SELLING TO TENANTS

12 Replies

Hi everybody! I have some tenants that want to buy the house they are renting. I bought the house with a line of credit and recently financed the house for the full amount of $37000 after making repairs at 5.5% making my PITI $420 per month. The house has a tax appraisal of $45741. The rent is 750 per month so if I figure 22% for vacancy and variable expenses making the net rent 585 per month leaving a profit of $165 per month. I am trying to setup a Rent to Own deal since owner financing is not an option.

I have three scenarios:

1. If I don't sell the house and only rent then over 5 years I will profit $9900 and still have my asset.

2. If I sell the house amortized over 30 years with a 5 year balloon at 12% interest making the tenant's payments $588 per month. I will profit $18,218 but the tenants will still owe $44475 making it hard for them to get financed. Also, I only cash flow $3 per month and am waiting for the payoff at the end of the balloon.

3. If I sell the house amortized over 15 years with a 5 year balloon at 12% interest making their payments $667 per month then I will profit $15248. This scenario leaves the tenants owing only $36885 so financing will be more possible. Also, I will at least cash flow $80 per month.

I have set these scenarios up without a down payment or fee. What percentage is reasonable for a fee? How much goes to the principal? Does anybody have suggestions on how to maximize my profit on this deal? Can I make their payment closer to the rent they are paying to help with cash flow and the pay down of their principal to help with future financing?

Thanks!

Eric

Is this a situation where the tenants cannot get financing on their own?  Have they gone through credit counseling or any other type of home-buying assistance?  When people ask me if I do any rent-to-own, I refer them to these resources.  I've read a statistic once that 90% of people doing rent-to-own never buy the property.

Thanks for your input :)

Do you have any reason for wanting to sell it, or is it just the tenants would like to buy it? I personally would not sell a property that was bringing in $165.00/month cash flow unless it was a great cash offer.

The only time I have used rent to own is on a low-income producing property that I wanted to get rid of. Your property sounds like a great long term hold, I wouldn't give that up so easily.  The deal has to be good for you, don't do a deal just because its there.

Justin Whitfield

    Thanks Justin! I wanted to explore all of my options.

    @Eric Smith Don't forget that when you sell on a wrap the buyer pays the taxes, insurance, and repairs, and you don't need to account for vacancies either (just get a non-refundable deposit in case they leave). So if their payment to you is $588 and yours is $210, your cash flow is $378/month not $3.

    Originally posted by @Doug Pretorius :

    @Eric Smith Don't forget that when you sell on a wrap the buyer pays the taxes, insurance, and repairs, and you don't need to account for vacancies either (just get a non-refundable deposit in case they leave). So if their payment to you is $588 and yours is $210, your cash flow is $378/month not $3.

     I see. That does make a difference. Thank you! What percentage of the selling price is fair for a non-refundable deposit?

    Did their offer include a price?  How does the the tax appraisal compare to the market value?  

    Can they get financing to purchase the house?

    Originally posted by @Eric Smith :
     I see. That does make a difference. Thank you! What percentage of the selling price is fair for a non-refundable deposit?

    I've got between 3 and 7% for new wrap buyers. For an existing tenant I would be willing to go down to 2% especially if they've lived there for a long time. It's more of a mentality thing, I want a clear divide between their life as a renter and their new life as an owner, and a good way to do that is for them to put some skin in the game. If they can come up with some cash is also demonstrates their ability to do so when a repair comes up.

    Originally posted by @Doug Pretorius :
    Originally posted by @Eric Smith:
     I see. That does make a difference. Thank you! What percentage of the selling price is fair for a non-refundable deposit?

    I've got between 3 and 7% for new wrap buyers. For an existing tenant I would be willing to go down to 2% especially if they've lived there for a long time. It's more of a mentality thing, I want a clear divide between their life as a renter and their new life as an owner, and a good way to do that is for them to put some skin in the game. If they can come up with some cash is also demonstrates their ability to do so when a repair comes up.

     Thank you!

    We always try to get 3.5% down so their requirement for an FHA loan is met. Of course, things could change in the future, but I use the current program amount when I write the deal.

    Originally posted by @Jesse T. :

    Did their offer include a price?  How does the the tax appraisal compare to the market value?  

    Can they get financing to purchase the house?

     If I sell I'd like to make money off the interest as well as the sale. My real estate strategy is a buy and hold for cash flow. I only want to sell in order to buy more rental units. I'll have to check on the comps. Is there any way to check comps without a realtor? I'd hate to waste a realtor's time since they won't make any money off the sale.

    Originally posted by @Bill Pohl :

    We always try to get 3.5% down so their requirement for an FHA loan is met. Of course, things could change in the future, but I use the current program amount when I write the deal.

     Thank you!

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