How to Buy a House From Your Landlord
Many renters fall in love with the homes they’re renting and would rather purchase the home instead of searching for another property and dealing with the hassle of moving. In this article, we’ll dig into the details on how to buy a house from your landlord (and hopefully, you’ll be able to use the info to keep the home you love!).
How to Buy a House From Your Landlord
Here's an important message before you begin the purchase process: DON’T let your emotions override your home-buying logic! It’s hard to avoid adding sentimental value to your home, but you need to keep a clear head when calculating whether the home is a worthwhile investment. There might be plenty of good memories associated with your rental home, but if your landlord doesn’t budge on a price you can’t afford, you need to be okay with walking away.
With that reality check done, let’s move on to how to buy a house you’re renting!
How to Buy the House You’re Renting
First, get the property appraised to ensure you get a fair price from the landlord. If you can’t get an appraisal, research prices of similar houses in the neighborhood so you have a reasonable ballpark estimate of what your rental home is worth.
Second, speak to your landlord about selling the home and gather info. They might not want to sell, in which case you need to decide whether you want to keep renting the house or if you want to start looking to purchase another home elsewhere. If they are open to selling, check with them regarding any hidden costs (school or property taxes, homeowners insurance, HOA fees, etc.) that you didn’t have to cover while renting. Include these costs in your calculations on whether you can afford to become the homeowner of your rental house.
"Remember, in addition to the mortgage principal and interest, you will now be responsible for paying school taxes and other property-based taxes as well as homeowners insurance premiums, which are significantly more expensive than renters insurance premiums.”
~ Trusted Choice
It will also be up to you and your landlord on whether you’ll want to bring in a real estate agent, or you can both proceed without one if it is a For Sale By Owner-type purchase.
If your landlord has agreed to sell, make sure you’ve qualified for a mortgage loan. If you are already qualified and have your downpayment ready, great! You can purchase your rental home outright. If you are still in the middle of your mortgage application or don’t yet have a downpayment, you’ve got a few options when it comes to how to buy a house you're renting:
1. Rent-to-own agreement. A rent-to-own agreement allows you to pay a bit extra over your rent each month till it equals the approved down payment amount (at which point you can purchase the home). The downside is that if you change your mind about buying the house, you won’t get refunded by your landlord. If you ultimately don’t purchase the home, you may incur some penalties, which brings us to our next point on how to buy a house from your landlord…
2. Lease-option vs. lease-purchase agreements. Go with a “lease-option” agreement if you want to avoid obligations (and potential penalties) should you change your mind about purchasing the home. A lease-option agreement means you have the option (not the obligation) to buy the home when the lease expires. A lease-option allows you to walk away without penalties if you change your mind about purchasing the rental house. A “lease-purchase” requires that you are obligated to buy the home at the end of the lease or suffer penalties. Be sure you review any agreement contracts carefully before signing to ensure that it’s a “lease-purchase” type of agreement if there’s any chance you might end up not wanting to buy your rental.
"To have the option to buy without the obligation to buy, it needs to be a lease-option contract."
~ Investopedia
You may think you won’t change your mind about the purchase, but there might be variables outside of your control (for example, your mortgage loan application might not get approved), so be wise when deciding which type of contract you’ll sign.
At this point, you’ve done all your due diligence, hashed out the details with your landlord, drawn up and carefully reviewed agreement contracts, signed said contracts, and are well on your way to buying the house you’re renting. Now you can sit back (you’re purchasing the home you already live in - no need to pack anything up!) and let the pieces fall into place!
Need More Details on How to Buy a House You’re Renting?
Please don’t hesitate to contact us with any questions about how to buy a house from your landlord. We’re here to help make sure you feel comfortable with the home-buying process, whether it’s your current rental house or a new home you’ve spotted on the market.
If you’re interested in more real estate investment tips, you can learn about buying an investment property here and selling an investment property here.