Not yet for sale by owner.
August 19, 2013 10:20 AM   Subscribe

Seeking advice on how to prepare for making an offer on a house that's not on the market. That our friends rent.

We're considering making an offer an a 2BR house that our closest friends have been renting for a few years. The house is almost 90 years old and located in the Denver metro area. We believe the owner will be interested in selling: she previously asked them if they might be interested in buying it, and she's been very reluctant to spend any amount of money on the property for basic maintenance issues (e.g., minor plumbing leaks). Despite that, the structure itself is in pretty good shape, although it has a lot of cosmetic changes to be done (repainting the exterior, pulling up ugly carpet to refinish hardwoods, replacing deteriorating linoleum), and will need some work framing out and insulating a back addition that was added on at a later date and leaks heat like nobody's business.

We've been looking at houses in this neighborhood casually for about a year, and are interested in approaching the seller about buying the house sometime around December or January. Between then and now, we have access (through our friends the tenants) to the house bring an inspector in, take measurements to plan out how we'd finish the basement, etc.

So. If you had unlimited access to a fixer-upper house you were considering purchasing: what would you do in 3-4 months before making an offer?

NB: This would be our first home purchase, and the plan we're hammering out is to keep said friends (a couple) in the house as tenants/roommates/enthusiastic DIY-assistants (one of them used to work for a general contractor and has some detailed ideas on the best order and approach to fixing up this house, but they just don't have the money for it) for as long as they're interested in living there. I'm sure MeFites may have some reservations on this element of the plan, but if possible, I'd like to table that issue for another question... for now, rest assured that we've done a lot of thinking on that front and would be hashing out the particulars in a detailed contract if we moved forward on this.
posted by deludingmyself to Home & Garden (13 answers total) 2 users marked this as a favorite
I don't understand what disadvantage you see in making an offer now (or after you have done the due diligence in getting the inspector) but with a longer than normal closing. She still gets her rent until it closes and you will be better prepared for budgeting with the long lead-time. Otherwise, I would caution you about not getting emotionally or financially invested in a house you do not own.
posted by saucysault at 10:29 AM on August 19, 2013 [5 favorites]

Look at other houses of similar size into which you could move your friends, figure out how much it'd cost to hire a full-service mover to move those friends into that house, and as you make your price comparisons discount those other houses by that price.

Which is a more specific way of reiterating saucysault's advice to not get too emotionally invested.

It is a house. There are many others like it. Your friends live in this one, which means that the value of this house is basically the cost to move them to another one.
posted by straw at 10:34 AM on August 19, 2013

Response by poster: While I genuinely appreciate the advice not to get too emotionally invested, I'm really looking for more advice and suggestions on process for a first-time home buyer making an offer to a private seller for a home not on the market, given that we have and can gather a lot of info on the state of the house.

I have an OK sense of how this house compares to others in the area, and if the current owner were to accept an offer in the ballpark we're thinking about, this house would be a good choice at a reasonable price. It's possible the owner won't, and then yeah... we'll be back looking at other houses. But for the moment, the value here isn't that my friends are living in it and moving them would be a pain, but rather that them having lived in it for years (and asked plenty of tradesmen about the state of the plumbing, flooring, electrical, etc during maintenance calls) reduces the number of unknowns compared to thinking about purchasing a similar house on the market whose condition may be less obvious.
posted by deludingmyself at 10:55 AM on August 19, 2013

Are you planning on getting a mortgage or offering some kind of land contract? If a mortgage, get prequalified, I guess. If a land contract, figure out where you're going to get your paperwork from (generally, a lawyer or at least a title company). If you are getting a mortgage, you'll need an appraisal, which may or may not be done by the bank, so think about that, and what you will do if the appraisal is below your offer.

I would make sure the owner knows you are interested in purchasing it, in an offhand way maybe, in case she thinks about putting it on the market. Presumably you can get quite a cost savings if no realtor is involved.
posted by dpx.mfx at 11:01 AM on August 19, 2013

Here's what you do. You find out the name of the owner, and you write a letter/contact them letting them know you're interested in purchasing their house. Either they open a negotiation or they tell you to pound sand.

One thing you can do is look at the "comps" in the neighborhood. "Comps" are the prices of comperable houses that have recently sold. That's how you get your starting number.

Then you put together an offer. Basically, your offer price (based on comps), with a contingency for an inspection. There is also a certain amount of time that you give yourself to get everything together, the due diligence period. 10-14 days is about right. You'll put up some "earnest money." This is about $2,000 and can be forefeit if you back out of the deal after your due diligence period.

In that period you have the house inspected, EVERYTHING! A good inspection will cost around $500, a GREAT inspection will cost about $1,000. Pay the extra. Get the camera down the pipes to see what's up with the plumbing (wish I had done that!) Get the guy with the infrared sensor to see heat loss around windows and doors. Get an engineer to really look at the foundation. Get an electrician in to look at the wiring. Is it knob and tube? (If!) Is there a breaker panel or a fuse box (we paid $1,500 to replace the fuse box.) The older the house the more intensive the inspection needs to be.

Be aware your house may not have enough electrical stuff in it to run all of your fancy, modern electronics.

Once you're happy with the inspection, or if you've amended your offer with a 'fix it' list, the house will need to be appraised by the bank to insure that it's worth what they're loaning you. If it doesn't appraise for the amount of the loan, the deal falls apart.

Once you've submitted your offer, contact your lending institution to lock in your mortgage and to get the wheels turning on that.

After due diligence and after inspection pack your boxes 'cause you're gonna move.' You'll have to line up homeowners insurance, turn on the utilities and deal with the taxes.

Get all those ducks in a row.

We are a week away from closing on our house sale and I can't wait to see the back of it. Owning our house turned out to be a real hassle. I too thought I'd tart stuff up with paint and tile. Then we replaced the sewer line (twice), bought a hot water heater, put siding on the back of the house, reconnected the water line, put in a breaker panel and in general did about $30,000 in some seriously unsexy projects. That's money I'll never get back.

Here's what I always advise:

1. Put 20% of purchase price down.

2. Have 6 months of an emergency fund, in case a job is lost.

3. Have $10,000 in a 'shit gonna break' fund, because 'shit gonna break'.

4. Realize that you will be owners and maintainers. Get on good terms with the folks at Lowes and Home Depot.
posted by Ruthless Bunny at 11:38 AM on August 19, 2013 [6 favorites]

Best answer: interested in approaching the seller about buying the house sometime around December or January

It's not clear to me if you plan on approaching the seller sooner than that on the topic of closing the sale in one of those two months, or if you are planning on making an offer with a fairly short expiration date during December or January.

It's possible the owner might have a very strong preference for closing in one month over the other, depending on their tax situation.

I wouldn't surprise the owner with an offer during the holiday season.

It would be a good idea to have a casual chat with the owner to see if they are even interested in selling the house outright, they might be hoping to finance it themselves, particularly if they have said something about selling to a current tenant.

Be sure to include the lead-based paint paperwork with your offer.

Some things you can do to prepare (some of these may be different in your state):
Figure out if you will be moving in shortly after closing (it will affect mortgage and insurance), shop for mortgages, and get a prequal letter in writing. Familiarize yourself with what the mortgage company's requirements are. Choose a title company and closing officer. Get a title search done. Find out exactly what or who is down as the owner of record, other people besides these landlords may need to be involved. Start figuring out what your closing costs will be. Determine if there is a well or septic and find out what paperwork needs to be done for that on a sale. Decide what inspections you want to get done and which inspection company to use, and consider if you want to do this in advance of making your offer. Decide if you want to make an as-is offer or not. Find out if the house is in a flood zone. Get homeowner's insurance quotes. Figure out how you are going to deal with earnest money, I suggest using an escrow company.

Since your friends are living there now and you are planning to move in with them later, look at how it works in your state and see if you need to execute some sort of occupancy agreement.

Be sure to discuss with your insurance agent the situation with your friends living there now, that they would continue living there, and that you would move in after closing, as this might affect the start date for your insurance.

If your friends are on a lease now, you might be bound by that. You might want to put something in writing concerning that in the event you purchase the house you and they would dissolve the lease by mutual agreement. You really don't want someone to be leasing the entire house if you are going to live there, and it could also cause problems with your mortgage if you aren't getting an investment loan.

Do what you can to increase your credit rating, but absolutely avoid taking out any new loans or racking up large balances on credit cards.

Don't do ANY fixing up on the house yourself before closing, not even tearing out carpet.

would be hashing out the particulars in a detailed contract if we moved forward on this

I'm not sure if that refers to your friends or to the owner. You do know that your written offer is a contract, right? You'll want to be very careful if you send them a letter proposing to buy the house. If you had some plan to make an offer and write up a contract later on, do yourself a favor and hire a buyers agent.

I am not a lawyer, and this is not legal advice.
posted by yohko at 1:53 PM on August 19, 2013

If you work full time you are not going to be able to DIY that much stuff. Especially in a 2 bedroom house with 4 people. So get contractor quotes on some of the work and assume you'll pay to get at least half the work done by a pro.
posted by fshgrl at 2:03 PM on August 19, 2013

Hire a buyers agent.

No such of a thing really, not here in the US. In the US, the seller pays each realtor (the selling agent and the buyer's agent) 3% of the purchase price. So leaving out a real estate agent could possibly save you 6%, but more likely 3% since the seller will want her share.

Sometimes it's a good idea to pay for someone's expertise.
posted by Ruthless Bunny at 2:10 PM on August 19, 2013

Response by poster: For anyone wondering about the same questions yohko raised (along with the awesome list of things to think about, thank you!):

- we're not thinking of offering until Dec/Jan, closing until 2014 - which is why I'm asking about getting pre-offer ducks in a row
- my mention of "detailed contract" referred to the lease w/ friends who might help with DIY, not anything with the current owner

I will also be looking into finding a good RE attorney (if not an agent) to help guide us through the process once we're at the offer making stage and beyond.
posted by deludingmyself at 2:12 PM on August 19, 2013

I would recommend, as you allude to, hiring a RE attorney in lieu of an agent. Agents are really most helpful in connecting buyers with sellers and (in most jurisdictions) extract their fees on a percentage. You'd likely wind up paying for something already done. A RE attorney can probably set up the deal and paperwork more cost-effectively.
posted by GPF at 4:01 PM on August 19, 2013 [1 favorite]

If I had the house inspected prior to an offer or prior to the landlord giving you permission, I would not tell them. That strikes me as somewhere between odd and unethical.

I would have my friends, the tenants, approach the owner. "hey owner, remember when you mentioned something about us considering buying the place? Well we still can't afford it, but we have friends who visit us regularly who might be interested. Can I give them your number?"

If they say yes, when you call, then ask if you can have it inspected before making an offer.
posted by JohnnyGunn at 10:25 PM on August 19, 2013

In the US, the seller pays each realtor

How buyers agents work differs by state, but I don't think there's any states where the seller is forced to pay a commission to a licensed real estate agent (who may or may not be a Realtor) they haven't contracted with when their house isn't even on the market.

Real estate law varies HUGELY between different states, and more states have enacted statutes that permit buyer's agents over time. If the OP is in a state without buyer's agents, getting someone involved who will represent the sellers' interests rather than their own isn't a good idea.

It is common for buyers agent contracts to stipulate that the buyer will pay the fee if the agent is not compensated by the seller. (In states that allow buyers agents, and allow that practice, that is!)

You can negotiate on fees! (And that is true in every state in the US, it has to do with federal law -- although being comfortable negotiating is not something law will provide you with. Results not guaranteed.) There are also agents in many areas offering services at a flat fee. One advantage for the agent in offering flat fee services is that the agent gets paid up front, rather than getting a percentage of a sale that might or might not go through -- conversely, if you agree to pay a percentage of the purchase price, you might (check, states, etc) not have to pay anything if the seller doesn't accept the offer or the deal falls through. Also, someone getting paid on percentage of sale price will tend to go out and take care off various problems that arise which would prevent closing from occurring; flat fee or limited service, not so much. Some states have made limited service illegal. If you contract with someone for real estate services, you probably want to limit the scope of that contract to this property, and to a particular range of dates.

Incidentally, in my state it's common for offers to be contingent on a satisfactory home inspection, which saves spending on a home inspection without a commitment from the seller.

If you are in a state where you are going to have to have an attorney for any house you buy, it might make sense to go straight to the attorney to start with, or at least see if they offer a free consult to tell you what their fees will be. In my state, it would be very rare for an RE attorney to be involved, so that's something I don't know much about.
posted by yohko at 10:49 PM on August 19, 2013

Response by poster: Thanks everyone for the advice! Ultimately, we bought a house 3 blocks away.
posted by deludingmyself at 3:31 PM on June 23, 2014 [1 favorite]

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