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.
The buyer’s attorney will order a title report, so that a title policy is obtained at the closing protecting the interest of the buyer. Also, the existing lease will be terminated at the closing by adjusting the rent for the month in which the property closes and crediting the buyer for the amount of the security deposit held.
The seller would be entering this transaction because he no longer wishes to rent the property to anyone and wants to dispose of the property on favorable terms. The tenant may not be in a rush because he already occupies the property and sees no particular change will occur in his daily life. As such, it is important that firm deadlines for the mortgage contingency and closing are contained in the contract and enforced by the seller. A time of the essence notice could be delivered to the buyer’s attorney if the buyer is not proceeding according to the deadlines in the contract.
If such a time of the essence notice is not effective, then the deal may be terminated. Once the deal is terminated, the seller may prefer to locate another tenant or sell to another party. In this situation, a landlord-tenant case may need to be commenced to remove the current tenant.