A home that used to house tenants can be a great deal for a home buyer—they often sell for less than owner-occupied homes. But there are reasons why these homes may command less than top dollar. There are several things to weigh when considering buying a home that was once rental property.
The reasons may be fairly simple, such as the owner became burned out from managing the property as a rental, dealing with the off-hour phone calls, and responding to tenant demands.
The owner might be moving or perhaps the market has risen, and now seems like the right time to cash in.
Reasons for selling.
Sometimes the issue is cash flow. If a tenant hasn’t paid the rent, the owner may struggle to cover the mortgage. Sometimes the owner cannot afford to make the repairs the house requires.
If the owner has rented out the house for many years, he or she might not have any depreciation left for a tax deduction and could be eager to do a 1031 Exchange for another property. Taking its name from Section 1031 of the Internal Revenue Code, a 1031 allows a taxpayer to sell income, investment, or business property and replace it with a “like-kind” property, without having to pay capital gains taxes.
Why does the reasoning matter?
Because it could indicate how well the property was cared for and whether or not the owner is motivated and willing to negotiate.
A cash-strapped owner may be less inclined to maintain the property. And since the owner hasn’t lived there, he or she may not even be aware of any problems.
Even if the owner has done regular maintenance and made frequent visits to the property, the tenants may not have cared for the property like an owner would. You’ll want to make sure you complete a thorough property inspection. You should request past inspection reports, too.
Do you research.
You’ll likely want to investigate any history of insurance claims. Talk to your insurance agent or discuss a CLUE (Comprehensive Loss Underwriting Exchange) report with your Realtor, for a five-year claim history on the property.
If the house shows signs of extra wear and tear, factor fixes into your budget. Ask the seller for repairs or credit you money toward closing costs. It’s not a deal if you’ll have to spend more on repairs than you’d pay for another, similar home in better shape.
Be sure to check out the neighborhood, do a drive through the area at various times of day. Speak with the neighbors and learn more about the other houses on the street.
Some factors to consider:
- Are there families in the area?
- Are there multirental units with student renters?
- What’s the average selling price?
- Have home prices decreased or increased lately?
These factors may affect the resale value of the property, especially when it comes to the overall curb appeal of a neighborhood, when other rental properties may not be kept up as well as yours.
This also plays to your own peace of mind. If you have young children, a busy street with a large apartment complex may raise safety concerns. If you have to park on the street, this too could make life troublesome sometimes.
Make sure you tour the house without the tenants present. If they still live in the house, they may not like the idea of being ousted from their home and could try to sabotage the sale by exaggerating minor issues or making up problems with the house. Or, they may discourage you from opening closets or looking in cabinets.
As a potential buyer, you should be able to ask a Realtor questions, discuss what you see, and make your own observations without pressure from tenants or the owner. This is why homeowners are usually scarce during open houses. Buying a rental home should be no different in this regard.
Written by Darren Wilson, The Wilson Team