Renting to Vendor after Settlement

[JulieW]

I've finally found 'the one' and offer accepted. Vendor wants a short settlement and to rent back the house until they find an alternative property. They may have financial difficuilties that being a factor in the reason for sale and not moving on immediately.

Can anyone help with advice, experience or warnings on traps for new players. Thanks.

 

[wylie]

If you don't need vacant possession, then you could allow them to rent at market rates, with fully documented entry condition report, bond etc.

If you do want vacant possession, just say no. Of course, if the offer has been accepted, what does the contract say, of is there not yet a contract?

 

[marg4000]

Do you intend this to be your PPOR?

If so, you will have CGT implications if you rent it out before you occupy it.
Marg

 

[josko]

hi Julie,

I have done this before with an IP and it was a simple process. AT least you have an instant tenant.

I actually negotiated 6 months rent off the purchase price of the property. It may mean more CGT down the track but at the time, cashflow was more important and I saved on deposit and Stamp Duty.

If you want the property for your PPOR then you need to think about what Marg refers to above and also the fact that you will be required to give your tenants notice before you can move in. You ought to find out about the laws in regards to this as different rules apply to different states.

Regards Jo

 

[deejay]

We have done this twice. Once worked well, once was horrible.

The problems are -

1. They continue to treat/think of it as their own place. They don't necessarily have a "tenant" mentality about things like what they can do, what they can change, how they take care of it, and they don't necessarily understand their responsibilities as a tenant because they haven't been a tenant in quite some time. Our relatively good tenant was under the impression that she could break her lease at no penalty when they found a house - she misunderstood the agent's statement that it was a good rental market and they would probably find a replacement tenant quickly to mean she had no risk at all. She hadn't rented in 10+ years and just didn't have a clue. It all worked out okay, but she was really upset with the agent because she felt she hadn't fully understood what she was getting into.

2. Unless you do a condition report on the day of settlement, you can't really prove whether or not damage pre-dates the settlement. (This came into play when our tenants kicked a hole in the wall. Fortunately they didn't fight for their bond).

3. They aren't necessarily vetted in the same way. You can't get former landlord references if they've owner-occupied for a decade. We assumed that, having serviced a mortgage and just received $200K+, our bad tenant would be capable of making regular payments on time, but once they were renting they were very slipshod.

4. You have to really monitor your property manager. I think PMs are a bit laid back about these arrangements - the tenancy is sort of a fait accompli. Our PM at the time (admittedly a bad one, which is why he isn't our PM anymore) didn't make sure the lease was signed before settlement. So for two weeks, we had these people living in our house without a legal right to be there, and we had to offer some things we didn't really want to offer (like an escape clause) in order to get them to sign one and get some legal protections. The PM said that "it was all under control" and "they were coming in to sign" the day before settlement and didn't tell us they didn't show up.

I don't think we would do it again. Personally, I'd say just delay settlement until they find a house. Look at it this way - you're getting the house at a few months ago's price without making repayments.

 

[Propertunity]

They may have financial difficuilties

If this is the case, then what deejay said could become a reality for you.

The alarm bells are ringing for me - that they want a quick settlement - ok - to get the bank off their backs. Not so good for a LL that wants to collect rent.

I'd offer a delayed settlement (which they won't want) or a quick settlement with vacant possession (no renting to them).

 

[JulieW]

Thank You All

Thank you very much everyone. I'm constantly impressed with your willingness to share your knowledge here. As I learn (this is first IP) I hope I can help others as you do. Your advice is very much appreciated.

Now another request. So far this is my 'to do' list once the paperwork is finalised and loans sorted.

1. Obtain building insurance
2. Obtain Landlord insurance
3. Document property condition , after any required repairs.maintenance.
(suggestions how best to do this appreciated - Professional report, or photos etc)
4. Arrange Property Manager
5. I'm assuming that the sale prices establishes the base for the future capital gains assessment) otherwise Get Valuation.


Is there anything else I should be planning/chasing at this stage?

thanks
JulieW

 

[marg4000]

The sale price will be the basis for any capital gains calculations regardless of whether you overpaid or got the bargain of the century.

If you are using a PM, then appoint them before settlement and they can take care of #3.
Marg

 

[mkraus]

I did this a few years ago and it worked out quite well. A couple of suggestions from my experience would be:
- Make / agree to clearly stated terms in writing up from prior to locking in the deal or the sale.
- Do the "entry" condition report in conjunction with the final inspection of the property before purchase. That way they may point out some things that are broken and you may wish to factor that in with any price adjustments.
- Have the vendor commit to a professional clean as part of their vacating the property.
- Treat it as a proper business transaction, as you would any normal tenancy.

For me, the main benefit of a property manager is selecting a good tenant and signing them up the lease, so with people already in the house, if you are willing to self manage, this may be a good opportunity.

Good luck.

MK

 

[ryan_mel]

The sale price will be the basis for any capital gains calculations regardless of whether you overpaid or got the bargain of the century.

If you are using a PM, then appoint them before settlement and they can take care of #3.
Marg

And also be aware of using which agent as your PM. Once I was lazy to choose PM, and just simply used the agent where I bought the property from, later on this PM just gave me so many headaches.

So from tenancy perspective point of view, a) good PM, b) professional condition report before settlement, c) and clearly defined vacant conditions (such as rubbish completely removed away, non-useful furniture etc), are important for such a tenancy.

Good luck and congratulations! (you know, at this stage, to get your offer accepted is not that easy )

 

[ryan_mel]

Do you intend this to be your PPOR?

If so, you will have CGT implications if you rent it out before you occupy it.
Marg

This is absolutely right according to what the ATO guy explains it to me.

And the CGT calculation is based on the portion of "the days of renting out/the days of owner occupy" when you sell the property.