Should You Buy The Property You’re Currently Renting?

If you think this is a rare, one-off situation, that doesn’t deserve its own blog post, think again.

I come across this time and time again, and at the risk of spoiling the ending, I’d say that this works out well half the time, and ends in regret the other half.

If you’re renting a property, and the landlord tells you he or she is going to sell it, do not have a knee-jerk reaction and immediately think, “I have to do everything in my power to buy this place.”

Believe it or not, that’s what most people do…

SoldHouse

One of the most frustrating deals I lost this year was for a 1-year-old townhouse condo that my buyer clients were in love with, but sadly, sold out from under us in what I still believe were somewhat shady circumstances.

The unit was being sold by the developer, but it was tenanted, and that’s a pretty rare combination!  Usually the developer does everything in his power to rid himself of inventory, but in this case, he held on to a couple of units, for reasons I can only assume were valid.  Perhaps he thought the market would go up in a year or two.  Perhaps he wanted to get the units sold in a different tax year.  Whatever the case, I found myself looking at a tenanted property that still came with all the representations and warranties of a new-build.

The agent I was talking to had this property as a “pocket listing,” since he told me about it before it ever came onto MLS.  He had sold the same model unit about a month earlier, which happened to be the very first property my buyers had seen, so naturally they weren’t ready to jump on it.  When it sold, and my buyers expressed some regret, the agent said, “I may have another unit coming out, but right now it’s tenanted.”

I asked to get in to see the tenanted unit, since this acted as a bit of a “second chance” for my buyers, but the listing agent said the tenants weren’t allowing any showings, and they were difficult.  I told him to please, please keep me in the loop, and he said he would.

A month later, the unit came out on MLS, with no heads-up from the listing agent.  To be fair, he doesn’t owe me anything at all.  We work for different brokerages, and there’s nothing that says he has to keep me informed.

We booked a viewing to get into the unit, but the tenants required 24 hours’ notice, so we were delayed a day.

When we finally got in to see the unit, my clients took a few seconds before they said, “Okay, we’re ready to make an offer.”

As luck would have it, however, there was a second offer on the property, and the listing agent told me it was from the father of one of the current tenants of the property.

Go figure.

We offered $15K over the list price, plus $29,000 for a parking space, and $4,500 each for two lockers, since the offer was going straight to the developer, and he had parking and lockers left over.

Our offer was for a possession date of about 90 days out, since the tenants had to be given 60 days’ notice from the first of the month to vacate, and the offer was conditional on a review of the condominium’s Status Certificate.

In the end, we lost.  And the loss hurt.

We lost by a paltry $400, which hurt even more because we tried to improve our offer by another $5,000, but our attempts were rebuffed by the listing agent.

The whole process made little sense to me, until I was able to take a breath, and look at the situation from arm’s length.

I truly believe that the developer preferred to deal with the tenant’s father, since they could close in ten days, wouldn’t make a fuss, and would likely waive some of their rights, ie. warranties, and a condition on Status.

What I think happened is this: the developer and/or the agent asked the tenant if they wanted to buy the unit, since the unit was going to be sold.  The father of the tenant, being a father, probably said, “Sure, we’ll buy it.  We’ll give ya $550,000 for it,” even though it was worth $650,000.  Parents who haven’t dealt in 2014’s Toronto real estate market always seem to act like it’s Richmond Hill, circa 1995.

I think that the developer and the agent decided to call the father’s bluff, and put the unit on MLS.  Once it was up, and once they had an offer in hand (ie. mine), the father had no choice but to pony up, and pay.

This is what I think happened, don’t forget.  It’s not fact.  But if this is the way things played out, not only were my clients and I used as bait (and rather successfully, might I add to my own dismay…), but they got everything they wanted from the father of the tenant, and more.

When you buy the property you’re currently renting, you have absolutely no leverage, and it usually ends up going in the seller’s favour.

Time and time again, I see people on the other end of a “shotgun clause,” who have to either pay up, or get out, and most of them pay up in the end.

It’s a mistake, but one that can be easily made, for the following reasons:

1.  Blinded By Emotion. 

A friend of mine bought the house he was renting about eight years ago, and he did so because he was in an absolute panic.

He had been renting the house for ten years with his wife and son, and the thought of leaving “his home” scared the life out of him.

I reminded him that this wasn’t his home, but rather it belonged to the seller, and he was merely a tenant.  But he refused to see it that way.

His son came home from the hospital as a newborn in this house, he married his wife in that house, and it’s all he’d known for a full decade.  The fact that he paid rent instead of a mortgage didn’t matter, as he saw this as his home, and the home in which his family was going to grow.

The idea of leaving the house was like leaving some of his memories, experiences, and happiness behind.  He almost felt as though it would tear at the family’s bond, and certainly it would add stress and pressure to all their lives.

I showed him a couple of different options in the same neighbourhood, but he never really considered them.  In the end, he bought the house he was renting, and I don’t think another course of action was ever really an option.

2.  Get Out Of Your Comfort Zone.

There’s more out there than just this house or condo that you’re renting.

Have you ever seen anything else?

People get extreme tunnel-vision when the thought of leaving their “home” first enters their mind, and they start to think that this is the only feasible place in the city.

The truth is: if it’s a condo, there are a probably a thousand others just like it.  Yes, there are some incredibly unique condos throughout the core, but 80% of them are cookie-cutter, and often the tenant-becoming-buyer has no clue what’s outside their front door.

I would hope that most tenants in this situation would go and look at a dozen condos to get some sort of basis of comparison, but many don’t.  They’re afraid to go outside their comfort zone, and fear often results in mistake.

3.  Don’t Force It. 

You have to ask yourself, “Is this the right time for us to buy?”

Many renters are renting because it’s not their time to buy, so if all of a sudden, somebody is shoving a house in your face saying, “You buy, you buy,” like a street vendor with a crappy sea-shell necklace in St. Lucia, then why are you going to open your wallet?

Many renters have a plan, and if it’s a young couple who are saving up for a down payment, or living beneath their means in a rental today so they can enjoy the fruits of their labour tomorrow, then why ditch the plan on a whim?

4.  The Price Is NOT Right

Many tenants are given the false impression that the landlord will give them some sort of “deal” if they buy the property they’re renting, since it would help the landlord.

But in reality, do people ever really do nice things, for no reason, and leave money on the table?

Real estate can be a very greedy game.

The owner/landlord would have to pay a 5% real estate commission to sell the property, and potentially have to spend money on repairs and renovations.  But do you think that the landlord, if offering the property to the tenant, would take this money off the top?

Not a chance.

In fact, I think most landlords offer the property to the tenants at a price higher than fair market value, for two reasons:

1) There’s no reason not to.  If the tenants say, “no,” then the landlord can lower their asking price, or bring it to the open market.
2) The tenants often don’t know any better, as they have no representation.  And the minute the tenant says, “I’m going to get a real estate agent to help me,” the landlord balks.

5.  Change

I hate change, so I’m the last one to comment on this.

I’ve been sitting in the same desk at my office for eleven years.  Three years ago when I hired a full-time assistant, I gave her the private office that was given to me by the company, and I’ve remained at my cubicle ever since.

But fear of change will cause people to do crazy things, and buying a property when you’re not ready, or over-paying for the one that you’re currently in, are direct results of the fear of a changing position in life.

I’m sure that there are just as many success stories about purchasing the property you’re renting, as there are stories to the contrary.  But my job on this blog is to point out the pitfalls, and give consumers cause for concern.

All I’m saying is that if you’re a renter, and the property you’re renting is going up for sale, try to avoid that knee-jerk reaction, and take some time to determine a course of action.

Nobody should be forced into buying a property, which is likely the largest purchase one will ever make during the course of a lifetime.

4 Comments

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  1. Jerilyn says:

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  3. Paully says:

    David, I think you were off-base on #1. Your friend may not have “owned” the house, but it was most definitely his “home.”

  4. Chroscklh says:

    Is true, I would offer tenant above market value – emotional attach. Plus him is one move not me. Similar case, I sell condo to guy live on same floor. He prob overpay by 8 billion kuzo (10-15k$). Easiest move of his life. But he imbecile, he hire mover, make take furniture down, load truck take back up – insist he get all what pay for. Other story – I have tenant offer buy property (unsolicit, I no look to sell), okay guy -lets talk. He say “rent to own, all legal, with lawyer.” I laugh too hard, pull rib. Try to explain present value of money, tell him $850k for condo worth $625k today is generous (plus 12% interest). I no bank. Plus I say, I transfer ownership in 25 year, in case he default before. Is deal yes? He say no. He then break toilet and dryer. I know is no accident.

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