Dont Sign that Lease!

For the Seller/Landlord:

Signing that lease can be detrimental whether your are the owner or the tenant. I have recently have several sellers contemplate keeping their exisiting home as a rental property and purchasing another primary residence. In qualifying for their new purchase, they quickly found out that the rules for qualifying for a home with a rental property in tow have changed. In the past, you have been able to submit a lease on your existing home and for qualifying purposes, the lender would count 75% of the rent towards offsetting the payment on the existing home for qualifying purposes. Not anymore! The full payment of the existing home is counted as debt towards the buyers qualifying ratios unless the property actually appears on the past years tax returns as a rental property. In essence, a person contemplating renting a property and purchasing another, should be prepared to qualify for both payments if they want to retain their existing property. 

Although I am a big proponent of holding real estate for investment purposes the following are not strong reasons to retain a property as a rental. One major reason I have heard recently is the buyer/seller does not want to move twice and cannot coordinate the sale of their existing home with the closing of the new primary residence. Some other clients typically want to hold on to their existing home in an appreciating home for a couple years so they can get more money. This too, is a little risky. In both of these instances an inexperienced landlord is holding an investment property for a short term gain. Any short term investment usually involves more risk and this is no exception. This landlord typically is not as proficient at screening tenants and therefore more likely to accept a marginal tenant which increases the chance of requiring an eviction or major damage to the home. Furthermore, this landlord, not being in the business or for long term, typically does not have the reserves required for this type of investment. Again, I believe in investing in real estate but only as a long term investment. Many investors have made a great deal of money in the short term recently but most of those quick profits have passed at this point and while we are trending upward still, there is no guarantee it will continue to rise.

For Tenants:

I am constantly hearing from buyers who tell me that they will be ready to buy in 11 months because they just signed a new lease or “Surely my landlord will let me out of my lease if I purchase a home!” A lease is a highly enforceable contract. Sometime a landlord will work with you and let you break the lease, but it usually requires a significant penalty if the landlord will agree at all. 

In a normal market, it would not be disastrous to just wait out the lease. In today’s hyper market, waiting 11 months could cost you 30 percent of the price of the home. Even if you are a few months from completing your lease, you may be money ahead to purchase your home now even if it means making double payments for a few months. Remember that if you close on a home on July 3rd, your first payment is not due until September 1st. Also do not forget that in almost every lease, the landlord requires 30 days advance notice even if the lease is expiring that you will be moving. Factor in the fact that in some cases, it is taking 30 to 60 days just to get a buyer under contract, the decision of whether to renew your lease should be made well in advance.

Many tenants are tenants as a result of having to foreclose or short sale in the market crash. Three years from the foreclosure date or short sale date is the magic date with a very few exceptions of 2 years or theoretically no years but I have never witnessed the last one. Most people should start the process at about 2.5 years after the event.