My tenant wants to buy my SFR - how to structure
Member since 2018 · 2 posts · 0 votes
Bought a home as a primary residence in Texas in 2017. In 2018, we relocated for work. Thought we would want to come back and settle down in this Texas home. We have now decided on another route (will not return to Texas).
Our tenant is great and she has asked on more than a few occasions if we would consider selling it to her.
We want to
1) pursue this and avoid realtor fees
2) use a 1031 exchange for a multifamily property with higher returns - we have 90k in equity; mortgage= 200k
Are there any creative arrangements or factors we should consider when proposing a deal to our tenant? Thank you!
Hi @Neil Rafol! This sounds like a cool route. I would show her the math for the follow:
- $x is the market value (real market value, not inflated)
- $4% - we'd pay a cheap real estate agent 4%
$x-4% +your closing costs is what we'll sell it to you for. You'll get the best deal that can be had on this!
Then when it comes time for the contract, I would make it "as-is" subject to a punch-list they make before signing the contract. That way they feel taken care of, you're protected in the long haul, and everyone get's a deal!
Hi @Neil Rafol! This sounds like a cool route. I would show her the math for the follow:
- $x is the market value (real market value, not inflated)
- $4% - we'd pay a cheap real estate agent 4%
$x-4% +your closing costs is what we'll sell it to you for. You'll get the best deal that can be had on this!
Then when it comes time for the contract, I would make it "as-is" subject to a punch-list they make before signing the contract. That way they feel taken care of, you're protected in the long haul, and everyone get's a deal!
@Will Fraser I'd be careful with 'We'd pay a cheap real estate agent 4%' - this is what is ruining our profession. You get what you pay for and sorry - I take offense when, an agent especially, wants to discount their service. If you're so quick to discount your service - what type of negotiation skills are you going to have to net your seller the most? But hey - I'm not an agent that takes listings at 4%.. and I offer so much to my clients that they don't even bother asking for a discount on my listing fees.
Now @Neil Rafol - the biggest thing here - is make sure you know the TRUE value of your home. Yes you can save on realtor fees if you don't use one, but make sure you're also not leaving money on the table without truly knowing what your house may sell for. Sellers can often believe their house is also worth more than it really is - so make sure you're squared away here. Curious though - did you live in the house at any point within the last 5 years for over a year? Over two years? You could avoid some capital gains and it may make sense NOT to pay for a 1031.. it all depends. But if not - definitely 1031 into a larger deal IMO, unless you're in need of the cash.
Get an appraisal. Use that value as sales price. Avoid realtors/attorney's fees. Use the standard state realtors contract. Fill in the pre printed blanks on the form. Profit.
@Neil Rafol Absent use of agents on one or both sides, or a real estate attorney (who should be fiduciary for the buyer), what comes to mind is protection for you (and your buyer) in the event something goes south, or turns out differently than anticipated after close of escrow.
The appraisal mentioned by @Brian Phillips, is one way to establish value by a 3rd party in order to ensure your buyer doesn't pay too much and you don't sell too low. The issue though, is that your buyer is the one who should hire the independent appraiser to perform a market appraisal. This way, it isn't you, or someone you hired who produced the value for the buyer's offer. This responsibility is theirs, where it should be. Based on market value, they offer and you accept formally, using legal and commonly-accepted contracts and addenda. BTW - the comments on appraisal assume you will be doing something creative, as you sort of alluded in your opening post, which does not involve a lender. If a lender is part of the equation, as you may know, they will engage their own appraiser to handle this on their (and the buyer's) behalf.
Beyond the above, to keep yourself out of trouble and to satisfy any lender involved and to provide the closing agent with what they need, if not using agents or an attorney, just pick a suitable title company to handle all the paper and the closing based on your completed/signed purchase contract. As @Brian Phillips pointed out, you can obtain what you need from your state's Real Estate Commission. Most publish fillable, blank PDF forms online.
Just make sure to use the standard CBS (contract to buy/sell), with the various addenda required by your Real Estate Commission to get things started. Addenda normally include Square Footage, Source of Water, Lead-Based Paint, Mold, Termite and other disclosures and addenda required by law to require your buyer to protect themselves.
Make certain to read and understand these docs carefully, then follow the usual requirements for the various stages of the contract, which normally include deadlines for preliminary title, inspection, appraisal, insurance, loan conditions, etc.
Even if your tenant / buyer decides to bypass the above steps and just "trust you," do yourself a favor and don't skip the steps. Your buyer needs to go into the transaction knowing what they need to know to purchase your property. If they decide to pass on some of the steps, then find out later there were inspection issues that will cost them thousands, or that they paid $30K too much, or a number of other gotchas, you will find out quickly how their attitude will change.
Don't rely on the "cheap real estate agent" that was proposed above. Re-create the process like a pro would, or get some help. Best of luck to you.
@Kenneth McKeown - we only lived there 8 years; great question and thank you
I'd agree you do not need the services of a RE agent here - after all you've found a buyer and done the leg work. I would however seek out a lawyer for this transaction. As per determining the true value of your home you can get it formally appraised (which I am not a fan of) or you can take a trip to the city and look at the sale records of homes in your immediate area. You can complement this effort by utilizing websites like Zillow and Trulia to see "recently sold homes" in your neighborhood. I personally am not a fan of appraisers, I feel like if your savvy, you can get the job done yourself.
An interesting idea would be to ask what she is willing to pay for it. If she is willing to pay above market value you can benefit by having her "reveal her hand" before revealing your offer to her.