Buying the rental from the owner.

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This is a good thread that is similar to my current situation - but the difference is that our area is now in an upmarket, not a down one and I'm interested more broadly in negotiation strategies.
http://www.fatwallet.com/forums/finance/790382/

Situation:
Renter for the past 5 years, very unique house, we are in love with it. Very very small number of similarly situated houses (so comps are few/far between).
Property Manager/Realtor is our point of contact, we have no direct contact withe the owner. Manager is friends with owner.
We want to buy - primarily to stabilize our future living situation and because we are in love with the house (yes, I realize that being in "love" with a single house is stupid - alas, it is very unique) - our monthly will undoubtedly be > rent now and that's ok.
There are some comps of similar houses, but nothing as *small* as the house we want to buy. In our area, small houses have outsized $/sq ft rates down to a point, then there is actually a dropoff (so for example, 900 sq ft houses have lower $ sq foot then 1000 sq foot houses which have higher $/sq ft then 2000 sq ft houses. You get a lot more for your $ above $1M in our area, but alas, we aren't in that market. The house is very small, sub 1k sq feet.
We know little about the owners situation, except that the property manager says they are interested in selling and that they own multiple properties.
This is in the inner Bay Area - inventory is currently tiny, houses are selling briskly, etc.

So I want:
1. To convince the owner that the price we agree to is a good one (that he doesn't need to put it on the market to find out what it's really worth)
2. To convince the owner that the costs of putting it on the market are high (fixing it up, unrented, inspections, etc).
3. To convince the owner that the value of selling directly to us is high (no contingencies, one simple negotiation about price etc).

So I'm looking for feedback on how to approach all this. My feeling is that I can make the arguments above pretty convincingly. In addition, I think we can do this with one real estate agent commission instead of two (we'll just get a lawyer).

Thoughts on negotiation strategy?

My feeling is that starting low may make the owners want to put it on the market to find out what it will fetch. Of course, I don't want to starrt high either.

The problem comes in the comps. I can make an argument that the house is only worth X based on comps, but I can also make the argument that it's worth X+200k. The comps are that weird.

I'm tempted to go with a middle point and then explicitly say - "and you're going to save another 50k by not having to actually formally sell the house" so that's already in the price.

Alternate strategies? How would you approach all this, keeping in mind that at present, this is all mediated through the property manager?

Many thanks

Member Summary
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Well, real estate attorneys doesn't get me inside deals, comparable analysis, advise me of market conditions, or a 1.5-2... (more)

FSBox (Feb. 14, 2013 @ 8:15p) |

let me guess...."now is a great time to buy"?

solarUS (Feb. 15, 2013 @ 10:47a) |

To the OP, as others have mentioned, it's important to get a good gauge of what a fair price is based on comparables. Ju... (more)

MaxRC (Feb. 15, 2013 @ 1:30p) |

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genenpet said:   TI think we can do this with one real estate agent commission instead of two (we'll just get a lawyer)
If you buy directly from the owner, the owner may not need to pay any commission

I don't think you'll be saving him anything on Realtor commissions. If theres a buyers realtor then they generally split the comission and it doesn't double the commission for two realtors.

What do sites like Zillow or epraissal say about the value?

How much work does the place need to be marketable?

Determine how much you're willing to pay, and make him an offer. If he turns it down, ask him for his number. Negotiate from there. If he takes your offer, kick yourself for paying too much.

It's really not any more complicated than that. You can use the argument that a quick sale to you will save on commissions and marketing time and all that jazz, but I'd test the waters with a reasonable (but on the low side) offer and see where it goes.

Oh, as an aside, houses don't really sell by the square foot in most places. Number of rooms, bathrooms, location, amenities and upgrades - those determine value. Other than to provide a very general comparison of sizes of houses, I don't think a price per square foot is much of a data point.

If you wanted to save commissions then you'd have to cut out the realtor but I think thats unlikely. I note you said 'property manager / realtor' which means that the property manger is also a realtor. Given that its a fairly good bet that the property management contract has a clause in it that requires the owner to use that realtor as their agent if/when they decide to sell. Every management contract I've seen from property managers who are also realtors had that clause. Plus you say that manager is friends with the owner, so either the owner is not going to cut his buddy realtor out of the deal or the buddy realtor will cut him a good commission rate that would apply however he sells.

Agree with ddcwilbur not to put much stock in $/sq ft measurement. You have to consider all the other factors and sq ft is just one element.

$/sf CAN be more useful only after you normalize the comps for room types/counts, lot size, etc. You do that w/ regression modeling and need enough of the right market comps.

Maybe I was under the delusion that the realtor/property manager would take something slightly North of 50% instead of 100% since they wouldn't have to split the commission.

As to work to be done to be marketable, I think that's hard to tell in that things often sell in the bay area with little or no work done. At a minimum, I'd think they'd have to put 10k in to make it look ok. They could also easily spend 20 times that fixing things up.

For example:
It has a 1960s kitchen with 90s major appliances (cheap ones at that).
Exterior wood frame shows signs of degradation on one side of house.
Plenty of evidence of foundation settling (but again, bay area, that's kinda normal).
No earthquake retrofitting (again, not atypical)
Hardwood floors need refinishing/repair.
No central heat etc...

Thanks for suggestions on the fact that it's actually a straightforward negotiation - I'm possibly/probably just overthinking this.

Why would there need to be any realtor invovled here? The house isn't on the market as I understand it, so he shouldn't already have a realtor. Realtors are primarily for finding buyers. You've lived there 5 years, so you know what you're getting. At most you hire a lawyer to draw up the contract and the like.

And I'll add that as a LL that may like my current tenant to eventually buy, the thought of not paying a commission on the sale is very enticing. As is the thought of not having to go through the stress and aggravation of cleaning it up, showing it, not knowing how long it might take to find a buyer, etc.

The one rental property I had previously I sold without a realtor when a neighbor made me an offer out of the blue. We'd been pretty carefully studying the potential value knowing we wanted to sell soon, and countered with that. Buyer said yes, and this saved me a ton of hassle and money.

4chi said:   Why would there need to be any realtor invovled here? The house isn't on the market as I understand it, so he shouldn't already have a realtor. Realtors are primarily for finding buyers. You've lived there 5 years, so you know what you're getting. At most you hire a lawyer to draw up the contract and the like.

THe property manager is a realtor who also happens to be the owners friend. The realtor in question is in the middle of this already. THe property manager/ realtor is quite likely to act as the owners sellers agent. Theres no buyers agent realtor if thats what you mean.

As a Realtor, I'd have point out a few things. First in order to get paid, the Realtor typically signs a contract with the owner that spells out the commission that will be paid if the house is sold. Depending on the contract used, he may split the commission with a buyer's agent if there is one, otherwise he would keep the entire commission or perhaps the owner might negotiate a lower commission if it's a direct buyer. At this stage of the game, there's probably no contract between the owner and the Realtor. As the tenant, you probably have paperwork that has the owner's information. In order to save the commission, you should contact the owner directly and see exactly what the situation is. You are making assumptions that may or may not be true. The Realtor probably expects to get the listing if the house is put on the market, but it is also somewhat common to miss the commission if the tenant contacts the owner directly and eliminates the need for a commission. You don't owe the Realtor anything by letting him know you want him to be the broker on the deal.

As an aside, if you're in a hot market, I think the owner is probably better off listing it, if there's a bidding war, he might get more than you're offering. Low supply, high demand means higher prices.

Surely you can find the owner information easily by looking up your county tax records online.

Yes, I have the owner information but no insight into the relationship between the Realtor/Property Mgr and Owner.
An out of the blue contact from me could be taken as an aggressive sign by the Realtor that we were trying to circumvent her- who in turn could make life difficult for us - and if their relationship is a close one, as she says it is, this could be a bump. I will probably do this, but after we continue down with the negotiation with the Realtor/Property Mgr a bit more and I have more insight into the process she is following...

You will need an appraisal and an inspection. In a normal sale situation, these both give the potential buyer two separate negotiating points.

First, if you offer X, contingent on getting a mortgage, and then the appraisal comes in low, you can negotiate with the seller or walk.
Similarly, a proper sales contract should have a contingency for passing the home inspection. Given the things you mention above, there
could be some things that must be fixed in order for you to get a mortgage and/or insurance, which could be negotiating points.

Since your situation is unusual, and you are dealing with a real estate agent/property management person as well as an experienced property owner,
you should at the very least have an a good real estate lawyer--with experience in the local market--on your team from right now. It may cost you
a lot less than it saves you.

genenpet said:   Yes, I have the owner information but no insight into the relationship between the Realtor/Property Mgr and Owner.
An out of the blue contact from me could be taken as an aggressive sign by the Realtor that we were trying to circumvent her- who in turn could make life difficult for us - and if their relationship is a close one, as she says it is, this could be a bump. I will probably do this, but after we continue down with the negotiation with the Realtor/Property Mgr a bit more and I have more insight into the process she is following...


You are making things way too complex. You don't need to know the relationship between the realtor and owner. You make your offer to the owner. If the owner would like to reduce the amount of money they get, he'll bring in the realtor, but that doesn't affect what you offer. You are trying to buy the property, you don't have any management issues and therefore don't need to involve the management company. You don't need any insight on the process she is following, she's not involved in the deal unless the owner brings her into it. That's up to the owner.

I rent a tiny, old, unique house that I am also in love with and considered buying one point. One of the big stumbling blocks was, as kenmoreland points out, qualifying for a mortgage. In my case, it just wouldn't happen without major work, including an all-new electrical system and replumbing.

A lot of old houses have this problem, and if you have to have a mortgage (which I'm guessing you do based on geography and the numbers you were mentioning) then that is going to wipe out Nos. 2 and 3 of your argument to the owner.

Before you get too invested in the idea, I'd have, at the least, a professional inspection. Maybe you and the landlord can work out a lease-purchase option that allows you to work together on improvements needed to get the house in mortgagable condition. Or maybe, after you run the real numbers, it won't be a very good deal for you at all.

henry33 said:   genenpet said:   Yes, I have the owner information but no insight into the relationship between the Realtor/Property Mgr and Owner.
An out of the blue contact from me could be taken as an aggressive sign by the Realtor that we were trying to circumvent her- who in turn could make life difficult for us - and if their relationship is a close one, as she says it is, this could be a bump. I will probably do this, but after we continue down with the negotiation with the Realtor/Property Mgr a bit more and I have more insight into the process she is following...


You are making things way too complex. You don't need to know the relationship between the realtor and owner. You make your offer to the owner. If the owner would like to reduce the amount of money they get, he'll bring in the realtor, but that doesn't affect what you offer. You are trying to buy the property, you don't have any management issues and therefore don't need to involve the management company. You don't need any insight on the process she is following, she's not involved in the deal unless the owner brings her into it. That's up to the owner.


Henry I defer to your more extensive knowledge as a realtor . But I have to agree with the tenant here- presenting the offer directly to the owner is going to piss off the property manager / realtor . She is going to tell the owner "I can get you $xxxx more money if we just list it" if the tenant tries to skirt around her

Op if you "love" this house then its time to stop dickering about $10k kitchen remodels etc. this is the Bay Area where homes sell for $100k over asking to all cash buyers. If you WANT this home Make your offer through the property manager , let her collect her double commission , as she will want dual agency , and forget about pointing out the homes deficiencies . You play ANY games in this hot market and you'll lose the house

On the other hand , if you just want the best deal and its not important to actually get the house , then try presenting your offer directly to owner , complain about all the issues , etc . You might get a deal, or you might lose the house

You need to decide what's most important- to get the house or get a deal

henry33 said:   genenpet said:   Yes, I have the owner information but no insight into the relationship between the Realtor/Property Mgr and Owner.
An out of the blue contact from me could be taken as an aggressive sign by the Realtor that we were trying to circumvent her- who in turn could make life difficult for us - and if their relationship is a close one, as she says it is, this could be a bump. I will probably do this, but after we continue down with the negotiation with the Realtor/Property Mgr a bit more and I have more insight into the process she is following...


You are making things way too complex. You don't need to know the relationship between the realtor and owner. You make your offer to the owner. If the owner would like to reduce the amount of money they get, he'll bring in the realtor, but that doesn't affect what you offer. You are trying to buy the property, you don't have any management issues and therefore don't need to involve the management company. You don't need any insight on the process she is following, she's not involved in the deal unless the owner brings her into it. That's up to the owner.
For some property managers that also do the work in finding tenants, it is part of the contract that they get realtor commission (not sure if it's seller or buyer) if the tenant ends up buying the house. So while it is not OP's problem to worry about the relationship, the owner may not be saving on realtor commissions as the much as the OP would hope.

Edit: After looking at a contract, it seems like the Property Manager gets the buyer's realtor commission if the current tenant buys the house or if someone other than the tenant buys the house but is represented by the Property Manager.

SUCKISSTAPLES said:   Henry I defer to your more extensive knowledge as a realtor . But I have to agree with the tenant here- presenting the offer directly to the owner is going to piss off the property manager / realtor . She is going to tell the owner "I can get you $xxxx more money if we just list it" if the tenant tries to skirt around her

Op if you "love" this house then its time to stop dickering about $10k kitchen remodels etc. this is the Bay Area where homes sell for $100k over asking to all cash buyers. If you WANT this home Make your offer through the property manager , let her collect her double commission , as she will want dual agency , and forget about pointing out the homes deficiencies . You play ANY games in this hot market and you'll lose the house

On the other hand , if you just want the best deal and its not important to actually get the house , then try presenting your offer directly to owner , complain about all the issues , etc . You might get a deal, or you might lose the house

You need to decide what's most important- to get the house or get a deal


I can see how both sides are possible, but just to break things down a bit, this is Fat Wallet where people go nuts over a deal that saves you $10. In this case on a 500k deal where the commission could be 5-6%, we're talking about saving perhaps 25-30k or at least having that much in negotiating room. OP was looking for advice to proceed. If he goes my route, it's possible he may save 25-30k in commissions, but you need to break eggs to make omelettes. OP isn't really aware of how commissions work. As a realtor, you find that's pretty common.

In the approach to the owner, I would just play it dumb, it's actually very common. There's no need to write up a formal offer, just mention your interest in the property and what you think you can offer or throw out a ball park number. Then let the owner decide how he's going to approach it. If he has a contract with the property manager that says a fee gets paid if you buy it, then he will let you know. If you do reach a specific number, have the lawyer write up the offer. I've been in the same boat too where I knew people who were selling but they got lucky and were able to sell it directly, sometimes you get lucky, sometimes you don't, it's all part of the business.

4chi said:   Why would there need to be any realtor invovled here? The house isn't on the market as I understand it, so he shouldn't already have a realtor. Realtors are primarily for finding buyers. You've lived there 5 years, so you know what you're getting. At most you hire a lawyer to draw up the contract and the like.

And I'll add that as a LL that may like my current tenant to eventually buy, the thought of not paying a commission on the sale is very enticing. As is the thought of not having to go through the stress and aggravation of cleaning it up, showing it, not knowing how long it might take to find a buyer, etc.

The one rental property I had previously I sold without a realtor when a neighbor made me an offer out of the blue. We'd been pretty carefully studying the potential value knowing we wanted to sell soon, and countered with that. Buyer said yes, and this saved me a ton of hassle and money.


While I agree with your general sentiment, the bolded portion should be: However, you always hire you're own lawyer [...]. Whether or not a real estate agent is involved or not, I'm of the opinion that you should always have your own lawyer draw up your offer, or at the very minimum vet the boilerplate offer.

An agent is enough for vast majority of real estate transactions. Real estate lawyers become useful when there are complex unknowns or potential defects in the title. The standard Realtor contract forms takes care of all of the things you would normally worry about in a real estate transaction.

Also, real estate lawyers are not some magic bullet assurance to a smooth and uneventful transaction. My experience with real estate lawyers, including expensive ones recommended by veterans in the residential and commercial real estate investment business, is that just like plumbers and electricians, there are good ones and bad ones. Even for the good ones, what you are asking for may not be their area of expertise, but none of them will shy away from taking your money. Trying to get real actionable advice from a real estate lawyer is like pulling teeth. They will gladly spend billable hours researching and analyzing the situation, and will only give you "opinions" that first and foremost formulated to protect them from any professional liability.

Actually most RE lawyers handle a typical residential closing on. flat Fee

Usually $400-2000 depending on complexity , property value , area and your relationship with that lawyer

That's usually much cheaper than the 2-3% an agent gets

henry33 said:   SUCKISSTAPLES said:   Henry I defer to your more extensive knowledge as a realtor . But I have to agree with the tenant here- presenting the offer directly to the owner is going to piss off the property manager / realtor . She is going to tell the owner "I can get you $xxxx more money if we just list it" if the tenant tries to skirt around her

Op if you "love" this house then its time to stop dickering about $10k kitchen remodels etc. this is the Bay Area where homes sell for $100k over asking to all cash buyers. If you WANT this home Make your offer through the property manager , let her collect her double commission , as she will want dual agency , and forget about pointing out the homes deficiencies . You play ANY games in this hot market and you'll lose the house

On the other hand , if you just want the best deal and its not important to actually get the house , then try presenting your offer directly to owner , complain about all the issues , etc . You might get a deal, or you might lose the house

You need to decide what's most important- to get the house or get a deal


I can see how both sides are possible, but just to break things down a bit, this is Fat Wallet where people go nuts over a deal that saves you $10. In this case on a 500k deal where the commission could be 5-6%, we're talking about saving perhaps 25-30k or at least having that much in negotiating room. OP was looking for advice to proceed. If he goes my route, it's possible he may save 25-30k in commissions, but you need to break eggs to make omelettes. OP isn't really aware of how commissions work. As a realtor, you find that's pretty common.

In the approach to the owner, I would just play it dumb, it's actually very common. There's no need to write up a formal offer, just mention your interest in the property and what you think you can offer or throw out a ball park number. Then let the owner decide how he's going to approach it. If he has a contract with the property manager that says a fee gets paid if you buy it, then he will let you know. If you do reach a specific number, have the lawyer write up the offer. I've been in the same boat too where I knew people who were selling but they got lucky and were able to sell it directly, sometimes you get lucky, sometimes you don't, it's all part of the business.
. Clause for purchase by tenant is very likely.... Agree 100 % with suggestion

SUCKISSTAPLES said:   Actually most RE lawyers handle a typical residential closing on. flat Fee

Usually $400-2000 depending on complexity , property value , area and your relationship with that lawyer

That's usually much cheaper than the 2-3% an agent gets


Well, real estate attorneys doesn't get me inside deals, comparable analysis, advise me of market conditions, or a 1.5-2% rebate on the buy-price. Given current market, seller agents are not as willing to accept only a 3% commission on a dual-agency deal.

FSBox said:   SUCKISSTAPLES said:   Actually most RE lawyers handle a typical residential closing on. flat Fee

Usually $400-2000 depending on complexity , property value , area and your relationship with that lawyer

That's usually much cheaper than the 2-3% an agent gets


Well, real estate attorneys doesn't get me inside deals, comparable analysis, advise me of market conditions, or a 1.5-2% rebate on the buy-price. Given current market, seller agents are not as willing to accept only a 3% commission on a dual-agency deal.

let me guess...."now is a great time to buy"?

To the OP, as others have mentioned, it's important to get a good gauge of what a fair price is based on comparables. Just $/sqft is not enough. I'd go so far as to say that it's not even enough for homes within the same neighborhood, or even on the same model home, just one with extension/sunroom versus without. Too many other variables goes into the valuation of a home for just sqft to have such an overriding impact on price.

Reminding the current owner that you are willing to take the house as-is will of course help as well.



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