the market this fall.  She knows about this new situation and was joking with me about losing "future" commissions.  What would be a reasonable charge if I were to hire her, something like 1%? Could this eliminate the need for me to get an independent appraisal?
  • I think itís highly unlikely, but what if my renter is trying to drag out time beyond the end of the lease period?  There is a month to month clause in the lease, so I suppose this would keep her paying rent until she takes ownership.
  • What documentation is required for taxes (recapturing depreciation)?  All of my numbers show that this is going to be a loss but maybe this question is better asked in the taxes thread.

The House -
Market Value:  ~$125,000 based on my look at comps but I may get an independent appraisal soon. Zestimate is $136k-ish and Trulia around $140k.  Both seem ridiculously high to me for that house, in that neighborhood.

Original Purchase price: $103,875 (in 2008), refi "price" $108k (in 2010)
Original Mortgage Amount: 2010 refi - $104,295

Interest Rate: 5% - FHA, Initial rate was 6.25% - FHA
Mortgage Term: 30 yr
Term remaining: 20 yr, 4 mon
Amount remaining on mortgage: $86,068

Gross Rents: $945 per month
Principal and Interest: $561.73 per month - I send $900 per month so $1.85 extra goes to P.
Taxes and Insurance: $338.27 per month (this is my escrow payment)
HOA costs: $125/yr

Deferred maintenance notes: There may be some roof work required but I just heard from my insurance adjuster (house was affected by the Ohio tornadoes) and I may get some financial support from the insurance company.  This situation will eliminate my need to paint and re-carpet the house before selling.
Anything else special or unique in regards to the numbers of the property: Probably pretty close to, if not the smallest house in the neighborhood, though Zillow would probably disagree with me.  The neighborhood is filled with split and tri-levels.

Dee18

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Re: Case Study: Selling Rental to Current Tenant
« Reply #1 on: June 22, 2019, 11:52:39 AM »
When I sold my own house a few years ago to a buyer I found I paid a realtor I knew a flat fee to handle everything.  I paid him $1000 on a $189,000 sale.

GizmoTX

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Re: Case Study: Selling Rental to Current Tenant
« Reply #2 on: June 22, 2019, 05:56:12 PM »
Use a real estate attorney, not a realtor.

theoverlook

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Re: Case Study: Selling Rental to Current Tenant
« Reply #3 on: June 24, 2019, 07:57:24 AM »
You don't need a realtor. A title insurance and closing company can handle everything for you. If it helps you feel better you might look around and find a simple document to put sale price and inspection terms and such in writing with the buyer, and have it signed by both of you. But as far as actually accepting funds and transferring the deed, the closing company handles that for you. I've done a couple with a closing company only and it was smooth as silk - a realtor would have added nothing of benefit to the process.

Your realtor friend could probably make a good recommendation for a title and closing company. (Usually, but not always, they're one and the same.) If you feel compelled to, buy them lunch or a few beers as a consolation for not getting the commission.

SwordGuy

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Re: Case Study: Selling Rental to Current Tenant
« Reply #4 on: June 24, 2019, 09:51:19 AM »
Normal course of business is to pay off the existing mortgage at the time of purchase.   If your tenants are getting a bank loan to pay this off it's easy and simple.  You do not need a realtor for this.  The closing attorney will do the job needed. 

If you want to be the bank and service the mortgage debt yourself, you'll need to deal with the existing mortgage.   You'll either have to pay the existing mortgage off yourself or sell the house "subject to" the existing lien.   Laws for how to do the latter vary from state to state and if the bank finds out about it, they can call the mortgage, which means it would be due in full immediately.    I would not recommend this course of action unless paying off an $86k mortgage with a single check is no big deal to you.


If you decide to act as the bank, hire a lawyer that works for you to draw up the mortgage terms.  Don't rely on the closing attorney, they don't work for you.



calimom

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Re: Case Study: Selling Rental to Current Tenant
« Reply #5 on: June 24, 2019, 06:53:55 PM »
Hello, fellow MMM widow! I think we've 'met' on another post of yours. I'm cheering on this opportunity for you to sell this under-performing rental to a single mom. It's a good way for her to enter the property market, and sounds like she's doing all the right things, like taking the first time buyer's class and so on. Really could be a win-win all the way around. Hopefully she has good credit and it goes smoothly for both parties.

Please let us know how it all plays out.

CowboyAndIndian

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Re: Case Study: Selling Rental to Current Tenant
« Reply #6 on: June 24, 2019, 07:03:41 PM »
Use a real estate attorney, not a realtor.

+1

That is what I did when I sold my townhouse to my renter.

I determined the price it would go for and deducted a few thousand since the bath and kitchen needed updates. We split the 5% commission.

The lawyers handled everything and it cost me about $1k

SwordGuy

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Re: Case Study: Selling Rental to Current Tenant
« Reply #7 on: June 24, 2019, 08:18:54 PM »
Whatever you do, do a complete sale, not a "rent to own" agreement unless you get some very specialized legal advice for your state.

primozaj

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Re: Case Study: Selling Rental to Current Tenant
« Reply #8 on: June 25, 2019, 07:23:58 PM »
A few of additional questions (especially for FSBO people):

Once the contract is signed, who do we distribute it to?
Does the buyer give the contract to the bank?
Does the seller get title company involved or does the buyer or it is the the buyer's bank?

I'm just trying to figure out what we do with the paperwork once we complete it.

Thanks.

peeps_be_peeping

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Re: Case Study: Selling Rental to Current Tenant
« Reply #9 on: June 25, 2019, 11:32:19 PM »
I bought my house in 2009 without realtors. I am an attorney (though an inexperienced one back then) so I felt comfortable on my own. I negotiated the purchase price and agreement directly with the seller and paid my earnest money to the seller. Then I think I took that agreement to my lender. I can't remember the exact sequence of events. My lender hired the inspector, brought in the title company, and the title company handled the rest of the paperwork and the closing. My lender paid the seller directly. The buyer's lender is the entity holding the security interest in the property so it is highly motivated to get the paperwork done correctly.

Other things to keep in mind - your state may require an attorney (I think some do) and/or certain types of disclosures for a real estate transaction.