patrick.net

Let's go with a 15 year FHA loan at 4%.

Purchase Price: $125,000.00
Principal $120,625.00
Monthly Interest: $402.08 (starting)

Actual PITI is ~$1150/mo but that includes at least $500/mo of principal repayment (a form of savings).

So the purchase decision hinges on maintenance expenses and the future of the neighborhood over the next 10+ years -- including area incomes. Plus also future interest rates.

Right now a $125,000 purchase price would be an effective cost (PITI less the P) of $800/mo or so, depending on your maintenance budget. If I were offering, I'd reduce my offer by anything needing replacement in the next 10 years.

Compared to renting, buying at $125,000 doesn't appear that bad, unless you're right and you can't unload it for anything close to that when you need to sell.

Declining interest rates from here will really bail you out, if 30 year rates hit 3% you could either refi to knock $400 off your monthly payment, or find that the increased "affordability" will help your buyer afford the $125,000 you paid.

Increasing rates would kill you unless they are accompanied by rising area wages, then they would be a wash.

At any rate, after 5 years, you'll owe about $90,000 on the house and have thereby reduced the interest cost to under $300/mo. Renting doesn't look so good in this future!

If you don't want to buy, just say you have personal reasons and are not ready to buy a house in that area or that type.

Hint that you want/are able to stay in the place for a few years (so he doesn't get paranoid that you're leaving soon), but don't want to buy because you likely won't want to stay there for the long term.

Let me see,

Someone wants you to buy his house in Detroit to help him solve his problems ?

Sounds like you answered your own question on that one.

With a 15 year loan @ 3.88%, $90,000 has a net cost (PITI less the P) of $700/mo, with an actual cash expense of $1100 (but not budgeting for much maintenance).

After 5 years, principal would be reduced to $63,000, resulting in an interest cost of only $200/mo at that time. After 2013 you should be under 80% LTV, saving PMI expense, and making it easy to refi should interest rates fall from here. Looking ahead to this possible future of 2013, refinancing $72,000 at 3% for 30 years would result in a FULLY AMORTIZED monthly expense of around $800.

This all assumes your Detroit nabe holds together as a middle-class environment. If you think area wages are going to hold together then buying now in this situation is likely not a mistake, though interest rates going up without area wages going up would be the one future that would kill you. Unfortunately, Michigan is not a non-recourse state, so any losses here would stick.

But - Troy, he's saying that he doesn't want to buy. Especially that house. So loan percentage rates and ltv/PMI doen't matter. It would if he wanted to buy. But once again, he doesn't.

Ebounding says

I planned on staying here another year and paying him upfront again. I personally think he would rent it again, but if he really wants to put it on the market, I’d like to know sooner rather than later.
So what’s the best approach to take with him?

I agree with those who say that you should tread lightly on this one - you don't want him to ruin the party. Tell him that you won't qualify for a loan at the present time and that you're rebuilding your credit. Tell him that you've got a credit counselor who advised you that you'll qualify for a loan of $150k in a year if you continue on the path you've taken... and hint that you're really happy with the house and it may very well be "the one."

Or prepare to move. 'Cause the guy might spook and run if you don't play him right.

There is no way I would give this guy any money up front. Life happens......he gets sick; you get sick; he files for BK and you're out every penny; that neighborhood, especially in Detroit goes south; he loses the house in forclosure; the list of possibilities is endless. Just tell him you're not in the market for a home right now and he probably won't think anything of it. If you get evicted, there is probably one the next block over. If you do want to buy, get a 15 or 30 yr., fixed rate loan and a great deal on the property price. Otherwise, Detroit is ground zero in the mid-west for deals and find one on the next block whether renting or buying.

I would not buy. What are the odds he will be able to sell? If he is making repairs quickly that likely means he is making money on top of his costs.

You can always get a another rental.

Some background on the landlord: He is not a professional landlord; he inherited the house when his father passed away. He actually lives a hundred miles away and has an upside down mortgage of his own (I don’t know why he told us this). So selling the house would solve a lot of his problems, but letting the house sit on the market wouldn’t help him either.

Most likely he does not have any problem. Even if he has an upside down mortgage in his own home, he is making money in the rental property where you are living. As he inherited the rental property, essentially it means he got it for free (or almost free). If he was desperate to get out his so-called "problem", he would sell this rental property for the price whatever he gets. After all he got it for free, right? He wouldn't keep it in market with his unrealistic wish-price of $125K. He put it up for sale last year. Didn't sell. So he is trying to make you a buyer before he re-lists this property with some realistic price.

In any case, don't make his perceived "problem" into YOUR real problem.

You should buy the house and then sell it for double! IT WILL WORK!

magcakpro says

You should buy the house and then sell it for double! IT WILL WORK!

YES!!!YES!!!!!! We're gonna be rich!!!!!

Who the heck is getting 4%?

If you don't want the house or a house I wouldn't even consider the idea. If you like where you are and the time is right then its possible. My attitude would be to buy when you can save money on expense. Think of your downpayment as the only real investment you make, and then factor repairs, tax breaks, expenses, inflation and so on. If you keep 20k in the bank right now you're safe, but not really making anything. That can't be said for a downpayment in Detroit where flat is the new up, and you'd be lucky to break even after expenses when you sell.

You buy will cost you 5%
You sell will cost you 5-10%
Do you think housing will rise by 10-15% by the time you move? If you do then it may be time to hedge a bet by buying a house. The real advantage to owning is nothing but a hedge, or at least it was before property taxes went nutz!

So you're paying $26.00 a day to live in this guys house. He is responsible for all maintenance and repair costs. Also taxes and insurance. He will also have to take the hit when house values continue to tank (and they will). And when rates go up, the long term value of the house will continue to fall (read what Patrick says!) Now he wants to sell you the house so he's not the one who gets stuck with it. Now you wonder if you should take him up on his offer. Have you been getting enough sleep lately?

People, I appreciate the responses, but I am not asking if I should rent or buy! I DO NOT want to buy the house; I don't want to buy any house right now.

I'm just asking how you deal with a landlord who wants you to buy the place you're renting. How do you tell them that you're not interested in buying but still want to rent the place?

I just told him that I'm not in the market for house right now, but I appreciate the offer. If he says anything back I'll post it here.

EBounding says

I just told him that I’m not in the market for house right now, but I appreciate the offer. If he says anything back I’ll post it here.

End of story, no?
Not sure why you are fretting...

I would tell him that you want to buy, but you are not sure about your finances because of your Credit Card debt. Say you are going to try to pay off some credit card debt and you'll get back to him in a few months. Then repeat. That way you don't have to get into an argument about what the house is worth.

EBounding says

People, I appreciate the responses, but I am not asking if I should rent or buy! I DO NOT want to buy the house; I don’t want to buy any house right now.
I’m just asking how you deal with a landlord who wants you to buy the place you’re renting. How do you tell them that you’re not interested in buying but still want to rent the place?
I just told him that I’m not in the market for house right now, but I appreciate the offer. If he says anything back I’ll post it here.

Honestly, the best thing you can do is make it easy on him. I've had some renter's call me at 8:30PM on a Friday night because a light bulb popped and the stairwell was a little dark. there was only one light at the bottom of the stairs now and it might be dangerous. This was the same couple who tried to sub-lease their apartment to another family-while I was living downstairs! One time after a tennant's child had flushed the third GI Joe in 5 days I told them to pay for it or get out.

Then you have the ones who plant flowers and sweep the driveway. Once a main breaker had tripped to an apartment and the tennants waited amost 2 days to call "because we knew you were going to be here tomorrow". That gesture probably saved them $500/yr, and before I sold the building I made the new buyer sign a 2yr lease with them.

permanent_marker says

EBounding says

I just told him that I’m not in the market for house right now, but I appreciate the offer. If he says anything back I’ll post it here.

End of story, no?
Not sure why you are fretting…

Really I had the same thought, nothing complicated here. You said you didn't want to sour the relationship but as knewbetter said, just be a good tenant. He won't want to lose you even if you won't buy his problem from him.