For Landlords – When Renters Become Buyers

August 1, 2010

Landlord Tenant Relations

When renters become buyers

Q: We’ve been renting a single-family home that we would like to purchase if the owner decides to sell. Our lease is up for renewal. Can we use a lease clause to put us in the best position to purchase if the property goes on the market? –Brad H.

A: Like you, lots of renters become very comfortable with their rental and dream of making it their own some day. It’s often advantageous for both landlord and tenant to become seller and buyer.

Though many of the usual home-selling conventions are honored — for example, the seller may use a broker simply to help with the details, and a thorough inspection should be required by even the most familiar of tenants — other steps, such as staging the home and open houses, are thankfully skipped.

There’s a psychological component as well. Many owners (particularly those who are not simply investors) want to sell their house to someone who will love and appreciate it as they did. When they’ve had a good relationship with the renters, and know that the renters have a special feeling about the home, the owners feel good about the sale.

The lease clause you need is either a “right of first refusal” or a “right of first offer.” Understand that we’re not talking here about an option to buy, which is a right that renters pay for when signing the lease so that they can purchase the property at a specified time for a specified price.

By contrast, the two rights described here kick in only if the owner-landlord decides to sell. For that reason, the rights are less valuable, which means that the renter should expect to pay less for them than an option to buy.

So, what’s the difference between these two rights? There’s a big difference. The right of first refusal means that when the owner puts the property on the market and has arrived at an all-but-inked deal with a potential buyer, the owner must come to the tenant and give him the chance to buy the property on better terms, such as for a higher price or with a bigger downpayment.

By contrast, a right of first offer means that once the landlord has decided to sell and has named a price, he must first offer it to the tenant. If the tenant can match the landlord’s price, that’s it. If not, the owner is free to market the property; if the tenant wants to bid later, he becomes just like any other interested would-be buyer.

Not surprisingly, landlords rarely agree to a right of first refusal. For one thing, they or their brokers would have to disclose to interested bidders that the tenant, with his refusal right, is waiting in the wings, ready to swoop out and steal the deal that the bidder has painstakingly hammered out with the seller.

Upon learning that the renter may be the one to reap the advantages of all their hard bargaining, many buyers will pull out and look elsewhere. The seller may end up with a property that no one wants to negotiate over.

With a right of first offer, there’s no similar tie-up. There are some drawbacks here for the seller as well, however, including that he will not be the happy beneficiary of a bidding war. If the tenant accepts the seller’s original price, that’s the end of it.

The seller can’t insist on more or see whether the market would bear a higher price. Nor can the seller in bad faith put an unrealistically high price on the property just to get rid of the tenant and his right of first offer.

Because a lot is riding on this one lease clause, you’d be well advised to consult an attorney in your state who specializes in real estate transactions. If you were to lose your right to obtain the home due to a poorly drafted clause, that would be a great shame.

And be prepared to pay for your right, whichever one you end up with. If it’s not clear in your lease that you have paid for the right, a judge might refuse to enforce it on the grounds that it was simply a gift.

By Janet Portman, Friday, May 21, 2010.

Inman News

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