How to Sell Rental Property With Tenants
You'd think owning a rental (or several) is the final piece in the puzzle that is financial freedom.
Maybe you had certain illusions or misconceptions about being a landlord early on, such as simply collecting rent every month and living off the proceeds on some tropical paradise.
However, a cold brush with reality--late night phone calls about something breaking down, tenants trashing your hard-earned investment property, illegal subleases--shattered these illusions. No one told you being a landlord is a full-time job in itself. Owning a rental and managing one are two very different things.
And so, you decide that being a landlord is not for you. So you want to sell it now. However, it is currently occupied, so you might be wondering...
Can You Sell Tenant Occupied Property?
Yes. However, there are pros and cons to doing so and you need to plan carefully to make sure that the process is as smooth and hassle-free as possible.
Benefits and Drawbacks of Selling Occupied Rental Property
You Save On Carrying Costs
On the whole, the selling process takes around four months from listing to closing. If you have a vacant property, that means you'll be the one to pay for the carrying costs (e.g. mortgage payments, utilities, property taxes) in the intervening months until the sale is finalized. Whereas if you sell while you have a tenant occupying the property, the monthly rent you collect can dampen these costs somewhat, if not pay for it altogether.
You Attract Investors
When you have tenants paying rent every month, the property generates income for you. Marketing it as an investment property with a steady cash flow can be very appealing to investors. The fact that it's occupied is a sign of a healthy real estate market in the area and plenty of opportunities abound.
You Have Built-In Property Security
An occupied property can deter burglars and eliminates the chances of vandalism. As a property owner, having tenants in your rental can give you priceless peace of mind.
You Can Have Free Staging
Having tenants living in the property essentially spares you from having to spend for staging. Prospective buyers viewing the rental would have an easier time imagining living in it with tenants around.
You Can Sell the Property as a Turnkey
A rental property with tenants can be sold as a turnkey property. Since people are living in it, it can be assumed that everything is in working condition and fit to be occupied.
Of course, a pre-listing home inspection should still be in your to-do list as a seller since there's nothing stopping potential buyers from conducting their own inspection to verify this.
It is important to get ahead of any problems that the buyer's inspection might possibly uncover, otherwise it would be akin to handing them a very powerful bargaining tool in the negotiations.
You Might Have an Uncooperative Tenant, Making for Difficult Showings
Open houses with difficult tenants can be challenging. Some might even refuse access to the house outright.
Tenants don't have a vested interest in keeping the property in top condition, so it's also possible that you could be dealing with an unkempt and messy rental house. This would be an instant turnoff for your buyers or a magnet for lowball offers, so it might be best to wait until the property is vacant before you consider showings.
You'll Have a Narrower Pool of Buyers
Your primary market for rental properties are fellow landlords and real estate investors. Since these are seasoned veterans in the industry, they'll be looking to buy properties at a discount to its market value, so be prepared for negotiations.
You’ll Have a Harder Time Doing Upgrades or Repairs
It would be tough to do renovations while your house is occupied. On the other hand, if you put it up for sale without doing the upgrades, you'll get significantly less than what you're hoping for.
The alternative is to wait until the tenants have moved out, delaying the sale. The seller's market may have cooled down by then, putting a damper on your plans.
Tips and Things to Consider When Selling Tenanted Property
Here are some important pointers to ensure a successful sale of your occupied property:
Find Out What the Law Says About Selling Rental Properties With Sitting Tenants
There are no laws barring you from placing your rental on local listings.
But if you have tenants living in your property, they have the legal right to stay there in accordance with the lease terms that you both signed. They are entitled to have sufficient time to prepare for vacating the property before the sale. For instance, you need to find out how much notice you are required to give. Depending on the state you live in, a 30-day notice usually suffices if your agreement is month-to-month.
Tenants' rights vary from state to state, so it would be worthwhile to consult with a real estate attorney to make sure you do everything correctly and avoid legal trouble down the line.
Check the Tenant's Lease Agreement
Does your tenant have a long term lease? Or is your lease agreement on a monthly basis?
If it's the latter, you won't have much problem ending the tenancy as all it requires is giving proper notice to your tenant as required by local laws. It can be between 30 to 60 days depending on the state you live in.
If they have a fixed term lease, that's where it gets complicated. You can't just kick them out and hand over the keys to the new owner. This type of agreement specifies when the tenant should move out, so until that date comes to pass and they're compliant with all the terms of the lease, they can absolutely stay on the property.
To get around this, some lease agreements have an early termination clause built into them.
This is convenient for a landlord selling their rental property, giving them an out without the hassles and possible expense of negotiating with your tenant. Check if you have one, as this is incredibly helpful.
Know Your Targeted Potential Buyers Beforehand
There's a saying that goes, "Try to please everyone, and you'll end up pleasing no one."
The same applies when you sell a rental property--especially those with tenants living in it. From the get-go, you'll have to know your target market so your marketing strategy will be geared towards that specific buyers pool.
For instance, a starter family looking for a primary residence would hardly be enthused at the prospect of becoming a new landlord.
On the other hand, a real estate investor would be extremely happy to pick up an occupied property.
Set Up the Showings Around Your Tenant’s Schedule
People don't like strangers suddenly barging into their home. Even if you own the property, be kind and considerate to your tenants by asking for their permission to show prospective buyers around the property.
It might be better if you schedule the showing when your tenants aren't around. The important thing is to communicate properly to figure out what works for both parties.
Additionally, never put up a FOR SALE sign. It would encourage realtors and random people from knocking on your tenants' door to inquire and they certainly wouldn't appreciate that.
Incentivize Your Existing Tenant to Vacate the Property Earlier
If your lease or rental agreement doesn't have an early termination clause, it can be tricky when the time comes for you to sell the rental property. In this case, you can consider negotiating a settlement with your tenant to get them to move out earlier than intended.
If the tenant agrees, well and good. But do note that they are under no obligation to accept your offer.
The incentive to encourage the move can be calculated based on the following:
Cover Moving Costs
Moving from one place to another is a big hassle, and you can consider helping your tenant with the expense to facilitate the move. On average, hiring professional movers range from $800-$2,500.
Offer To Pay for the Security Deposit
In addition to the stresses of moving, your tenant may not be keen to shell out a security deposit and a month's rent in advance to settle into a new property. As a landlord, you can cover this to help make the early move easier for your tenant.
Pay Rent Differential
There could be a nearby rental home that your tenant could move into before their current lease is up, but the problem is, the rent is more expensive. You can pay for the difference for the remaining months on their lease.
Consider A Lump Sum Incentive
Known as "cash for keys", you can offer your tenants a lump sum amount to get them to move out early. This amount should be enough to cover the move and other associated costs, as well as a little extra to compensate for the inconvenience of the sudden change in their living arrangements.
Options in Selling a Rental Property With Existing Tenants
Fixed term leases generally complicate the sale of a rental property. This type of lease agreement still holds even though the property is turned over to a new owner. All of the lease terms are carried over, including the security deposit, which you must turn over to the new buyer at closing.
Don't fret though, a fixed term lease doesn't put you in a disadvantage. By all means, you can still have a smooth real estate transaction.
Here are three options open to you in selling a renter-occupied property:
Option 1: Sell After the Lease Expires
Patience is a virtue, and in this case, waiting until your tenant's lease expires saves you the headache and stress of negotiating with them. Once they vacate the property, you'd be free to do repairs, upgrades, or renovations so you can sell your rental for the highest possible price.
With a vacant property, you can adequately stage your house before you start doing open houses so you'll be able to attract the widest pool of buyers, and thus, get the best offers.
Option 2: Sell to Your Current Tenant
Your tenant may already be interested to purchase the home they are currently living in. They may even have the Right of First Refusal provided for in the rental agreement, after paying a one-time non refundable option fee during signing of the lease contract.
Seller Finance Agreement
If your tenant wants to buy the property, you can arrange a seller finance agreement wherein you act as the lender (similar to traditional financing) holding the mortgage, and the buyer makes regular monthly payments to you.
In the event of the default though, you'd be the one to start the foreclosure and eviction process, which can be expensive and time-consuming.
Lease to Own Agreement
Not everyone can afford a substantial down payment (about 6% of the selling price) to fund their home purchase. Cue a lease to own agreement: one of the most approachable paths to home ownership. Instead of the down payment, the rent collected is instead used to pay down the remaining balance on the home.
Option 3: Sell the Property With an Active Lease
A real estate investor is usually keen on purchasing a property with an active lease because of the guaranteed cash flow. For most investors, the velocity of return on their investment is important. As they don't have to look for a new tenant, they save time and money while already getting a stream of revenue from their purchase.
Another advantage of selling to an investor is that they usually pay cash, so there's no wasted time waiting for a mortgage approval. You also don't have to deal with a real estate agent, so you won't have to give up a chunk of your profits to pay their fees.
If you're pressed for time and you want to quickly sell a rental property, selling to a real estate investor is your best bet.
Just make sure your tenant is current on their rent payments--a delinquent tenant is definitely a tough sell for investors!
Final Thoughts: Selling Rental Property With Tenants
Selling occupied property can be a little complicated, but it's not impossible.
First and foremost, you have to know your target market first so your efforts will be geared towards those types of potential buyers. Try to market to everyone, and you might end up selling to no one. Rentals, with their steady cash flow every month are considered investment properties, and as such, you're better off selling to a real estate investor. And guess what?
Here at House Buyer Network, we can instantly connect you with our vast network of investors across the United States! Just fill in our form with your property address, phone number, and email!
Within 24 hours, expect a fair, no obligation cash offer from us! If everything works for you, we can close in as little as 7 days--all closing costs are on us! No hidden fees or real estate agent commissions, so you get everything that's on offer!
To start off the smooth sale of your occupied rental property, give us a call at (855) 835-2544 and we'd be happy to walk you through the process!