Landlord (probably) refinancing. Should we offer to buy?
April 21, 2015 10:59 AM   Subscribe

My wife and I rent a house (in Philadelphia if it matters). Out of the blue, our landlord had an appraiser do a walk-through today, only a few days after we started the earliest stages of considering buying a house. (We haven't found one we like.) The appraiser said landlord is refinancing, not selling. (I plan to confirm this.) We're thinking about our options. Questions within; experience with (a) buying from one's landlord, (b) selling to one's tenants, and (c) refinancing a rental property especially welcome.

I like this house. I've lived there as (I think) a model tenant for almost 7 years (!). Landlord has never raised the rent, and the only times we've needed him to fix something were within a couple months of moving in-- robbery/broken window, and an inside-the-wall leak.

I would be happy to buy this house. My wife would be less happy, but open to it. Both depend, of course, on the asking price. We are very early in the stages of considering buying. We can pay a decent down payment (much more than FHA minimum, probably not enough to avoid mortgage insurance), and want to have a lower monthly payment, all in, than we pay now in rent. We haven't found anything worth going for.

Main question: Considering that he's somewhere in the process of a refinance (again, I plan to confirm this), is it a good/bad/neutral idea to do one/any of the following, in order of (I think) aggressiveness:

a) Tell him that if he ever wanted to sell, to let us know
b) Tell him that we're in the early stages of buying in the next 6 months
c) Tell him we're interested in buying the house now, before he finalizes the refi

Possibly relevant details:
  • When he bought the house in Spring 2008, it was in bad shape. He did a full remodel and we were the first rental tenants.
  • We obviously haven't done anything drastic, but I can see it taking some effort on his part to get it back to a blank slate for re-renting or selling.
  • It's a neighborhood with property values on the rise.
  • There's a house down the block that's similar at a price within our range.
  • Based on our initial research, market value is somewhere between 12-15x our annual rent.
  • There may be an opportunity soon to get in on the ground floor (so to speak) of a semi-custom new construction house very close by at a price we could swing. I would love to do this, but it's up in the air right now. Still...
  • I really dread moving. Like, even to the house down the block.
Worst-case scenarios include him wanting to sell and already having a buyer, wanting to sell above our price range, and raising the rent so much that we'd feel like we need to leave. (Though we could afford more than we're paying now.)
posted by supercres to Work & Money (13 answers total) 2 users marked this as a favorite
Whoah, easy there. Buying a home for the first time is crazy and exciting, but the only thing that's actually happened is that an appraiser came by and said your landlord was not selling. People refinance for all sorts of reasons, and now is a particularly good time, so I'd be careful to read too much into the situation.

Even if your landlord is actually selling, do not get so wed to the place you're in because it's the place you're in. It's early for both your process and the spring buying season. Wait for things to pick up (they will) and go see every place that remotely interests you. It's always free to look.
posted by mkultra at 11:07 AM on April 21, 2015 [4 favorites]

and want to have a lower monthly payment, all in, than we pay now in rent. We haven't found anything worth going for.

You may want to do the calculations to see if this is actually possible. PMI is going to be in the range of about $100 a month. It can't be rid of. That, and if you consider that you have to factor in property taxes and the amount of interest for what you borrow, means that your monthly payment could be higher, depending on how much you put down. Your landlord likely isn't paying PMI and is likely paying less in interest than you will.
posted by MisantropicPainforest at 11:08 AM on April 21, 2015 [1 favorite]

All that said, if you're committed to buying, I'd let your landlord know because it seems like he's been good to you and, as you said, he'll want to start thinking about/budgeting for some modest work. With enough lead time he might gracefully exit you from your lease.
posted by mkultra at 11:11 AM on April 21, 2015

Response by poster: We've run the numbers on a FHA mortgage with insurance & current property taxes. We have a pretty decent idea of what we can afford, at least as much as possible before getting preapproved. Current rent is really more of a mental benchmark than a requirement; it's much lower than the normal rules about housing costs as %age of income.

The impetus to buy happened several months before the appraisal happened. Really, I'm concerned about the timing relative to the refinance, like, if I don't offer now, he probably won't want to sell after the refi goes through, right?

We're month-to-month at this point.

Thanks so far!
posted by supercres at 11:16 AM on April 21, 2015

You can ask for "right of first refusal" instead of just offering to buy the place. That makes it less awkward on your end if you for some reason need to back out, but it still shows that you are interested. I have had a landlord sell a rental out from underneath me, and based on the way the selling process went for him (annoyingly hesitant buyers in a difficult market, basically), he would have been elated had we expressed interest in buying his property, even through right of first refusal.
posted by circular at 11:17 AM on April 21, 2015 [4 favorites]

Also keep in mind mortgage interest and property taxes are tax deductible, which should be worth about a 100 bucks a month, give or take.
posted by MisantropicPainforest at 11:20 AM on April 21, 2015

Landlord here. I can weigh in on (b) selling to one's tenants, and (c) refinancing a rental property.

We refinanced our rental in 2012, didn't mention it to the tenants, it was just to get a way better interest rate. At that point there was 0% chance we would sell. So refinancing is definitely not a "maybe they would like to sell" event.

We thought about selling the property this past December, and told the tenants it was a possibility. They wanted to buy it, and it turned into this major big deal / pain in the butt because they gave us a ridiculously low offer and then gave us a better offer but with kind of ridiculous demands, and we eventually decided not to sell. And the whole thing has hurt our relationship with our tenants to an extent that we kind of feel that we'd prefer for them to find somewhere else to live. Real estate agents are expensive, but there's a reason that people use them most of the time: negotiations between buyer and seller can get really personal and emotional if you don't have a neutral third party to act as a buffer.

So I guess my point is to be very careful with this. If you really want to buy the house, you can of course send up feelers with your landlord, but be prepared for it to mess with your landlord-tenant relationship, even if that wasn't your intention. It might be easier to just buy a different house.
posted by rabbitrabbit at 11:29 AM on April 21, 2015 [3 favorites]

I can totally see why you'd see the refi as a now-or-never point, that if he was at all willing to sell right now, he'd be less willing to sell after doing a refi. So it would be worth mentioning to him ASAP that you'd be interested in buying if he was ever interested in selling. On the other hand, the cost of a refi varies but is generally about $2000-3000 in closing costs - i.e. if you didn't ask right now but waited 6 months, the only numeric difference the refi would make is between a price of $348k and $350k, and if that makes a huge difference to your plans, you're in trouble. The real sticking point here is that a refi is more an indicator of planning to keep the property for at least 3 years, than it is an indicator of being broke and needing to sell, so we're all being a bit skeptical that this will get you anywhere. But it doesn't hurt to ask, right?

On the other hand, given that you're month-to-month, when you tell him you're interested in buying a place at all, you're in some sense also telling him that you're hoping to move out within the next 6-9 months. If that's not true, maybe explicitly mention that also, so your landlord-tenant relations don't go down the tubes.
posted by aimedwander at 11:43 AM on April 21, 2015

I attempted to buy a house from my landlord and was basically on the other and of what rabbitrabbit is describing. It didn't get emotional but it was awkward.

We made a low but what we thought was reasonable offer. The landlord came back with a price that said "this is a price that would motivate me but I'm not too motivated because I'm making money right now." We said no thanks and the next couple encounters were awkward but smoothed out afterwards. Later we bought a place across town that was a lot better, suited us wonderfully and for a lot less.

I'm now a landlord and if I received a market price offer for my property I'd totally consider it.
posted by bdc34 at 11:57 AM on April 21, 2015 [1 favorite]

We bought our house from our landlord in 2010, and we have no regrets.

Our situation was similar, but a little more severe. After living in our house for five years as model tenants, our landlord left a message out of the blue to say that a photographer would be coming through our house to take pictures as he was exploring a sale with the joint owners of the property.

My wife and I didn't take much time to think things through, we just jumped that same day. I called for a handful of loan pre-qualifications from various vendors at an amount that was around 80% of the market price of our home to show that we were serious, could quickly get money, but still wanted to negotiate. I called the landlord and told him we were pre-qualified for an appropriate amount of money and we were interested in purchasing the house if it were going up for sale. He asked me to show him the pre-qualification paperwork, which I did, and he went back to discuss the situation with the joint owners of our property. We ended up negotiating a price that was fair in 2010, but given the recent upswing in the market, it was really great in retrospect. While our landlord was also a licensed Realtor, he did not charge us the standard Realtor's fees for handling the paperwork, so the transaction costs for buying the house were incidental and far less than what we would have experienced had we purchased a different house.

Negotiations were tense - as I think they always are, and especially so in our case since there was not a single owner of our property. Any offer had to get approval from multiple parties, resulting in what was a nervous, creepy silence between counteroffers. But it turned out OK.

We ourselves refinanced in late 2012 when 30 year fixed rates plummeted to historic lows, and the current sum of our monthly mortgage, property tax payment and the benefits of the mortgage deduction end up making our yearly housing costs almost exactly the same amount we were paying in rent in 2010. Such a thing is possible. However, part of the reason for that was that we put up enough of a down-payment that we have not had to pay PMI or escrow costs, and also paid points to bring our interest rate way down. Your specifics will differ, so do all of the necessary calculations.

When calculating costs, do be sure to also consider that you will have increased expenses due to maintenance and home improvement. As any homeowner will tell you, houses can suddenly develop high maintenance costs unexpectedly. Even though you live there, have a full inspection done anyway and lay out a budget for things that will need to be replaced or worked on, and if an inspector finds a core issue (such as with the foundation) you might have to consider rescinding your offer.

I also have a close friend who also went through a nearly identical situation in a different city. His family rented a house from their landlord for many years, and he had mentioned to the landlord that he would be interested in the house if the landlord ever wanted to sell. One day it happened, in a very similar way to what I described above, and I don't believe anyone there has any regrets either. In many ways, buying from our landlords got us a better deal than we would have been able to find elsewhere.

If I were in your shoes, I wouldn't hesitate to bring your interest up with your landlord. Get a couple of loan pre-qualifications - it really doesn't take long - and if you find you have access to a loan, tell him that the appraisal got you thinking that you'd be interested in buying if he were interested in selling. Mention that it could potentially be an easy and quick transaction. (However, I probably wouldn't recommend saying you were considering buying in six months elsewhere. I'd keep the discussions focused on your current place so that things end up less awkward if you don't end up buying anything and keep renting there.)

The worst case scenario after telling him that you're interested is that he says "yeah, I'm not looking to sell right now." But maybe he is, and maybe he will be later. If you have a good relationship, and approach negotiations respectfully without engaging in ridiculous lowballing, I think it's pretty doubtful he's going to raise your rent because you expressed interest in buying after an appraiser showed up.

Good luck!
posted by eschatfische at 12:37 PM on April 21, 2015 [1 favorite]

As a landlord:

Refinancing is pretty much the opposite of "we want to sell" scenario. Refinancing means we want to keep the house for a long time, so we are interested in paying cash up front (closing fees) in order to lock in a lower interest rate. Please do not take a "refinance" as the same as sell. (To be fair, if they were doing a cash out refinancing, they may want to the cash. But it may be to invest in more rental properties, which is still not a we-want-to-sell scenario.)

Second, an appraisal costs money. Where I am, about $500. I don't see a landlord doing that for no apparent reason. I also don't see why your landlord's appraiser might lie about it, but I might just be naive.

If you're seriously interested in buying a house--and in buying that house, specifically--you can always bring it up to your landlord. Saving 6% on real estate agent commissions can be attractive, and maybe he's interested in a different type of properties now. But do it when you are ready. Don't feel rushed because he's trying to refinance.
posted by ethidda at 1:13 PM on April 21, 2015 [2 favorites]

I doubt your landlord is actually looking to sell: he wants to refinance because HE wants to pay less monthly.

However, if you do want keep your options open, you could ask for right of first refusal to purchase --- although there's no guarentee he'll give it to you, of course, so accept any such refusal with grace if you want to keep things as they are with him.

Finally, if you decide to make an offer to buy the place, make a REASONABLE offer: don't try making an exceptionally low offer, make it something acceptable. I used to rent out my condo; after five years, one set of tenants came to me out of the blue and made a purchase offer: they looked up MY purchase price, then subtracted the amount they'd paid to me in rent over those five years..... then THEY had the gall to call ME unreasonable when I rejected it on the spot. Don't be those tenants!
posted by easily confused at 1:46 PM on April 21, 2015

There is nothing stopping you to express interest at any point in time i.e. "Hey landlord, if you ever think you may want to sell this house we would be very interested to make you an offer" and leave it at that. You will soon know if he is intending to sell on the market because he would likely be interested in all offers.

As said above though, Refinancing isn't necessarily a precursor to selling.
posted by Under the Sea at 5:11 AM on April 22, 2015

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