The Tenant's Guide to Buying a Home Directly from a Landlord
Do you love your rental property and want to pursue buying it? Or has your landlord approached you about the possibility of buying it? In both cases, there are plenty of ways to make the transition from renter to homeowner and have it be a win-win for everyone.
Whether it's something you want to plan for in the future or something that needs to happen sooner rather than later this guide will let you know what to expect and how to navigate the process.
Here are 8 essential things you should consider when considering buying your rental property.
1. How to Approach Your Landlord (The Icebreaker)
Now this is a little different for each scenario but regardless of how you initiate the conversation you want to ensure you frame it as a win-win scenario. If you have a good relationship with the landlord it may be as simple as mentioning how much you love the home and just letting them know that you would be interested if they were ever thinking about selling. If you don't have an established relationship with the owner a friendly letter can be helpful to start the conversation.
2. Highlight the Perks for the Landlord (Your Negotiation Leverage)
It's critical that you highlight the benefits to the landlord as it could certainly tip the scale in your favor. In most markets the seller, or landlord in our case, would be paying 5-6% in real estate commissions that could potentially be skipped. They also don't have to worry about trying to clean or stage the home and the unique challenges of trying to sell a home that is tenant occupied.
3. Getting Pre-Approved BEFORE you Agree on a Price
As a mortgage broker, I really think this should likely be number 1 on your list of priorities but regardless you definitely want to know exactly what you can afford before you start negotiating the price of the home. Get pre-approved locally in Colorado and have the confidence going into negotiations to know your exact buying power and monthly payments.
4. Do You Ask for Seller Paid Closing Costs?
Maybe the biggest benefit of getting pre-approved early is knowing exactly what programs are available and how much money you need to actually buy the home. While programs exist that may allow you to buy the home with no money down you are still typically responsible for closing costs that could range from $5,000 - $10,000. Remember the landlord not having to clean or stage their home and potentially saving the 5-6% in real estate commission? This is where knowing the numbers upfront can pay dividends to ensure we ask for the right amount from the sellers to help offset those costs.
5. Figuring Out the Fair Market Value
This is where things get a little more complicated. It is important to look at comparable sales of homes in the neighborhood to determine what the likely value of the home is. While it is important that an agreed upon price is determined before writing a contract, technically the lender (unless you are paying cash for the home) will determine what the fair market value of the home is for lending purposes.
6. Don't Skip the Home Inspection!
It's easy to want to save the money on this part of the process but this can lead to costly future repairs. Tenants often think, "I live here, I know what's wrong with it." but the reality is that a professional inspection can help to ensure that any hidden issues are brought to your attention before you are responsible for paying for the repairs. A leaky faucet may not break the bank but a damaged foundation or improperly installed roof could lead to costly future repairs that could have been avoided with an inspection.
7. What Happens to the Security Deposit and Rent?
Good news - you are getting your security deposit back! Kind of nice to not have to worry about the landlord bringing out the magnifying glass for the the moveout inspection. Typically your security deposit and any prorated rent would be credited to you at closing. This will reduce the amount of cash back you need to bring to closing.
8. Handling the Paperwork
In Colorado, the real estate contract is available on the DORA website. It provides a fill in the blank approach that you and the seller can complete together. It is a legal document so it is important that you review and understand it before signing the contract.
If you don't feel comfortable doing the contract yourself you can definitely involve a Transaction Broker to assist in the preparation of the paperwork. The fee for this type of service will vary and typically you and the seller would want to negotiate beforehand who will pay the fee.
