Attention Newbies: Stop Rushing to Buy Your First Home Before Your Lease Expires!

by | BiggerPockets.com

It’s June 1, and Sally is considering buying her first home. She is paying $1,500 in rent to her landlord, and her lease ends on July 31. Sally approaches her real estate agent and tells him that she wants to purchase a property no later than July 31. Her budget is up to $350,000. Her agent is delighted to hear from Sally, as she is a motivated buyer with a deadline and a budget, meaning sure business for him. He immediately begins showing properties close to her maximum price, and they go under contract on an average home for $335,000 by the end of June, closing a few days before July 31. Sally happily moves in, glad to have beaten her deadline and her budget.

This seems like a pretty standard transaction, and your typical middle-class American is usually delighted with this outcome.

Except this premise is absolutely absurd.

A purchase plan like this gives the purchaser extremely high odds of ending up with the worst possible outcome—and very little chance of getting a great deal on that all-important first home purchase!

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Stop Making False Deadlines

Think about this for a second. Sally made two egregious errors in her plan.

  1. First, she purchased a property that stretched her close to her financial limits, ensuring that she will not rapidly build wealth. That’s another discussion entirely, one that we go into in depth in another post on the subject of buying one’s first home.
  2. Second—and the major point of this article—is that she created a false deadline for herself that rushed her into making the most important financial decision of her life thus far in a hurry.

“False deadline?” you ask, “Her lease expired on July 31st! She HAD to buy before then. Otherwise…”

And to this I’d respond, “Otherwise, WHAT!?”

The fact that Sally’s lease expires on July 31st should have nothing to do with her decision of when and how to buy her first property. The fact that your lease is ending is a TERRIBLE reason to rush your first home purchase decision, and the point of this article is to show you the absurdity of creating this false deadline for yourself and the potential it has to be one of the most costly mistakes you can make financially.

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Related: Why I’d STRONGLY Discourage Newbies From Buying D-Class Investment Properties

See, the thing about leases is that they are almost always negotiable. Consider this: If Sally had asked her landlord to go month-to-month for a few months, would the landlord have acquiesced? Many landlords, myself included, will happily go month-to-month with a quality tenant at a higher rate, especially if they are preparing to buy a first home. Turnover is costly, and delaying that turnover while receiving extra rent is usually a great thing for landlords! It will often offset even the costs of having to advertise the property for rent and find a new tenant in the off-peak season.

In spite of the fact that it might sting a bit to pay more rent, Sally should absolutely go month-to-month at a higher rate instead of timing her first home purchase around the expiration of her lease. If Sally pays an extra $100-$250 per month for a few months while patiently searching for a great deal, she might suffer out-of-pocket expenses of $600-$1,500 over a six-month period.

At the high end, $1,500 is 0.5% of a $300,000 home purchase. Again, that’s 0.5%.

That $1,500 is an immaterial amount of money in relation to the size of the financial decision at stake. I’d argue that the odds are excellent that Sally finds a much better deal over a six-month period with patient and methodical research—and no pressure to move quickly. I’d argue that Sally finds it much easier to negotiate terms and price of a property once under contract with a seller without the self-inflicted artificially constructed pressure of a looming lease termination date influencing her decision-making!

Remember the Big Picture

I’d argue removing this ridiculous deadline from her decision-making process could be worth tens of thousands of dollars to the Sallys of the world, who otherwise might be rushing into their first home purchase.

“But my landlord simply won’t sign a month-to-month with me!” Sally might say.

Then, MOVE to a rental that will go month-to-month!

I am completely aware that no one likes moving unnecessarily. Too bad. This is a necessary move when considering your first home purchase. You are talking about taking a couple of crappy weekend days during which you temporarily move out of one rental and into another while you search for your first home purchase. The stakes are too high to fail to deal with the temporary discomfort of potentially having to move.

Related: The 5-Step Newbie Guide to Successful Real Estate Bookkeeping

Sally must accept this option as a possibility and be willing to take action and move if necessary. Sally might make a decision that is $10,000, $25,000, or maybe even $50,000 better without pressure than she might under pressure. Being able to walk away is a card that you MUST have at the negotiation table, and it is particularly important to the very people who voluntarily discard it from their hand by failing to find a temporary housing solution while searching for their first home purchase. Suck it up and move multiple times in a year if you don’t have the option to reasonably let month to month in your current place.

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Conclusion

Time and again, people come to me with premises like this. They tell me that they plan to buy a first home or to “house-hack” but that they must make their purchase by a certain date when their lease expires. They are rushing into several hundred thousand dollar decisions in order to save a few hundred dollars and a little bit of a potential headache. They lose the forest for the trees.

Do not do this to yourself. Do not put yourself under pressure to make a decision quickly.

Sure, a few hundred dollars, a thousand dollars in increased rent beyond your current monthly rate may seem like a lot of money. It IS a lot of money. But it is NOT a lot of money in the context of a several hundred thousand dollar first home purchase that is likely to be the largest financial transaction you have undergone in your life to that point.

Understand the stakes, and understand the context. Pay the extra rent, move if necessary, and give yourself the extended timeline you need to give yourself the best possible odds of making a quality decision.

Agree? Disagree?

Leave your comments below!

About Author

Scott Trench

VP of Operations at BiggerPockets.com, Scott is also a licensed real estate broker/agent, real estate investor managing 8 units in Denver, CO with a partner, a house-hacker, and personal finance nerd. His book, “Set for Life” (published through BiggerPockets Publishing) thoroughly details a step-by-step journey to early financial freedom for full-time workers earning median incomes and starting with little or negative net worth. When he’s not helping full-time workers move toward early financial freedom, the 26-year-old can be found playing rugby, biking, or skiing.

23 Comments

  1. Good points. She could have also rented one of my properties, knowing she would soon be a buyer. My tenants know that when they become buyers, I am going to help them find a home and allow them to terminate their lease a few days after closing, allowing time to move. Of course they use me as their broker with a deal like that! They get all of their deposit back, and they leave the home in great condition. Seamless and inexpensive for them, and an extra payday for me, AND they often send me referrals that have led to future business.

  2. John Drinkwater

    I live in Los Angeles, and have been renting here for the past 16 years. In all my rentals, I have never had a lease that did not automatically convert into a month to month after the first year. Is that only a thing in California? I agree with Mr. Trench’s advice about not allowing a self imposed deadline to fuck you, especially when purchasing. Personally the past few months have been trying at best, but I’m close to closing on a deal that I have been working on since the end of August, and if I had put an artificial deadline on when I needed to have completed my first transaction by, this house wouldn’t have been a possibility. Which would have been a big mistake.

    • Brad J.

      John, that’s an LA thing. Most places the landlord wants to lock you in for another 12 months if they can. Also, elsewhere as a tenant you want to lock in a rate so the landlord won’t raise it. So it’s generally win-win unless you know you’ll be moving in the next year.

      • It is not an LA thing. A one-year lease auto-converting to a month-to-month is pretty common. Also common are landlords who want to lock you in every year, even in LA. Good landlords do not need to lock in their tenants. Happy month-to-month tenants will choose to stay for years,

    • Scott Trench

      I think it depends on the area as far as the norm for month to month or a term renewal. The point however, is that *even in the case of month to month* renters, they STILL feel that the lease going up in rent, even by a few hundred dollars, is enough of a reason to create an artificial deadline to buy quickly.

  3. Daniel Friedman

    If Sally waits and goes month-to-month or moved to a new place that allows her to go month to month then she has extra pressure to find a place. Her budget drops from $350,000 to $300,000. This limits her options and those places might be harder to find or more competitive. I agree that should not rush this decision but at the same time, there needs to be a timetable.

    Thoughts?

    • Scott Trench

      Thanks Dan! I am a bit confused on why her budget would drop here. If that’s the case for some reason, then that MIGHT be a better reason to have a deadline on the purchase date. Still not ideal. Also, I’d question Sally’s wisdom in buying property in the first place if her financial position was so unstable as to have large swings in her purchasing power. Either way, Sally should keep in touch with a lender throughout the process to make sure she has an accurate understanding of her purchasing power and the consequences of various decisions!

  4. “Her budget is up to $350,000. Her agent is delighted to hear from Sally, as she is a motivated buyer with a deadline and a budget, meaning sure business for him. He immediately begins showing properties close to her maximum price”

    Every buyer’s agent I have ever talked to always asks me how much I am planning to spend. I answer, “As little as possible to get the house with the features I want in the location I want.” As soon as you throw out a number, they cannot seem to find any houses for much less than that number.

    As far as month-to-month, it should not cost any more to have a month-to-month lease. The lease should be month-to-month from the start. A good landlord will be able to keep a good tenant for years, and it will be easier to get rid of a bad tenant. Bad landlords often use a lease to trap tenants.

    • Scott Trench

      Katie – this is good advice in my opinion on the subject of buying homes.

      As for the lease term – I and most landlords I know in my area go with term leases, often about 1 year. It may be a geographic thing. Perhaps landlords in other parts of the country typically default to month-to-month leases. I like the term leases, because I like to have predictability in turnover and to handle that in the summer months. Few people enjoy moving in the unpredictable winter here in Denver!

  5. Susan Maneck

    I moved from an apartment to a house when I learned that my rent would not only go up $100 but because of a change in Mississippi law, tenants could now be charged for the water even though there were no separate meters. I bought a HUD house that took *forever* to close and stayed two months past my lease expiration date. I was able to pay rent under the terms of my old lease during that period, no problem.

    • Brad J.

      This sounds like a great solution. I think most landlords will work with you if they know you’re trying to buy a place and willing to keep paying full rent. Instead of moving, as listed in the article above, it might even be more cost effective to offer to pay your landlord a few more bucks each month to go month=to-month if for some reason they’re averse to it. Just keep negotiating.

  6. I had the opposite problem. I bought a house at an auction and still had 4 months left on my lease. Poor planning, but in the big picture, buying a house under market was more important to me than worrying about the details of my lease. One positive was it gave me ample time to upgrade the floors and roof before moving in. Something to think about with a fixer upper is to figure out what needs doing immediately and do it before you move in. This is especially true of floors or interior paint.

    • Brad J.

      Totally! And I know that landlords on this site don’t want to hear this, but they will have trouble charging you rent when you leave early if the place can be filled and they don’t lose money. I.e. you’d probably have to pay for a month while they “cleaned” it. We had a tenant leave early and we just found someone else to rent 2 days. After the old tenant left. A little more work for us, but nowhere near the hassle of moving slowly, and trying to get the old tenant to keep paying.

  7. I understand Sally’s mistakes in rushing to buy her first home, especially in that price range. My wife and I are also planning to buy a home this Spring, our 3rd home, and do want to time it with the end of our rental lease which is June 30. Reasons? We live in a sub-standard rental unit with a host of problems which the landlord has refused to repair. She is also very inflexible and uncooperative. Like it has 8 windows and only one of them can be opened which has a screen in it. The heating and cooling is very inefficient and expensive. Just to name a few. We are on a corner lot right next to a very busy and extremely noisy main street (speeding, drag racing, etc.). We are both retired, approaching 70 years of age and it is driving us crazy to live here. We still have more than 4 months until the end of our lease. We were told by our real estate agent yesterday that homes here in central Florida are closing quickly in about 30 days. Some of them are going under contract within hours of listing them! So what I’m saying is that sometimes there are legitimate reasons why a tenant wants to time his home purchase with the end of his rental lease. Thanks for the article!

    • You are a great example of why I say that good landlords use month-to-month (MTM), and bad landlords use leases. Even with a MTM, tenants will stay for years, even decades with a good landlord. Bad landlords use leases to trap tenants.

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