Pros and Cons of Selling Your House to Your Tenant
It sounds like a dream come true: sell your house to the person who is currently renting it. By doing so, you can avoid the costs of turning over the property as well as fees associated with selling your home. But is it all positive?
No Marketing or Real Estate Agent Costs
By selling to your tenant you may not have to hire a realtor at around six percent (this varies by market, but typically three percent goes to the buyer’s agent and three percent to seller’s agent). You also don’t have to prepare your home for showings or open houses. Showing your home can come with many additional expenses, such as cleaning up minor cosmetic fixes, or having to spend money staying out of your house for the day.
No Empty Cost House Costs
Since your tenant is buying the house it never goes empty, and they will be paying rent right up until the purchase closing date. Depending on your market, your house could easily be on the market for 30 days while you are looking for a buyer, and then another 45 to 60 days until it closes. This could easily mean three months or more of rent that is lost when you sell to an outside buyer versus your tenant.
Most home buyers – even first time home buyers – know that selling a house costs a lot of money, and that your For Sale By Owner saves you money. Therefore, when they are negotiating the price, they may expect to benefit from the savings, too! They may ask for closing cost assistance or maybe even a lower price. When you sell your home yourself, you still have to do the work for accepting these concessions. This may mean coordinating with the title company or closing attorney, hiring contractors to perform repairs, or completing all required paperwork. If you have made your discount too steep, your savings may be offset by lost profit.
Losing Money By Pricing Too Low
When you sell to your tenants you are not opening the house up to the market. In a buyer’s market this typically isn’t a problem. However, many markets now are seller’s markets, where there is low inventory and high demand. A house with multiple offers will raise selling prices higher than anticipated. That means that those who don’t open to the public will miss out on this increased potential. Being unaware of the market conditions may end up costing you thousands of dollars.
Time Is Money
Lastly, when you sell as your own agent, you will be on your own, without professional knowledge and experience. While you can certainly put a team together, this will not be the same as someone who does many transactions a year. In addition, you will be serving as the landlord and the seller, and will be coordinating directly with the buyer. There will be no third party intermediary, and no buffer between the two sides, just as emotions are running high.
The key is evaluating your market, your tenant and yourself. Some people don’t mind putting in the extra effort to close the deal. For others, a real estate agent could be hired to do the paperwork. While this isn’t available everywhere, in some areas agents will facilitate the deal for two to three percent. They will organize inspectors, appraisers, and the like for both parties. This gives the best of both worlds by including professional representation while reducing the costs.