So, you've lived in your place for a year or two and your landlord has approached you about buying it. You really like your house and you want to stay there, and the prospect of homeownership is very exciting indeed! Before you jump on that chance, however, here are a few tips for navigating the process of buying the rental home you're in.
1. Ask the landlord why he wants to sell the property. Most of the time, your landlord isn't just being benevolent. There's a reason he wants to sell. Maybe the property taxes have gone up. Maybe there is a lien on the property. Maybe he's not making money on it anymore because he owes more than what its worth, or its too costly for him to maintain. You should ask a lot of questions. Now is not the time to "trust" your landlord just because he's been nice to you all this time.
2. Get a home inspection. Sure, you've lived there for a while, you know what's wrong with the house. But when was the last time you checked out the crawl space or the attic? Do you know the useful life of the roof? How about the HVAC or the water heater? You need to have these mechanical items, in addition to the plumbing checked out by a certified professional. Find someone who is a member of the American Society of Home Inspectors, ASHI.
3. Hire a title company to do a title search. You will need a title search to uncover any "clouds" on the title. A cloud to a title could be any lien on the property including tax liens (unpaid taxes), mechanic's liens (when someone did some work and didn't get paid, they can file a claim against the house) or any pending lawsuits.
4. If your landlord is offering to finance it for you, you need to ask a lot of questions. How long will the seller financing be for? Keep in mind, most seller financing is for a short period of time, like 2-3 years, after which time, you will be required to obtain traditional financing through a bank or credit union. If the conditions that are causing you to need seller financing at this time are still in existence, and you can't qualify for a loan, the seller may be entitled to revoke the sales contract. Laws differ in each state, but this is generally how seller financing works.
5. Get a real estate appraisal- from an appraiser of your own choosing, not the landlord's. This one seems obvious. Before you put a down payment on the property and hand over money to the landlord, you need to know what the fair market value of the house it. It makes absolutely no sense to pay more for a home than its worth.
6. Find out whether you will be purchasing the home outright or if it will be a lease-purchase. You need to understand the difference. Will some of the rent money you've already paid be put toward a down payment? You'll need to know the details of your transaction before you sign ANYTHING.
7. Hire a REALTOR. This should really be STEP 1. A REALTOR will help you make sense of the process, and help you to understand what needs to happen, step by step. They will represent you and your interests. Anything the landlord does will be in his interest. Its not evil, its just business. I guarantee you the landlord has a real estate attorney- his office is probably where you will conduct the settlement. Do not let the landlord handle it all for you. You wouldn't go to court without an attorney, so don't go to a settlement without an agent. Try to find an agent who is an Accredited Buyer Representative. Ask your landlord if he will pay the agent out of the proceeds. If he won't, then perhaps you can build the agent's fee into the price (so long as it appraises.) But if the landlord balks and says you don't need an agent, that he will handle everything- you should run far, far away! You can always negotiate the agent's fee. Call around. Ask your friends and neighbors for recommendations. If you've never bought a home before, it is foolish not to have representation your first time out.
7.a. (Added after posting original post) In the State of Virginia, agents can draw up agreements using standard forms. They cannot draw up forms themselves. Virginia does not require a settlement attorney, a settlement agent is sufficient. In NY, you must have an attorney review. Please be mindful of what the laws and requirements are in your state.
These steps are not free. But considering the thousands upon thousands of dollars you will be spending on your home, repairs, maintenance, taxes, etc., you can't afford NOT to do these things.
I once listed a property for a couple who had purchased their home from their landlord without an agent. When a prospective buyer's agent inquired as to the status of the second kitchen in the basement, I asked the sellers, and they said as far as they knew, it was legal and permitted, since that is what their landlord told them. As it turned out, the buyer's agent went to the county and it was discovered that there were no permits and no approval for the second kitchen. This was now information that had to be disclosed every time someone asked, since now, I knew about it. The sellers were very angry about this nevertheless. They didn't see what the "big deal" was. Eventually, they had to pay to have the gas line shut off and sealed down there- so it cost them more money in the end. If they had representation for their purchase, it is likely that their agent would have asked about this and advised them about checking for permits. They may have been able to save some money either at the time of purchase or at the time of sale.
Most states are "buyer beware". So, protect yourself and your family. Ask a professional before doing anything. Ask, ask, ask. If you don't know what to ask, then ask your agent, what you should be asking. After all, you are embarking on the largest purchase of your entire life.