How to Buy Triplex with owner still wanting to live in it

Question

Hi everyone.  I've had a potential opportunity come up but I'm having some difficulty with structuring a deal for it.

A bit of background.  I moved into a Triplex in Montreal about 4 months ago, as a renter.  The landlord is an older gentleman of 80 years of age, who lives on the main floor of the building.  We have the top apartment and there is another older lady who lives in the basement unit.  A few weeks ago, we received word from the real estate agent for the building that the owner was looking to sell it.  He's having trouble keeping up with the land lord duties and has been leaning heavily on his daughter to help him.  According to the agent, our landlord is looking to sell the building but wants to remain living in the main floor apartment.  We've had two prospective buyers come through the building already.

When I heard about the sale, I instantly thought "What an opportunity." and then I started thinking about what I could offer.  We don't have the cash for a down payment, having just uprooted our family and moved  to another country, but I thought that I might be able to offer a seller financing deal.

So here's where I would like some advice.  The landlord selling but wanting to remain in the property seems awkward.  I'd be collecting rent from him and then paying it back to him with the seller finance idea.  Am I making this more difficult than it needs to be?  Has anyone else been in a similar situation?

Thanks,

Bryan

Guillaume D. · Answer

@Bryan Lee Hey Bryan! It's important for you to understand that cash down needed for an owner occupied triplex would be 10% if you insure your mortgage with CMHC. In other words, the bank will finance up to 90% of the LOWEST between the purchase price and the fair market value of the building, meaning that you have to make sure to NOT overpay, otherwise down money will have to be higher than 10%. Then, banks in Canada generally don't accept seller financing deals, and there's no chance this will be accepted by CMHC. You can't just assume seller financing will work ;)! Yes, you could make it work creatively, but this means you'll have to go for a conventional loan with 20% down instead of 10% down, and you'll most likely have to convince the seller to finance WITHOUT taking a guarantee on the building. It's doable, as I've done it before, but very hard to get a seller to accept.

Roy N. · Answer

@Bryan Lee

Before you have any serious discussions with the owner about a purchase with owner financing or an instalment sale, you need to ascertain whether you can afford to carry the building - particularly if you will be making a live here rent free - offer.

You also want to be well versed on the deferment of capital gains before you start any discussions.  Depending on several factors: his financial situation; whether he's been claiming CCA on the portion of the property which is not his primary residence; his personal health, etc.  the ability to defer a capital gain over a period up to 5-years may  or may not be attractive to him.

We have found pitching an owner carry or instalment often requires a significant amount of educating.   Even then, it is outside the comfort zone of many (perhaps most) people.

If you are going to pitch an owner carry, you probably want to have a preliminary discussion before the Owner engages a listing agent.  Most real estate agents do not understand the concept and may see it as a threat to their commission.

If you do open a dialogue with the owner, you may want to encourage that his daughter attend your discussions.   Several years ago, we made an similar to a 90 year old gentleman for his house and lot:  We will buy it now and you can remain rent free for the remainder of your days.   His son was not involved upfront and when he became aware was certain we were trying to take advantage of an old man and usurp his inheritance.

Bryan Lee · Answer

@Melissa Kirchoff - I agree that having the landlord stay in the place after selling it could create a sticky situation.  If something goes wrong, how can I take action against someone who I owe money to?  You make some good points about seller financing.

@Mary Mitchell - Looking into alternatives to paying rent is an intriguing idea.  Thanks for the suggestion.

@ Chris Walters - I am enjoying the cold weather.  It's been some time since I've been in a good Canadian winter.  :)  I know that he owns the building outright.  He's been living here for some time.  That being said, I don't know his financial situation.  I have been looking into comparatives and that's part of the reason why I was looking into Seller Financing.  Traditional financing is going to be difficult for me at the moment.

Thanks for the input, everyone.  It's been good to get different perspectives on this.

Chris Walters · Answer

@Bryan Lee Hi Bryan and welxome to Montreal :) Hope you arr enjoying the recent cold weather and especially tomorrow’s cold one :)

Firstly, I would chexk out the comparatives in order to know how much similar appartments as his are rented for, then seehow much time you think that it would take you to pay him off.

Secondly, find out whether or not he owns the triplex outright, because if he does, you can offer seller financing. The advantage for him will be that he will be paying less in taxes because he will be getting smaller amounts every year compared to one big amount this year. The downside for him is if he needs the money right away he won’thave access to it all, but you can always remind him that he will be making some extra money in interest than if you were to get financed by the bank. The only thing is that you will have to find the money to pay the agent his/her money upfront, because I strongly doubt they will want partial commission payments.

Thirdly, I am not a fan of letting a seller live in the same property they sell because there might still be that emotional attachment. But judge based on the way he his. If he’s a nice guy and simply want to live a simple quiet life where he is, then it might be a good situation.

Mary M. · Answer

I would think more creatively. He doesnt need to pay rent. He could discount the price by x amount of years rent.  This would alleviate the issues above.

Also, he is 80. He probably wants to just enjoy life. Not everyone is a jerk that will cause problems.

Talk to lenders and talk to the seller. See what you can come up with.

Good luck!

Melissa Kirchhoff · Answer

@Bryan Lee - Have you talked to a lender? Could you do a low money down set up (since it's owner occupied, I'd imagine you wouldn't have too much of a problem on that end, but might have a problem with the money, since you aren't a previous landlord, they won't count the rental money as income)? That would be cleaner. Then he can just straight rent from you and there's nothing weird there.

I'm not a big fan of situations like that, personally. I would wait and save and get yourself into a situation where you can do it more on your own. There's lots of opportunities still out there, and you wouldn't feel like you would have to leave this guy in, like you owe him something. IMO, I bet he's wanting to pay less rent than a normal tenant might, and he might still want to run the show. I think it could create a sticky situation - I mean, are you going to evict him if needed or make him pay fair market value for rent? My point is, don't feel like this is your only chance to get in on this, like the opportunity might slip. Work hard, save, and get in the situation to do this in the future. If you still want to do this seller financing, go for it, but make sure you have a good agreement and an attorney by your side and making sure the situation works for you too. And seller financing I also don't like because usually the situation has to greatly benefit the seller, otherwise why assume the risk? So if it greatly benefits the seller, it isn't necessarily greatly benefiting you... Just some things to consider.