I'm renting to own. Do these numbers sounds right?

October 14, 2004 10:04 AM

Residential Real Estate rent-to-own: what are reasonable numbers? [More in the back bedroom]

I've been renting the same 2-bedroom house from the same landlord for slightly over 11 years now. My rent's $535 a month, and I'm sure I gave him first and last when I moved in.

I'm self-employed, and probably not a great mortgage loan risk, and in the wake of my mom's recent death, as soon as my and my sister square away the estate, I'll likely have some capital to throw around.

What is a reasonable amount of that $70K+ in rent (which retired his first mortgage, and is likely about to retire his second) to expect/ask for credit for as equity, if any?

The neighbor houses sold for $78k and $83k in the last 4 years; he bought the house new in '71 for $15k, according to the tax records. Assesed value is $81.4k; which includes they think it has central air, which it does not. No pool either, nor any large trees. 900 ft^2, plus garage and screened back porch. Their annual taxes are around $1500, since they don't get the homestead exemption, but, as he noted amusingly to me when I brought this up the other day, he hasn't had nearly enough deductable upkeep expense on the place. :-)

Anyone done this before? Knows someone who has? I'd like to get a rough idea, so I don't try to screw either of us. And if any has specific numbers, please show your work.

posted by baylink to work & money (7 comments total)

I don't think you can expect any credit for the rent you've paid. Certainly not from a legal perspective, and probably not from a "gee, we're just folks" perspective, either. That wasn't the bargain you made back in 1993. The deal was, you'd pay rent, and the landlord wouldn't kick you out.

If your credit history or employment situation makes it hard to get a mortgage, one way you might be able to take advantage of your long-time rentership is to have the owner sell the house to you and carry the mortgage himself. He may be willing to do that because he knows you can (and do) make your monthly payments. It's a win-win situation: you both get a better interest rate than either of you could get from a bank for the same amount of money.

I wouldn't expect you to be able to buy the place for much less than the comparables (assuming they really are comparable). Your landlord might knock off a little since he doesn't have to pay a commission to a realtor, but you're still going to have to hire a lawyer to handle the sale, plus escrow, title insurance, and so on.
posted by spacewrench at 10:26 AM on October 14, 2004

I'm self-employed, and probably not a great mortgage loan risk

Have you been self-employed for 11 years? Do you have any long-term, written, contracts with your customers? Do you have any significant standing in the local business community? Banks think of self-employment is one failed contract away from unemployment, unless there are sufficient written contracts to carry you through lean times.

What is a reasonable amount of that $70K+ in rent (which retired his first mortgage, and is likely about to retire his second) to expect/ask for credit for as equity, if any?

Unless you previously arranged a rent-to-own deal with the landlord, then you should not expect anything at all from the rent you have already paid.



On the positive side, the money from your mother's estate may be sufficient to make a downpayment that will motivate a bank to lend to you. Note that while you and your landlord are arranging a deal that is mutually beneficial, the banker assumes is arranging a similar deal between you and his lenders. Your mortgage will be aggregated with hundreds of other mortgages that have similar properties (length, risk profile, interest rate) and then split up along the linse of those properties.

Your goal in dealing with the bank is poviding a strong argument that although you are a small business, you are really like millions of other home buyers and your risk-profile is similar as well.
posted by b1tr0t at 10:34 AM on October 14, 2004

As for what you should do, if you want to buy the place, decide how much you'd be willing to pay (assume you didn't live there, but just saw a sign out front, did a lot of research and inspecting and learned all you actually know about the place) and see what kind of rates you can get for a bank mortgage for that amount. Then discount the price you'd be willing to pay a little (maybe 7-10%?) and reduce the bank mortgage rate by a point or two. Offer the landlord that deal: $X if you carry the mortgage for 30 years at Y%. See what develops.
posted by spacewrench at 10:39 AM on October 14, 2004

Let me clarify a touch: while I realize that I should have negotiated such an arrangement with him in advance, the thrust of my question is more: if he decides to make such a deal with me retroactively (and he sounded as if he might), what would have been reasonable numbers to have negotiated in advance, and how much should those be adjusted in each direction since a) I didn't but b) I am now a known quantity...?
posted by baylink at 11:54 AM on October 14, 2004

Ah, that's a tougher question. The reason is, if you had made the deal back then, you'd have been dealing based on the market value at the time. Presumably, things have gone up since then, and if you'd been renting to own over those 11 years, all of that appreciation would have gone to you. As it is, all the increased value belongs to the landlord.

I don't know whether it's productive to try to analyze "would'a - could'a - should'a" at this late stage. You could try to look at 1993 comparable sale prices, interest rates, and so on, but it's a lot of work and doesn't really get you much -- you might be able to say "If I'd bought back then, I'd owe $X on my mortgage and you would have gotten $Y in payments," but so what? The important question is, "how much is he willing to sell the house for now?" You both know (more or less) how much he could get by kicking you out and selling on the open market. Any discount you get is based purely on the value of the good will in the relationship you have (though it sucks to think of it like that), regardless of whether you rationalize it by saying "this is where we would have been if we had done something else 11 years ago."

(Of course, it may be easier to sell a deal if you do have a rationalization, so if you can get the market value back in 1993 and some info on mortgages back then, I'm sure a MeFi'er with more accounting skills than I have can help you run the numbers.)
posted by spacewrench at 12:58 PM on October 14, 2004

And hopefully, one will wander by. :-)

The houses in my neighborhood turn enough that I shouldn't have any problem finding 10 year old comps.

And, of course, I have a better chance getting him to carry my paper than someone else would, as someone noted above. Depends on how the other deal washes out -- if ever (my sister is currently living in that house, and I don't have a reading on whether she'd prefer to move back Up North where all her friends are or not).
posted by baylink at 2:49 PM on October 14, 2004

As a landlord myself, the answer would be $0.

I consider myself a generous landlord, though - I wouldn't laugh in my tenant's face when I explained this to them.

Good luck, though. If he likes you, he may cut you a good deal, which is really what you are hoping for. How good depends on how much he likes you.
posted by ikkyu2 at 1:11 AM on October 15, 2004