Making an offer on the house I rent?

2 Replies

I'd like to make an offer on the house I've been renting and living in for 3 1/2 years. It's been functioning as a rented house-hack and we've been model tenants - never late, do our own minor repairs, etc. - and the PM and owner seem to appreciate us, such that they haven't increased our rent beyond the first year. My motivation is to set myself up to benefit further from the house-hack by gaining equity ... and not having to move is a serious bonus.

The mean value of the house via several sources is $444K; median is $433K.

The owner seems to be an out-of-town retired lady and this is one of her income streams. We currently pay $2200 rent and I believe she's is netting about $1050/mo after taxes, insurance, landscaping, and PM. I'm not sure if she owns the house free-and-clear.

My pitch was gonna be this:

  • $10,000 down payment
  • $1500/mo for 20 years
  • I'd pay all closing costs
  • Offer the prop mgr 1 year of fees (~$2650) to assist the tenant in the transaction

This works out to basically a $370K sale price, or the equivalent of $402K if she were having to pay regular agent/closing costs.

Benefits to the owner would be:

  • Her cashflow immediately improves by about $450/mo
  • She gets an unexpected $10K bump - a nice kicker, but not enough to trigger a big tax event
  • She no longer has to worry about or pay for taxes, insurance, property management, maintenance, wear-and-tear, bad renters, etc.
  • The transaction is hassle-free - no inspection, appraisal, or bank loan that can fall through ... she'd just receive some papers via FedEx, sign them, and we're done
  • The property - her former family home - would go to someone who truly loves it and would care for it well

Downsides for her would be loss of future appreciation and rent increases; and maybe she has plans to leave it to someone in her family.

What do you think of this offer? Would you make any adjustments?

Bonus points for perspective on specifically how I should handle the transaction, e.g., should I title it into a series within my Series LLC? What should I do if she's still paying a note on the property? Are the costs for buying and operating this asset deductible as business expenses? Any insurance considerations? Any gotchas I should watch out for?

Many thanks in advance --

I don’t know if you are VERY VERY VERY NEW to the idea of money or are trying to pretend you aren’t ripping off the senior seller if they accept?

You start with, it’s worth about $430k, but if she sold for $402k, she’d only get $370k  why would she pay a realtor to sell her house for $30k less than it’s worth?

If you offered her $260k for her house, with 10k down and she carried the $250k for 20 years at 4% your payments would be $1515/mo plus taxes and insurance. if you truly think your paying $370k and only screwing her out of $30-$60k, then your payments should be $2,180/mo, assuming she agrees to just 4% interest  

Imagine I asked you to give me something worth $360k today and I’d make payments back to you over the next 20 years of $1500/mo. In fact just give me $360k and I’ll give it back to you over the next 20 years. 

You’d have to check Dodd frank and other associated laws, I don’t BELIEVE you can do zero interest mortgages as far as the IRS is concerned. Otherwise I could charge more for my house I’m selling tax free and then offer a zero interest loan. 

I appreciate the perspective, Bill. Some thoughts:

I really wouldn't feel bad offering $402K on a house listed at $430K on the MLS - seem 93% of list price wouldn't be an insulting offer, especially considering the place has some deferred maintenance that'd likely drive the price down post-inspection anyway.

And as far as the specific offer I drafted, I wasn't thinking of it as much a function of sales price as "what is this lady making now, and what can I do to improve it?" I figured 42% more cashflow today and removing a lot of risk from her life with minimal effort on her part would be worth a functional discount in the overall price. And were she to sell on the open market, there'd be make-ready, all the hassle of selling, arrival of a huge chunk of income she's then have to reinvest to defer taxes and reconstitute her income stream.