Smart Moves by Ellen James Martin

Buying a Former Rental Can Pay Off

For wannabe first-time homebuyers, the latest statistics are stunning -- and dispiriting. Median-priced homes are no longer affordable for average wage earners in 71 percent of America’s residential neighborhoods.

“We are seeing a housing market in flux across the United States, with a mix of tailwinds and headwinds that are pricing out many people,” says Todd Teta, a senior analyst at Attom Data Solutions (attomdata.com), which tracks affordability trends across the country.

“Due to price jumps, many people still need a novel strategy to help them break into the market,” says Tom Early, a real estate broker and past president of the National Association of Exclusive Buyer Agents (naeba.org).

One strategy Early recommends for income-tight buyers involves choosing a place that’s currently serving as a rental unit and therefore shows poorly on a superficial level.

“For people pushing to buy a first home, finding one that’s still occupied by tenants could be the ultimate diamond in the rough,” Early says.

How can buyers identify well-priced properties with unrealized potential? Here are a few pointers:

-- Search for hidden value in a home with solely superficial shortcomings.

Because buyers still outnumber sellers in many popular starter-home communities, bargain properties can be tough to find in those areas. Nevertheless, buyers with the imagination to see beyond surface issues -- like cat odors, dirty dishes in the sink and excess clutter -- can still capture a good deal on a rental property.

“There are huge variations in the condition of rental units. It’s not every property where the hedges have grown wild and the roof needs replacement. Some owners keep their homes in prime condition, even while tenants are living there,” says Sid Davis, an independent real estate broker and author of "A Survival Guide for Buying a Home."

The key to finding a genuine bargain in a rental unit is to carefully consider each property you visit on the basis of its own merits and drawbacks.

Davis urges you to consider any property on the basis of an arm’s length analysis.

“You can’t let your emotions take over,” Davis says.

-- Try to schedule your visit when the tenants are away.

Though there are exceptions to the rule, people living in rental properties are typically unhappy that their landlord plans to sell their habitat out from under them, Davis says.

“Not infrequently, renters are angry. In a subtle way, they’ll try to sabotage the sale.

“Tenants will shoot their mouths off about any little thing that’s wrong -- from a burned-out lightbulb to fictional problems with the roof,” Davis says.

He recommends you try to visit a rental property when the tenants are absent. This way, you can give the place greater scrutiny. For instance, you’ll be more at ease checking out the closets and kitchen cabinets.

-- Seek out cost estimates for necessary repairs and improvements.

For 15 years, Davis owned a half-dozen investment properties that he rented to tenants. His experience as a landlord taught him that renters often fail to tell their landlord about problems until they become serious.

The prospective buyer of a rental property needs to know in advance how much it would cost to fix the home’s problems. To do so, Davis recommends you arrange to get estimates on the costs for all the major repairs on your inspector’s list before finalizing your commitment to the purchase. Then be sure these expenses are factored into the price you negotiate.

“Rental property is typically stigmatized, so many buyers refuse to consider it. That gives you more leverage with owners,” he says.

-- Go for a highly professional home inspection.

Even if a rental property has been overseen by a professional management firm, it may not have received the same level of attention as an owner-occupied home. So, it’s important to make any bid conditional on a satisfactory home inspection.

To identify a diligent home inspector, Davis recommends you ask your real estate agent for a list of at least 10 candidates, and then interview three on the phone before making your final selection. Ask all the candidates whether they’ve gained training and certification through a professional group such as the American Society of Home Inspectors (ashi.org).

“Make sure you rule out any inspector who’s also in the home improvement business. That’s a huge conflict of interest, because that kind of inspector has an incentive to find problems where none exist,” Davis says.

Remember that some problems with rental properties may look more serious than they are.

“Often, a rental house needs paint and carpet cleaning. But those repairs should be superficial and pretty cheap to do,” Davis says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)