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.
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.
The United States has seen surging rental real estate trends surrounding this issue.
Most notably, the ongoing shift to remote working has caused rent growth to shrink in metropolitan areas and skyrocket in suburban markets. 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.
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 experienced property investors and a top real estate agent to gather tips and tricks about the benefits and drawbacks of selling a home empty and occupied.
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 most crucial factor is the type of rental agreement you entered into with your tenants. Brian Phan, a full-time property investor in Atlanta, Georgia, and acquisition specialist of the direct-cash house buying company Sure Closing, identifies the two major types of rental agreements: 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.
“Proper notice involves mailing or delivering a letter to your tenant 30 days before you’d like them to be out, usually in respect to the rent due date,” says Phan, though note that in some states, such as New York, you may be required to give at least 60 or even 90 days notice, depending on how long the tenant has lived in the home. “You don’t need a reason to terminate a month-to-month agreement, which is why it’s called a ‘no cause’ termination. It’s one of the main benefits of having a month-to-month agreement.”
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.
- Cheryl Coleman Real Estate AgentCloseCheryl Coleman Real Estate Agent at Keller Williams Realty Currently accepting new clients
- Years of Experience 18
- Transactions 306
- Average Price Point $744k
- Single Family Homes 225
Options for handling tenants with a fixed-term lease
If your tenants signed a fixed-term lease, your options are more complicated. “Selling an occupied rental property with a fixed-term lease requires more processes and doesn’t easily terminate just because of a change in ownership of the property,” Phan explains.
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, 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 do not wish to accrue.
An exception to the fixed-term lease occurs if there are evictable violations to the lease agreement. Phan explains, “If your tenant has violated any lease terms, you can terminate the lease more quickly with proper notice.”
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 current 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.
Phan explains, “In almost every state, the law dictates that the lease and security deposit must be transferred with the property, and the new owner becomes the new landlord.”
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 preexisting 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. “Keep in mind that the tenant is under no obligation to accept your offer or agree to your terms,” notes Phan. “In that case, you’ll be back to square one, which entails waiting 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 and expensive. If you decide to try this route, Phan offers these tips to 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 fees.
Make up the difference: “Look to see what comparable properties are renting for in the area. If rent elsewhere is more than what you’ve been charging, offer to pay the difference between what your tenant will likely have to pay and what they have been paying you, times the amount of months left on the lease,” says Phan.
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. Phan suggests offering half of what your tenant would need to find a new home. Generally, that amount is the first month’s rent and the security deposit.
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: 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 they [the tenant] stop 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. Phan explains that some leases contain a “safety net” for landlords known as an “early termination clause,” which may be helpful in a variety of situations.
“These clauses usually say that the lease terminates in 30, 60, or 90 days, for example, after the closing on the sale of the property,” says Phan. “The ‘trigger’ for the termination can be anything you want, as long as it is reasonable and both parties agree to it in the lease.”
Here are some keys to a smooth sale with tenants
Communication is key to a smooth sale. Make sure to keep 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.
“Explain the process you will use to show the home, but demonstrate that you understand it could inconvenience them and that you’ll do what you can do to mitigate disruption,” Phan says. “Showing this kind of care and concern can help tenants trust you more easily, which will make the transaction smoother.”
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.
“It is not acceptable for a real estate agent to just show up and enter the property unannounced,” Phan notes. “They must provide advance notice according to state laws for entering the property.”
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 general public
Phan warns yard signs are an opportunity for passersby to knock on the door and request a showing. “Let your tenants know that if someone shows up, they should never let them in,” he says. “They should always refer back directly to the agent for safety and best practices.”
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 watering hole, 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?”
Like all things in life, there are benefits and drawbacks to having tenants in your home when you decide to sell.
Here are some benefits to selling a property with tenants living in it:
The home is staged: Buyers can easily imagine themselves in the property when you 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.
Here are some 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 nonresponsive 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.
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 will know more about the buying criteria of investors, how much they could pay, and the investor market itself,” notes Phan. “The agent could also help connect you to investors looking to buy properties like yours.”
Find the perfect real estate agent for you and sell your home faster by using HomeLight’s Agent Match. 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.
Header Image Source: (Derwin Edwards / Pexels)