Whether or not you actively work with lease purchasers, there will probably come a point in your investing career when one of your tenants will want to buy your property from you. As far as I’m concerned, every investment property that I own is for sale. If the price is right I will always entertain the prospect of selling a property. This can be especially lucrative when selling to a tenant because typically you can sell for top dollar and avoid paying real estate commissions.
For the most part, the tenant pool is comprised of individuals who are renting because they don’t meet acceptable lender guidelines to be approved for a home loan. Occasionally, however, I’ll encounter a tenant who has only one or two small obstacles (typically credit) keeping him or her from being financeable and they simply don’t have the guidance or know-how to overcome these issues. In this situation, you as the landlord can provide some valuable direction.
One of the first things I do when screening a new tenant is to check his credit to see if there is potential for the tenant to purchase in the near future. If the credit score is in the neighborhood of 620, I’ll usually broach the subject of renting with the option to buy. When I identify a tenant who is a good prospect to buy, I’ll try to connect the person with a reliable loan officer specializing in FHA loans so the potential buyer can be coached through any issues holding him back from a loan approval (for example: increasing credit score, adding trade lines, paying down debt, etc.)
While there is no one-size-fits-all approach to this scenario, I always encourage investors to think outside the box as it relates to helping a tenant obtain financing. As an example, I had a tenant a few years back who had a good credit score, but she lacked the money to pay for both the 3.5% down payment required by FHA and a collection for $4,000 (on her credit report from a loan that she had co-signed). I had enough margin in the deal that I was willing to help her pay off the collection so that she could buy the house from me. While I knew there was an element of risk, I had a great rapport with the tenant, a promissory note in place and confirmation from the lender that once the $4,000 collection was paid, she would be approved for the loan. In the end, I was able to sell the home for full retail value with no real estate commissions. In addition, over the past two years I’ve received monthly payments from this tenant toward the $4,000 I loaned her to pay off the previous collection.
There are many ways to help a tenant get past the barriers preventing him or her from buying your property. While your tenant may resolve issues on his own, as an investor you should still arm yourself with as many tools and as much knowledge as possible to help facilitate the purchase. This may include getting to know FHA lenders in your area, becoming acquainted with credit counselors, boning up on down payment assistance programs, and other connections to help get tenants approved and on track to purchase your house. Having the skills and ability to sell your rental properties for an excellent price with a minimum of time expended is a great way to grow your business and your wealth!