We have observed that the current inventory of houses available to purchase in the area serviced by our attorneys is low. In addition, many houses are rented. When the tenant and landlord have a good relationship, it is not unusual for the parties to agree that the tenant will buy the house from the owner. This post will address the legal issues involved in such a transaction whereby the tenant becomes the buyer and the landlord becomes the seller.
The first action that both parties should take is to engage the services of an experienced real estate attorney. Such a transaction would be considered “for sale by owner” , since neither party would be using the services of a real estate agent. As such, the attorneys will need to develop the particulars of the deal terms that will be included in the contract, such as the purchase price, downpayment amount, whether there are conditions such as a mortgage contingency, and deadlines for obtaining the mortgage commitment and closing. One concern is that the property may not appraise to at least the amount in the contract since it was not offered on the open market through a real estate agent who is familiar with appropriate pricing for the property. If the appraised value is lower than the purchase price, the buyer will not be able to obtain the mortgage in the anticipated amount needed to close.
A tenant occupying the property is already familiar with property condition and may not find it necessary to make repair requests. However, it may behoove the buyer to conduct due diligence and order a professional engineer’s inspection that will evaluate systems servicing the house such as the furnace, hot water heater and roof. These are elements that a tenant may not consider when renting a house, but a potential owner should evaluate before signing a contract. A proposed owner may also be concerned as to whether proper permits exist for improvements made to the house, while a tenant would not have considered such issue before moving in.