Can I Legally Sell My Rental Property With Tenants in It?
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Dwayne Vega Contributing AuthorClose
Dwayne Vega Contributing AuthorDwayne Vega is a freelance writer with a specialization in real estate content. He works closely with B2C and B2B companies providing useful and engaging content that converts viewers into clients. When he isn’t writing for work, you can find him reading and writing for his ongoing MFA in Creative Writing.
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Richard Haddad Managing EditorClose
Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Are you selling your rental property with a tenant still living in it?
If so, you already know that dealing with tenants is a complicated affair. Selling your rental property with tenants adds more complexity to an already elaborate process. In recent years, rents have been growing at a brisk pace due to low rental vacancy rates and an increased demand driven by expensive new home builds, making it potentially attractive to landlords looking to cash out — and attractive to buyers looking for income by investing in real estate.
Whether rents grow or decline, you may decide that you no longer want to be a landlord. You may want a cash infusion, are looking for a new property, or are ready to retire.
You probably have many questions if you’ve been thinking about selling your occupied rental home.
We talked to an experienced property investor and a top real estate agent to gather tips and tricks about the benefits and drawbacks of selling a home empty versus occupied.
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DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal advice. If you need assistance navigating the legalities of your sale, HomeLight always encourages you to reach out to your own advisor.
Can I sell a rental property with tenants living in it?
Yes, you can sell a rental property with tenants living in it.
Erik Jacobs, a real estate investor with Cicero, France & Alexander, P.C., works on many sales of rental properties. Jacobs estimates that 90 to 95% of the commercial transaction he handles involves tenants staying with the property.
The key determining factor is the type of rental agreement you’ve established with your tenants. There are two primary options: month-to-month agreements and fixed-term leases.
Options for handling tenants with a month-to-month agreement
If your tenant rents on a month-to-month basis, you likely won’t have a problem selling an occupied property as long as you give the tenant proper notice.
In general, both landlords and tenants can end month-to-month tenancies by giving written notice at least 30 days in advance. Neither party needs a reason to terminate a month-to-month agreement, which is one of the main benefits of having a month-to-month agreement.
However, it’s important to consult state and local laws as well as review the rental agreement itself to ensure you follow the specific procedures required. Each state has different rules and laws that control proper notice, so make sure to check the regulations in your area.
Even if we lose two to three months of rent payments this way, we usually end up selling for up to 20% more than we would if we’d sold with the tenants still living there.
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Options for handling tenants with a fixed-term lease
A fixed-term lease, on the other hand, usually extends over a longer period, often spanning 12 months or more. During the lease term, tenants agree to stay, pay rent, and can’t be forced to leave unless they violate lease terms. Fixed-term leases are great for stable, long-term housing, and landlords who want to avoid frequent tenant turnovers. When the lease ends, tenants can move, renew, or it may become month-to-month.
If your tenants signed a fixed-term lease, your options for selling during that term are more complicated because the lease doesn’t easily terminate just because of a change in ownership of the property. You can:
1. Wait until the lease expires
If you want to sell your property, it might be better to take the patient approach and wait for the current lease to expire. This approach takes a little planning and foresight on your part but relieves you of the headache of dealing with tenants. There are several crucial benefits to waiting until the tenants have moved out to list a rental property.
First, the current rental income will dictate what the house is worth, says top-selling Huntington Beach, California, real estate agent Cheryl Coleman, who specializes in investment properties. If the tenants move out, you may be able to increase the rent, which will, in turn, raise the value of the property.
Another reason to sell a vacant property is that you’ll have the opportunity to make any renovations to increase home value, common repairs, or upgrades without disturbing the tenants. It will also be easier to prep, stage, and show the home, Coleman notes. “Even if we lose two to three months of rent payments this way, we usually end up selling for up to 20% more than we would if we’d sold with the tenants still living there,” she says.
The biggest drawback of waiting for your tenant’s lease to expire is the cost of paying a mortgage. If you are still paying a mortgage on your rental property, the time it takes to prep your home for sale may be an expense that you don’t wish to accrue.
An exception to the fixed-term lease occurs if there are evictable violations to the lease agreement. Valid reasons for a lease termination may include, but are not limited to:
- Being a nuisance to others
- Causing serious property damage
- Engaging in illegal activities on the property
- Failing to pay rent
- Falsifying information on a rental application
- Subleasing (when prohibited)
- Violating a no-pet clause
2. Sell the property to an investor with an active lease
If your tenant is up to date on their rent payment and has a preexisting lease or rental agreement, selling to a real estate investor might be the best option for you. Having a tenant already in the property is advantageous for real estate investors because you’ll save them time and money from finding a new tenant.
One thing to consider is that selling the property to an investor limits your pool of buyers because you need to sell to someone who accepts and understands that a tenant is living on the property. The lease transfers to the new owner when you sell a property with a tenant on a fixed-term lease.
In commercial real estate contexts, having an existing tenant is a major selling point, according to Jacobs. “Investors are more apt to look at the rate of return that they are receiving on their investment than other buyers might be,” he explains. “They are concerned with net operating income (NOI).”
All in all, a good tenant with a pre-existing lease or rental agreement who pays rent on time is a good asset for a real estate investor, and it may make them more likely to purchase your property.
3. Negotiate with the tenant for an early move-out
Suppose you have a motivated and qualified buyer ready to close the deal, and you need the property vacated. In that case, you should consider negotiating a settlement with your tenant to get them to leave the property before the lease expires.
The first thing to remember is that this requires the tenant’s consent. If the tenant doesn’t accept your offer, you’ll have to wait until the end of the lease to sell the property.
Keep in mind that negotiating with a tenant for an early move-out can be effective but expensive. If you decide to try this route, here are some tips to help you determine how much you should offer:
Cover moving costs: Asking your tenant to move out inconveniences them. It might be helpful if you offer to pay for some or all the moving expenses.
Make up the difference: To increase your chances of success, research comparable properties in the area, and if the rental rates are higher than what you’ve been charging, offer to pay the difference to take the financial stress off of the tenant.
Offer a payout: You may decide to offer cash in exchange for the tenant to modify the lease and move out. If the tenant agrees to your terms, then you have the chance to have the house cleaned, staged, and prepared for a seller. Ultimately, the amount you offer will be a balance between your available financial resources and what you stand to gain by getting your tenant to leave early.
Pay the security deposit: You can also entice your tenant to leave early by offering to pay a portion of the fees for a new place. Encouraging your tenant to vacate early by offering to cover a portion of their relocation costs, typically half of their first month’s rent and security deposit for a new place.
4. Sell the property to your tenant
What if your tenant loves living in your rental property? An easy way to sell the occupied rental property is to offer it to your current tenant.
There are a few ways that these transactions can happen:
Lease-to-own with a one-time, non-refundable option fee to purchase: Leonard Ang, CEO of iProperty Management, explains, “Agreements such as this are leases wherein the tenant pays an additional fee in order to have the option to purchase the property in question at some point during the term of the lease.”
Lease-to-own agreement: Also referred to as rent to own, the tenant rents the property but intends to buy it eventually. Ang points out, “In most cases, there is no down payment with these agreements. Rental payments take the place of a down payment instead.”
Seller-finance agreement: This type of transaction is when the seller acts as the lender, and collects monthly payments from the buyer. Christopher Avallon, a broker and owner of Avallon Real Estate Group in Princeton, NJ, states, “In other words, the seller will agree to hold the mortgage for the property…If the tenant stops paying, it falls on the seller to start the foreclosure process. The foreclosure process is long and costly and could erase any profits from the house and then some.”
If you decide that seller financing isn’t right for you, you can always suggest that the tenants obtain their funding to complete the purchase.
5. Execute an early termination clause in the lease
There are situations where tenants, even those in good standing, may be removed prior to the finished lease term. Some leases contain a “safety net” for landlords known as an “early termination clause,” which may be helpful in a variety of situations. Typically, these clauses state that the lease will end in 30, 60, or 90 days once the sale of the property closes.
Here are some keys to a smooth sale with tenants
Communication is key to a smooth sale. Make sure to keep the lines of communication open with your tenants to avoid any unexpected or unpleasant surprises.
Know the laws
Each state has different laws when it comes to tenants’ rights. It would be beneficial for you to work with a reliable property manager, attorney, and real estate agent familiar with local laws and regulations.
Be upfront about selling
Communicate your intentions with your tenant, meet up with them, and be fully transparent about your efforts to sell the property and the impact that it will have on their lives. The impending sale might be a good time for you to sit down and allow your tenant to ask as many questions as they have.
Make showing times convenient and easy for the tenant
Tenants need at least 24 hours’ notice (or more depending on the lease agreement) for showings. Respect your tenant’s schedule, and determine when you cannot show the property to prospective buyers.
Part of respecting your tenant’s schedule is asking them for their preferred days and times for showing and adhering to those days and times with fidelity. When you follow their schedule, you indicate that you respect their time, space, and privacy.
Make property upkeep easy for the tenant
Once you’ve decided to sell, offer to hire a cleaning service or lawn service while the property is on the market. That way, you don’t have to rely on the tenant to keep the property show-ready, and you build some goodwill by lessening their workload.
Don’t put signage in the yard alerting neighbors and the public
Yard signs serve as an open invitation for passersby to ask for a showing. They act as a visible cue, encouraging potential buyers or renters to take the initiative to engage with the property. Make sure your tenants know to direct anyone who’s interested to contact the listing agent.
Ask your tenants to be out of the home during showings
How awkward would it be for your potential buyer or investor to be followed around by the current resident? You owe it to your buyer to let them view the property undisturbed. One thing you might consider is springing for a gift card to a nearby movie theater or café your tenant can enjoy while you show the property.
Help the tenant find a new rental if the situation calls for it
If you own other properties, let the tenant know that you have openings available. You can also suggest local listings or put them in contact with someone who has available properties.
Be certain the tenant is caught up with rent
Landlords come in all shapes and sizes, and some are more forgiving than others in letting tenants get behind in rent. If your tenant is staying in the property, it’s time for you to act because a delinquent tenant is a poor selling point.
You might be able to leverage the behind rent to your advantage by forgiving the delinquent rent in exchange for the tenant moving out. Court action and eviction are also potential options if the tenant cannot pay the rent.
Communicate after the sale
Once the deal is closed, Jacobs usually drafts a letter signed by the seller informing the tenant of the property’s sale and directing them to send their next rent payment to the new landlord.
“In many cases, the sellers take the buyer to the home and introduce him or her to the tenant,” says Jacobs. “I think this more personal approach is the most effective.”
When the property manager remains the same, there is simply a new owner behind the scenes. “Those tenants usually don’t notice any difference, as they pay the same management company after closing,” says Jacobs.
Should I sell my property with tenants living in it?
We have established that you can legally sell your rental property with tenants in it. The follow-on question is, “should I sell my property with tenants living in it?”
Benefits to selling a property with tenants living in it
The home is staged: Buyers can easily imagine themselves in the property when they have a furnished home. Tenants that take care of the home make it more desirable to potential buyers.
Attractive to real estate investors: As we’ve noted, if your tenants are in good standing, that is a huge selling point for real estate investors. You save an investor the time and money to find quality tenants.
Like all things in life, there are benefits and drawbacks to having tenants in your home when you decide to sell.
Drawbacks to selling an occupied property
Tenants can make showings difficult: The tenant’s personality and habits are a factor when selling the home — maybe they are grumpy, messy, and keep the house in disarray. They might be unresponsive to your communication and do not work with you to show the home. Their prickliness will only hamper your attempts to sell the property.
Tenants can be a financial risk: A tenant who owes you back rent is a liability when it comes to selling because court proceedings and eviction are laborious tasks. Also, your tenant may be paying below-market-value rent, which can be a huge obstacle for most real estate investors.
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Partner with professionals for the best outcome
The sale of a rental property can get complicated, especially when tenants are involved. That complexity is why you must work with professionals who have experience with these types of transactions.
An investor-friendly agent is well-versed in investor purchasing preferences, how much they could pay, and the nuances of the investor market. Additionally, an agent who regularly works with investors can connect you to investors interested in buying properties similar to yours.
Find the perfect real estate agent for you and sell your home faster by using HomeLight. The service is 100% free, with no strings attached. It takes only a few minutes to match you up with an experienced real estate agent who can help you navigate the murky waters of lease agreements and tenants’ rights issues.
FAQs on selling property with tenants in it
Yes, you can sell your rental property with tenants in it. However, you must adhere to your local laws and regulations, which may require providing proper notice to tenants and respecting their rights during the sales process.
If you sell the property, the lease typically transfers to the new owner, making them the new landlord. Your tenants will continue to live in the property, and the new owner must honor the terms of the existing lease until it expires
You don’t usually need your tenants’ permission to sell the property, as long as you follow the lease terms and provide proper notice for showings and inspections. However, communicating openly with your tenants about the sale can help alleviate any concerns.
Making changes to the lease terms or rent before selling the property depends on local rent control laws and the terms of the existing lease. Consult with legal counsel to understand your options and any restrictions.
To make the selling process smoother for your tenants, provide advance notice for showings, respect their privacy, and address their concerns promptly. Clear communication and collaboration can help maintain a positive tenant-landlord relationship during the sale.
Header Image Source: (Derwin Edwards / Pexels)
- "What Is the Difference Between a Month-By-Month Lease and a Fixed-Term Lease?," FindLaw (December 2022)
- "General Eviction Information for New York," Law NY (March 2023)
- "State Rules on Notice Required to Change or Terminate a Month-to-Month Tenancy," NOLO (April 2023)
- "Net Operating Income (NOI)," Corporate Finance Institute (January 2023)
