Buy the house you are currently renting
If you’re renting a house, and especially like the property and neighborhood, it’s natural to dream about owning the house completely and staying in it for the foreseeable future. But the problem is that you don’t want to be a tenant forever. So why not consider buying the house for the landlord?
There are many ways to do this. You can go the normal route by working out a purchase agreement and getting the original mortgage loan. Or you and the landlord may agree on alternative arrangements, such as an option to purchase or seller financing. Here’s what you need to know about your options and how the process works.
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Can I buy my rented house from my landlord?
If you are interested in buying a rental property, start by asking the landlord about the possibility of buying from them. There is no law against asking about a sale, and you probably won’t offend or anger the landlord by asking. Even better, if the property is already listed for sale, you may be a good candidate to buy the home. After all, you already know and are hopefully on good terms with the landlord/seller.
“If the property isn’t listed for sale, it’s possible to try to buy from your landlord,” says James Anderson, CEO of Veritas Buyers in Huntsville, Alabama. “You can try to make an offer on the house, but the landlord may not be willing to sell. If you’re interested in buying, talk to the landlord about your interest and try to negotiate a purchase price.”
Three ways to buy a house from your landlord
There are three common ways that tenants can purchase a rental property from their landlord.
1. Buy the house outright
The first option is very straightforward. If you want to buy the rental property from the landlord and finance it with a traditional loan, you can easily make an offer. This is easier if the home is already on the market but the owner doesn’t want to sell, but it can be done.
“This is similar to buying any home on the market, but hopefully without the hassle of going through real estate agents,” says Anthony Martin, founder and CEO of Forbes Financial Council.
Buying your rental property directly means making an offer and negotiating the transaction directly with the landlord/owner. Or, if the house is already listed for sale, it means working through real estate agents to come to an agreement and complete the transaction.
The best time to buy rent from your landlord is typically when the lease is up for renewal. “At this point, you can approach the landlord and express your interest in buying the property,” says Joshua Haley, founder of Moving Ast.
2. Browse the purchase option
Another strategy is to set up a purchase option with the landlord, preferably when you first sign the contract. “You’re not obligated to buy a home here, and it gives you the opportunity to decide what you want at the time you agree,” Martin adds.
If you want to buy your rented home but the landlord is not ready to sell, this may be an option. “If the landlord is not interested in selling, you can try to renegotiate to include an option to buy. This gives you the right of refusal if the landlord decides to sell the property in the future,” she says.
3. Rent-to-own agreements
A third option is to enter into a lease agreement with the landlord. “In this arrangement, you and your landlord structure a transaction where you pay a certain amount above the market rent. That amount is credited toward the purchase, but only if you ultimately buy the property,” says Atlanta-based realtor and attorney Bruce Allion.
Basically, a rent-to-own deal allows you to build equity in your rented home without needing a loan.
However, tenancy agreements can be risky. If you decide not to buy the house later, your landlord can withhold the “extra” rent from your down payment. And these deals don’t come with the consumer protections that prime mortgages do. So it’s worth exploring a more traditional buying route before turning to a lease agreement.
Mortgage options when buying from your landlord
If you’re buying the home outright — rather than using a purchase option or lease agreement — you may need financing. This can be done with a traditional mortgage loan or, in some cases, a home loan provided by the seller. The latter is known as “seller financing”.
While traditional mortgages are safer and more affordable than seller financing, not everyone qualifies. And there are select situations where seller financing may be a better option.
Using a mortgage loan
“A typical home purchase almost always involves a third-party loan from a bank, credit union or mortgage lender,” says Martin Orefice, CEO of Rent Labs.
If you’re going the traditional purchase route, you can apply for any major mortgage program. The right type of loan depends on your credit score, down payment and other factors. You can explore home loan options here.
Use of seller financing
Seller financing, on the other hand, involves the landlord/owner giving the money directly to the tenant/buyer. It does not include any third party foreign lender.
“It usually works like a mortgage in that there’s a down payment, interest and repayment period. But the actual financial terms are between the two parties, and there aren’t many protections for either party if the deal falls apart,” added Orefice.
Because there is a payment history and comfort level with you, the owner may be more comfortable offering financing, Alion points out. “The landlord may accept a lower down payment than the bank is asking for,” he says.
Also, owner financing allows both parties to save on closing costs, which can equate to 2% to 5% of the home’s total value.
“Owner financing can be a good idea when the interest rate the seller is willing to charge is lower than the market rate and the terms are favorable to the buyer. For example, if the market rate is 7%, and the seller offers owner financing at 5%, the buyer would be better off taking owner financing,” says Haley.
Steps to buy a rental house
Thinking of making an offer to your landlord on your rental property? Here’s what the home buying process looks like and what steps to expect:
- Check your financing options. Get a Mortgage loan pre-approval If selected lender. “This will give you an idea of how much money you can borrow for the purchase,” says Haley
- Make a discount on the rental property. If the rental property is already listed for sale, work through a real estate agent to make a formal offer. If not, contact the landlord and offer it directly. “Learn about home market values to negotiate a fair or good deal,” advises Allion. “It may be best to work with a realtor who can represent you, help you determine a price, and possibly negotiate the sale, including writing the sales agreement.
- Agree on the sales contract. Include the purchase price, any requested renovations or repairs, and the timeline of the transaction. These details must be put in writing in the form of a purchase agreement that a real estate attorney should review
- Order a home inspection. Have the property professionally inspected by an experienced home inspector to make sure there are no hidden defects that you will have to pay to fix after you take ownership.
- Get homeowners insurance. This is required if you are using a mortgage loan
- Close the deal. On the day of closing, you sign your mortgage papers, pay the down payment and closing costs, get the deed, and take possession of the property.
Ultimately, if you are buying the home through a traditional purchase agreement, this process is similar to any other home buyer.
Understanding rent-to-own homes
It’s important to understand that rent-to-own deals are not the same as buying a home or even using seller financing. These events come with their own unique rules and risks.
Orefice said many landlords are only interested in selling their properties to tenants with rent-to-own deals. He explains, “In most lease agreements, the first step involves paying a one-time option fee at the beginning of your lease. This will be between 1% and 5% of the home’s value and is usually non-refundable. This is a down payment that allows you to decide to buy the home at some point during your lease.
He continued, “Once the option is exercised, tenants generally continue to pay rent on the property. However, all rent you pay from this point forward, and often all or part of the rent you have paid up to this point, will count towards the final purchase.
A lease by owner usually lasts for one to three years, during which time the tenant has the right to occupy the property, but not own it. “At the end of the lease, the tenant can choose to buy the house at a certain price or not,” says Anderson.
Be aware that there are some risks associated with a rent-to-own arrangement.
“For a tenant, there’s always the risk that the landlord might cancel the deal or sell the property to someone else,” Haley warns. “For the landlord, there is a chance that the tenant will damage the property or not pay their monthly payments on time.”
Additionally, in a self-rental situation, you will pay more in rent than you would for a similar home that you are not planning to buy. And if you refuse to buy the home at the end of the lease, you may have to lose any equity you’ve built up in the property.
“Also, if the housing market goes down during the lease, you may be stuck with a house for less than the purchase price,” Anderson warns.
Your next steps
If you’re hoping to buy the house you’re currently renting, talk to the landlord about a traditional purchase agreement. When buying a home outright, you can typically use a conventional mortgage loan. This will in most cases be safer and cheaper than alternative options such as a lease agreement.
As a first step, work closely with your mortgage lender to get pre-approved and find out how much you can afford to pay. This will help you make a realistic offer to the landlord and ensure that you can finance the maintenance of the home.
The information on the Mortgage Reports website is for informational purposes only and is not an advertisement for any products offered by Full Baker. The views and opinions expressed herein are those of the author and do not reflect the policies or positions of Full Baker, its officers, parents or affiliates.