The Obamas became part of a growing trend recently when they opted to buy the house they were renting in Washington. Although not common, taking ownership of the home you are leasing can be a choice for renters, not just those who are former presidents.
Only about 5 percent of renters purchase their rental each year. Because many renters live in apartment buildings, they don’t have the option of buying the place where they live. But since the Great Recession, more people have been renting condos, townhouses and single-family houses owned by investors.
Many of these investors bought up distressed properties and turned them into rentals rather than reselling them. Some homeowners who owed more than their homes were worth became reluctant landlords, opting to rent rather than sell at a loss. Now as rent growth is slowing in parts of the country and home values are rising, more landlords are willing to consider parting with their properties.
For landlords, the advantage of selling to their renters is it can be less expensive than the traditional route. They don’t have to pay a real estate agent to market the property.
“They can do it a lot more cheaply,” said John Wake, an economist and real estate agent in Phoenix. “They may not have to pay a real estate agent. They also know the renter and trust the renter. That’s an advantage there, especially if they’re friendly with each other.”
For renters, a huge advantage is not having to move.
“They say moving is like the third most stressful thing in life behind a death in the family and divorce,” Wake said.
Besides saving the cost and stress of a move, a renter who opts to buy his home also has tried out his digs before making a long-term commitment.
“You already know that you like it,” Wake said. “If you move into a new house, you may find you have a loud neighbor or the commute is a lot longer than you thought.”
If you are thinking about buying your rental property, the first thing to do is contact a lender to figure out how much you can spend on a home.
“You want to show that you know the process and that you’re not going to waste their time,” Wake said. “Once you get approved, look around. You might be able to find a better house than the one you are renting.”
Once you’ve informed your landlord you would like to purchase the home, Wake recommends suggesting to the landlord that you pick an appraiser together and split the cost.
“I kind of think the whole process of working together to find the appraiser and pay the appraiser is kind of you learning if you can work together with the landlord,” Wake said. “They’re putting money on the line, you’re putting money on the line.”
The appraisal process can be tricky. Wake knew of someone who wanted to sell their house to their renter. The landlord suggested they each get an appraiser and split the difference between the two appraisals. The problem was, the renter’s appraisal came in 10 percent below the landlord’s. Because the landlord made that offer, he wound up losing money.
Be wary of a landlord who tells you that you don’t need a real estate agent or attorney to close the deal.
“If you’re a first-time home buyer and you don’t use a real estate agent, you’re really opening yourself up to being taken advantage of,” Wake said.
But don’t call an attorney or real estate agent until you are confident that a deal is possible.
“You can do it verbally with the landlord until you get to the point that you think you can reach a deal,” Wake said. “That’s the point where you bring in a real estate agent or attorney to make a formal written offer. You want to have a good feeling that it’s possible you can reach an agreement before you start spending money on an attorney.”
Wake also recommends having an inspection contingency in the contract. You may think that because you have been living in the house you can save money by skipping the inspection but it could cost you more in the end.
For more tips on purchasing your rental property, check out Wake’s YouTube video here.