Real Estate Exit Strategy - Structuring An Existing Tenant Purchase
As a real estate investor, I always love to help tenants purchase the property they are living in. Talk about a win win for everyone! About a fourth of the properties I personally owned and sold were to my existing tenants. When I decided to reposition my assets, I would simply ask my tenants, “If I could show you how you can own this property with little to no out of pocket expense would you be interested”. Only once was I told, “No I have other plans.” The benefit to structuring an existing tenant purchase is that I just saved a lot of liquidation cost and time to liquidate so I can take those savings and invest it in the tenant.
Today’s lending practices have tightened up so that the tenants will most often need to come to the closing table with the standard 3.5% down payment required by the Lenders guidelines. You may be able to, in many cases, help them acquire this down payment. Most locations have down payment assistance programs where they can go to get this assistance, so do a little diligence in advance and see what is available. Many real estate investors who have not actively pursued this option don't even know it is out there so ask around. It will DEFINITELY help your sales efforts. Sometimes it is as simple as saying, “I will help with all your other costs if you have a family member who will help you with a 3.5% down payment."
Now that the down payment is addressed, you can help by connecting them with a local and trusted mortgage officer to qualify them for the loan. The loan will require a set of buyers fees which you, as the seller, can pay for. Yes, I know it sounds funny - why I would pay their fees? Simple, you are saving up to 6% in sales cost by doing this yourself and you may even get more for the property. So covering the buyer’s closing cost is an easy one.
Here is the win. You are helping them get a property they did not even consider purchasing. You ask them, “If I could help you get into this home with little or no money down and essentially live here for equal or less than you are currently living here would you be interested?" Your tenants are now grateful, they are not thinking, "I wonder how much I can squeeze them for on the price.” As long as you do the right thing and help them get into the home for fair market price and a price that is supported by an honest and legitimate appraisal, they will gladly pay it. This alone saves you more than the cost of their closing costs. Remember this must remain a win win for both you and the purchaser.
Existing Tenant Purchase Win:
- in today’s real estate market the rents are often higher than the cost of the mortgage for the same home so their payments can easily remain the same or lower (if not, the deal will not work)
- they now gain all the tax benefits in owning a home
- they save all expense related to moving into a newly purchased home
- they have the convenience of not having to move
- they now have the pride of ownership
Landlord or Real Estate Investors Win:
- you save money in liquidation costs
- you learned the process so you can duplicate it over and over
- you saved a lot of time in marketing and selling the property
- you maintained maximum control of the sale to help you in repositioning your assets to the next investment
- you helped someone accomplish the American dream of home ownership (some on this does nothing for the pocket book, but is very possibly the best benefit of them all!)
If you are one of our foreign friends from overseas considering investing in USA real estate, find out more about How Buying American Investment Property Works.