How should a pre-existing rental agreement affect the price of a property?

[miamicuse]

Looking to make a purchase offer on a single family home for myself to live in. However, the home is not occupied by the seller, but by a tenant who has a lease that will not expire until December 2006. Closing date will be in mid April.

The price will be around 500K (well that is what I plan to offer). But that is what I am willing to pay for if the house is in move in condition. Having this rental deal creates a real inconvenience, I have to pay two mortgages for a period of eight months, I have to pay flood and windstorm insurance for my current property and this one, property taxes and other maintainance (water, sewer, lawn, pest control etc...) and the monthly rent ($1800) will not even cover part of a mortgage.

My question is, I want to quantify what this additional 8 months of rental deal will cost me. Then I would like to deduct some of it from my offer price because it does cost me extra money. Not to mention the hassle of when it comes time to terminate the lease at the end, I might be stucked with having to return a security deposit which the seller has already pocketed. But how will I quantify such a thing?

I know, I know, a house is worth what someone is willing to pay for it, and I know I am willing to pay 500K if the house is ready for me to move in, but with a lease? I don't know, I will not pay as much. Can someone help me figure out what is a fair reduction for this? Location is Miami, Florida.

I have reviewed the lease agreement and there is no out clause in the event of a home sale.

Thanks in advance,

MC

[hallerb]

you could pay the tenant $5000 say to leave ASAP.might be less than added other costs if he stays

ask the tenant his intentions

Be concerned what if you buy home in move in condition and right before lease runs out tenant trashes place:(

[John]

Legally the new owner would assume the lease and its terms, even if that's not mentioned in the lease. A key issue is the quality of the tenant. A bad tenant or one that doesn't want the house to be sold because she's afraid she could lose her home could create all kinds of problems. Trashing the place, leaving the water on all the time, chemical "accidents" are examples. If there is damage or updates that need to be done, the security deposit may be insufficient, even if you can legally keep it. In most states there are clear rules (written damage estimates, written notification to tenant etc) that must be followed precisely before the landlord is entitled to keep the security deposit.

In many states, the security deposit is required by law to be held in a separate bank account, so that seller shouldn't be able to just clean it out and run. You should ensure you know what is going on with both the security deposit and prepaid last month's rent, if any. That should be spelled out in the lease agreement that you reviewed.

Also just kicking the tenant out at the lease expiration may be more complicated if the tenant doesn't want to go. The tenant may have additional rights to stay in the middle of the winter., although that probably is not an issue in Miami If the rent doesn't pay the mortgage/taxes than you will effectively be subsidizing the tenant to live there as well.

[Edwin Pawlowski]

You really have to talke to a real estate lawyer when you get intot he security depots stuff. It may be possible to termiante the lease at the time of sale, but that will depends on state law.

The house will in all probability be increasing in value while you sit it out. It does not matter how you quantify your added expenses, it still depends on the seller accepting your offer. Before doing anything like that, be sure of your legal status and repercussions as a part time landlord, depreciation, income from rents, etc.

[bambam]

1) If you can afford half a mil for a house, you can afford a couple of hundred for local, specialized legal advice. Here, for example, you cannot boot a tennant for the sake of another tennant. But under some circumstances, you can boot a tennant if the owner requires the property for a personal residence. 2) Consider the concepts of discounted cash flows and risked rates of returns to answer the questions you've asked. 3) Consider what else you can buy for the same money.

4) Buy the tennant out. Offer a cash bonus of three months rent for vacant possession.

5) Offer five hundred for vacant possesson. Or four fifty with assumption of landord obligations. Let the seller do the work.

Ken

[Red Neckerson]

Just buy the place and then tell the tenneants to get the f*ck out.

If they don't, let me know. I got some guys that can take of it for you.....

[trader4]

The tenant has a lease and there isn't any place I know of where you can terminate a lease because the property is being sold, unless that is spelled out in the lease. It doesn't matter if the landlord intends to now use it for his own use. A lease is a binding legal contract.

As far as the security deposit, I would make sure where that is, how much it is, and that what has been done conforms to local law. Some places have strict laws requiring that it be placed in an interest earning account, promptly returned, etc. And if it's not, the tenant may be able to recover more than the security deposit. I would have the security deposit spelled out in the purchase contract and that it is being turned over to your control or given to you, etc.

A key consideration here is the tenent. I would try to find out as much as possible. Since they are paying a substantial rent, you are less likely to have problems, but that is still possible. Giving the tenant an incentive to leave, as suggested, could be a good idea. You could offer a bonus equal to two months rent if the tenant leaves within say 90 days.

As to how much to discount the offer price, that's almost impossible to seperate from all the other factors involved. Like how much you like the place, how easy it would be to find another place, how hot/cold the current market is, etc. From a hard numbers standpoint, you could calculate what the carrying cost of the place is for interest, taxes, maintenance, etc for the remainder of the lease. Factor in that the loss is tax deductible, which helps. If you come up with say $10K, then that is a general guide. In any case, unless it's a hot market and you want it bad, I'd tend to make the offer on the low side, as you can always come up.

[Sacramento Dave]

First of all You should consider what your willing to pay or can afford. That's what should dictate your offer. Second you don't seem to be in any hurry to move in ( Dec. 2006) seems like you have time to keep looking. Basically your buying a rental house tenant included. How are the tenets I would think a $500,000 house there not loser, How long have they been in there? If they have rented it for quiet a while and it's not a mess then chances are they wont give you a going away surprise. Most people are decent there a small % of idiots that's the ones you hear about. Another factor would be What's the market going to be like in a year, will you make money on the house? But even if it goes down it comes up. In my area my house Just appraised for $96,000 more than we paid 14 months ago. So in this dooms day market I made money ( people love doom ) We don't know your Financial situation only you no that, I certainly know the feeling of two house payments, it was tight until we sold our first house. There are so many factors, Is the house a deal at 500K? That important question. " The price will be around 500K (well that is what I plan to offer" Seems like you Know the offer. Sometimes you have to stretch for the payoff.

[miamicuse]

Thanks Dave, I am just trying to figure out a fair price to offer them, My interest in the property is substantial because it has a unique style I like, and I plan to do some major interior renovation once I take procession so if the tenant trash the place (wall, ruin the carpet, break the sink etc... I don't care). I also don't have an issue with payment (my current home is paid off already and I might or might not sell afterwards). My motivation for lowering the offer is simply the fact that I am going to be paying a fee for close to 8 months for which I get zero benefit and this somehow needs to be factored in.

The tenants are new. They moved in beginning of January. The agent told me the property was vacant for a while and owner went to a nursing home, daughter who lives far away is getting a warranty deed transferred and hence cannot close till April...they put the house on the market and then hurrican Katrina, then Wilma came through, damaged their tree, and part of the screen enclosure, people weren't out looking for houses, one thing leads to another they decided to rent it out and signed a one year lease but the house is still for sale.

What I don't understand is, why the tenant, knowing the house is for sale, will move into this place, with some hurricane damage (it will be an as-is deal, with a right to inspect, so I have to take a serious look). The renting probably also make the property less appealing to other buyers so I think I have some leverage there. But I want to be fair and not take advantage of the seller's situation. That is why I tried to figure out what I would pay for should the house is vacant and then I need to deduct some amount that is reasonable for the renting period. But it's tricky.

MC

[miamicuse]

Thank you, that makes sense. I will run a check on the tenant to see what I might find.

MC

[miamicuse]

OKKK.........

[HeyBub]

I'd have this Wilma person arrested for malicious mischief. Unless you meant Rita.

Sounds like my (relatively new) next door neighbors. I can answer your questions:

1. The tenants are Katrina evacuees, who should have stayed in New Orleans and contributed to the levee sandbagging.
2. Their rent is paid by FEMA.
3. They don't give a fig about what's going to happen next January, or next week. Their only concern is staying out of jail today.

I could by wrong; maybe you just have ordinary fools. But if FEMA IS the actual renter, you may have another whole bucket of problems - such as automatic renewal of the lease in perpetuity - that comes from dealing with the government.

[David Martel]

This is rather confusing. You speak of having to pay 2 mortgages but claim to have your home paid off. You plan major renovations so you will need a place to live and to store your stuff while these are occurring. You argue that you will get zero benefit from the tenants yet you claim that they pay $1800/mo. in rent. These things do not make sense. You need to get a copy of the lease and read it thoroughly. You need to include in the sale contract the payment from the seller to you of the security deposit and any interest. You need to get a quick course in landlord law somewhere. Since you'll be paying insurance and taxes on 2 homes you may wish to factor this into your offer but since you want the house do not low ball.

Dave M.

[Oren]

He should also ensure any involved "court order" about a deed transfer and it is available to the lawyer/title company at closing. He mentions about the daughter, since the mother is in a nursing home. I went through a similar thing in my house.

To the OP, your numbers ought to reflect a positive cash flow. If you know going into the deal with some potential lose look for ways to reduce fees, etc.... get a point shaved off from both the agent and loan officer and others.

Oren

"My doctor says I have a malformed public-duty gland and a natural deficiency in moral fiber, and that I am therefore excused from saving Universes."

[miamicuse]

Yes my current home is paid off, but that fact should not factor into the decision because I am not determining the price of the property base on what I can afford. I have no trouble coming up with a FMV for the property based on an apple to apple comparison. What I was trying to figure out is what effect the rental lease have on my offer. I know what I would offer if the house is ready to move in, and I know it's less attractive because it has a lease, the question is how much.

I am saying zero benefit because I computed the mortgage to be just above $2200 a month. On top of that will be property tax, water and sewer, windstorm insurance (which will rise like at least 50% due to Wilma), flood insurance, pest and lawn maintainance etc...so I will be paying money for the tenant to live there for like 8 months. That is what I mean by zero benefit.

Sure, the mortgage can't be compared to the rent, because mortgage goes to the equity of the house, but for the first few years, most of that is interest, so I am paying interest for close to nothing.

It does not affect me as much as someone who might be paying for their current home, but the bottom line is there is significant cost involved during the coming 8 months to house this tenant.

Yes I will need a place to live during the renovation. I will live in my current home. Again that does not impact the evaluation one bit. Should I move in after closing in April I need three months to do the renovation, I will stay at my current home for three more months. Now I cannot move in until December 2007, so I will have to stay in my current home three months after that. Either way, I need to stay at my current home three months beyond the time it is ready for me to take occupency.

Therefore, whether I have a mortgage or not, or whether I need to make renovations or not, has zero impact on how it may or may not affect the price of the property.

MC

[Dorot29701]

When we bought this house, it was rented and the tenants were building their own house. There wasn't much question that they would move. We inspected the house the day we closed to be sure everything looked okay. The seller had used a rental agency to handle the details of the rental....anyway, at closing, the security deposit was put in a special account held by the real estate agent who handled the sale (actually her boss, the broker). If the house had been damaged he would not have given them the security deposit.

First month, everything went fine. Then Feb. 1, rent check arrived and only half the rent was paid....said they were deducting the other half from security deposit. We sought legal advice and bottom line, there was nothing much we could do. It would have cost more to sue than we would have got. As long as the house was still in good shape....we weren't actually out anything. It was unethical...but we were afraid to do something that would cause them to damage our house. When they moved, we did find that the doorknob on the front door in the entrance hall had been pushed through the drywall. It was covered with wallpaper and hard to see. By then we had returned the remainder of the security deposit and there was nothing we could do.

Talk to a lawyer and be very careful. If they are good tenants it can go very well....

[mm]

Paying for a check might be a good idea, but in this case, his record with his current landlord is particularly important. Ask the seller if you can see the records, not just the verbal assurance that he pays on time.

And asking the tenant how he feels about moving is the best idea.

You might ask him about the condition of the property too. He has an incentive to exacggerate or lie if he doesn't want the property sold to someone who will evict him, and you have to allow for that.

Remove NOPSAM to email me. Please let me know if you have posted also.

[caledon]

I think the concern with the tenant is the Sellers issue. Remember, they want to sell the house! So, I would put in the offer, that the seller is responsible for the tenant and that the tenant must be gone by a specific date. Ideally prior to your move in date. Then you would put in a clause that you have the right for inspection of the property after the tenant has moved out and prior to you moving in. Leave it up to the seller to offer the tenant a sum of money to "buy them out of the his lease". It depends on how badly they want to sell the house and risk losing your offer. I am assuming this is a "firm offer".

I have a friend who had a similar experience. The seller paid out the tenancy, and the tenant was suppose to leave at a specific date. Only the tenant was a real problem..um... had anger issues.... However, because my friend did have much of the above clauses in his offer, and upon his personal inspection, the seller had to pay for the damages the tenant created when he left. (the sheriff did have to come and help him vacate....)

Sometimes people don't realize that basically ANYTHING can be written into a purchase deal. Write in all that you want, see what sticks. You would be surprised what the seller will do to make the deal happen. Let the seller have the headache. He initiated the tenancy, he can terminate it. ....Again, this is only based on the deal being a "firm offer" . My two cents.

[Goedjn]

I don't understand why this is complicated.

How many dollars worth of assets-debts would you expect to have in 2 years if there were no tenant?

How many dollars worth of assets-debts do you expect to have in two years given that there IS a tenant? Whats the dollar difference between the two?