tenant buyout options for when buying a property to owner-occupy

[wheninroma]

I'm planning to make an offer on a multi-unit property where all units currently have leases through next summer. I'm going to owner-occupy, and in order to get those better mortgage owner-occupant rates, I need to move into the property within 60 days of close. So one of these tenants is going to have to be persuaded to leave via a buyout.

The seller suggested that I include some money earmarked as a financial incentive to the tenants as part of my offer, which seems fine. But he also suggested that we'd need some kind of arrangement where if the tenant left and then the deal fell through, I'd need to compensate him via earnest money since I would have gotten rid of one of his paying tenants for no reason.

What I'm confused about is: is it out of the question to offer some kind of contingent buyout to the tenant? E.g. a contract where they'd agree to leave within 60 days if the deal goes through (and would get their financial incentive), but if the deal falls apart, they don't have to leave (or can't – their lease would still be valid). It seems at least worth trying since it's a much better outcome if the deal falls apart: the tenant gets to stay, landlord is happy, I'm happy since I don't owe the landlord anything.

The main downsides in this contingent scenario are borne by the tenant, because their moving future is now determined by the deal. Maybe that's too much uncertainty and the tenants won't be interested, but 1) I don't see the harm in starting with that approach, and 2) that uncertainty can be mitigated in various ways (e.g. increase the incentive, pay them a smaller incentive even if the deal does fall through, etc.).

To me, this seems worth exploring, but so far my real estate agent doesn't seem that interested in the idea. I haven't talked with her in-depth about it, but my attempts to communicate the concept in writing haven't been very successful. I've also been unable to find any articles online describing this sort of thing, so maybe there are legal barriers.

I'm curious to hear if anyone is familiar with this, or has other tenant buyout stories, successful or not.

EDIT: this is happening in Illinois (Chicago) if relevant.

[former player]

If the landlord has accepted your offer on the basis that a tenant is going to leave then its up to the landlord to fulfill the condition of the offer and get a tenant to leave.  Your mistake is to think that the tenant can stay for 60 days after the sale is completed, you need the tenant to be out before completion, and it's up to the current landlord how that is done (as long as it's legal, of course).  The fact that your mortgage company gives you sixty days is irrelevant to your agreement with the seller.

What's the difference in cost between an owner-occupier mortgage and a commercial buy to let mortgage?  The fundamental problem is that you are trying to get owner-occupier rates on a building that is curently 100% commercial.

[chasingthegoodlife]

I’m not an American and I know your mortgages are a bit different over there but can you talk to your mortgage broker about whether the bank can start the mortgage on an investor rate and just do a variation to an owner occupied rate when the next tenant leaves? Makes things a whole lot simpler.

[affordablehousing]

Like Former Player said, just put the cards on the table- the cost for a commercial mortgage is X+Y, the cost for an owner occupied is X. The cost to get rid of the tenant for you is A and the cost for the seller to get rid of the tenant is A+B. You can do the math but just figure out what the cheapest option is. Also I'm assuming you can just refi the commercial mortgage to a conventional if it takes you time to get the tenant out, but then you pay the refi rather than purchase rate.

Like most transactions, you sound like you're trying to optimize too much. Keep site of the big picture of whether the building is a good deal and works for you. If it is, proceed how you need to proceed, if it hinges on this one piece of minutiae, walk away.

[PMJL34]

OP,

Keep things simple. Make an offer with a clause that one unit must be vacant at closing. Let the seller deal with it. The seller will either accept your offer or not. No need to make it complicated with payment options should it fall through blah blah. And the most important thing for you would be to not close unless there is a vacant unit.

Or you can make it difficult for yourself and buy as is and handle the eviction/owner occupy process after closing and hope that one of your tenants happily leaves or that your local laws allow you to evict within 60 days. I'm not even sure your lender will allow you to have an owner occupy loan as this multi property will be fully occupied at closing.

I'd strongly advise the first option as you appear to be newer to the game. Also feel free to post a case study with numbers included if you want real advice. 

Best of luck!

Edit: I would not buy with an investment loan. It will be 25% minimum down and APR will be significantly higher. There's also no guarantee that you will be able to refi at your preferred rate. FYI if you refi within 6 monthly payments of closing, your lender loses all commission. Please note that some may even make you sign a no refi clause for 6 payments to protect themselves. In which case, who knows what the rate will be in 6 months. All that to say, just go with option 1 above.

[wheninroma]

Thanks for the advice, all.

In the end, the language that went into the contract (that was accepted) was similar to what I was thinking: the buyout is contingent on the deal closing and in turn the closing isn't going to happen if we don't have a tenant lined up to terminate their lease. I'm definitely not interested in rolling the dice and trying to get someone to leave after close.

I do see the wisdom of just making it the seller's problem, which is what I thought was typically how things were done. But it is still a seller's market, and I think in this particular case a bit of willingness to play along and solve this together may have helped the offer be accepted.