If you own an occupied rental property in California, perhaps you’re ready to sell it — and hope to make a juicy profit on your investment. Strong demand coupled with a dwindling housing supply continues to fuel record-breaking prices in California. In April, the average cost of a home in the Golden State surged to more than $800,000, a new high. But before you plant that for-sale sign, you need to know the rights of your tenants. Renters occupy some 45% of homes in California, one of the most tenant-friendly states in the country.
In addition, special regulations passed by Governor Gavin Newsom during the pandemic to protect renters struggling with financial hardships caused by COVID-19 have added a new layer of complexity to the landlord-tenant landscape. Even after these laws expire, landlords will continue to deal with their ripple effects. Read on to get up to speed on California tenant rights so that you don’t let an opportunity to turn this rental into gold slip between your fingers.
1. Give tenants ample warning of your intent to sell
If you want to list your rental home for sale and plan to let potential buyers in to show your unit(s), you must give tenants a heads up at least 120 days ahead of time, according to California Civil Code, Section 1954. And this notice must be in writing. As a landlord, you should also familiarize yourself with Assembly Bill 1482, which enacted the Tenant Protection Act of 2019. The bill broadens the state’s definition of “no-fault” evictions and the rights of tenants facing them. It applies to most multi-unit housing and single-family rentals owned by a real estate investment trust, LLC, or corporate member.
2. Know how to handle month-to-month renters
Many states require landlords whose renters have a monthly lease to provide only 30 days notice to vacate the property they’re selling. But California is more generous when it comes to giving month-to-month renters time to figure out their future living arrangements. In the state of California, if you have month-to-month tenants who have resided in your place for at least a year, you must provide a 60-day warning if you want them to move, according to California Civil Code 1946.1.
3. Play fair with fixed-term tenants
In California, renters with a fixed-term lease have the right to stay put until it expires. This is true even if you sell the property before the lease is up. “A fixed-term lease protects the tenant from eviction from the current or subsequent owner,” explains Brian F. Kram, a Marin County real estate attorney who specializes in California tenant and landlord law.
If your buyer is an investor, your tenant simply pays rent to the new owner until the lease ends. At that point, they can work out new terms.
However, when your buyer plans to live in the tenant-occupied home, the situation gets trickier. While you can’t legally force a tenant to leave, you can try to motivate them with money (aka “cash for keys”).
“It’s really about feeling out the tenant and having a conversation,” says Justin Bonney, a top Los Angeles-based real estate agent who’s helped clients maneuver the challenges of selling tenant-occupied rental homes.
“The average varies, but between $4,000-$6,000 seems to be the sweet spot to help cover expenses like moving trucks and security deposits.”
4. Follow the rules and respect tenants when showing your property
Having strangers parade through the place they call home can be stressful for tenants. Be sure to abide by the law when arranging showings to avoid straining relationships and jeopardizing your odds of scheduling viewings in a timely manner.
- Give 24-hours notice before showing your rental to potential buyers
You deliver this message by email, phone, or in person. All showings must be at reasonable hours — late evenings or crack-of-dawn-weekend visits probably won’t fly with most folks. And while you can ask your tenants to leave the premises for a viewing or open house, they are entitled to deny your request.
- Express your gratitude
Consider giving your renters a gift certificate to a local coffee shop or restaurant to express your appreciation when asking them to disrupt their day for a showing. Such gestures will go a long way towards fostering cooperation and inspiring tenants to keep the place tidy to appeal to buyers.
- Leave a note
If you or your agent show your property while your tenant is out, California law says you must leave a written note letting them know you were in their home.
5. Weigh your options when dealing with difficult tenants
Let’s say you’ve been dealing with unreasonable tenants who haven’t paid rent for months. You’ve been patient, treated them fairly, and provided them with proper written notice of your plans to sell. Their lease is up and they’ve had plenty of time to look for another place. You’ve even offered cash to motivate them to pack up and leave. But they still won’t budge. Even worse, they refuse to let potential buyers inside the house. While such nightmare scenarios are rare, they do happen, so it pays to have a game plan just in case. Consider the following options:
- Bite the bullet and hire an attorney
If you find yourself in this kind of predicament, it’s probably time to hire an attorney who specializes in landlord-tenant law to pursue an eviction. “If you’ve already been in a period of a year or so of having no performance with a property because of a bad tenant, you might as well go through with the process of getting them out,” says Bonney. “You’ll net a lot more on the sale because it’s much easier to sell a property without an uncooperative tenant.”
- Lower your listing price
If you’re not ready to commit to the cost and hassle of the eviction process, or are under pressure to sell your home as soon as possible, you can continue to try and move it with a difficult tenant under your roof. But be prepared to settle for a lower price. “Just know you’re going to take a hit because you’re selling your problem to someone else,” warns Bonney.
Kram adds that unless you failed to disclose that the home was occupied by renters or had an agreement stating you would be responsible for getting them out before closing, the troublesome squatters will become the responsibility of new owners.
6. Navigate fallout from COVID-19 renter protection laws
The State Assembly just passed AB 832, a bill that extends the original statewide ban on evictions due to financial problems caused by COVID-19 through September 30, 2021. While such relief has been critical, it’s also taken a toll on some mom-and-pop landlords who still have mortgages and other expenses. In March 2021, research from the University of Pennsylvania showed that 37% of landlords with five or fewer units were experiencing financial distress that would put them out of business within three months.
Even after eviction moratoriums end, the situation will remain fluid for some time. Here are a few key things to keep in mind as you move forward with plans to sell your rental property after the pandemic:
- Prepare for a backlog of court cases as California returns to business as usual
Once AB 832 expires, you can take tenants who haven’t paid rent to small claims court to collect what you’re owed or start the eviction process. Before taking this step, you must provide renters previously protected under COVID-19 legislation with a special 15-day notice to “pay or quit” form. This is in addition to any other forms or notifications the law requires to evict a tenant for non-payment.
- Educate yourself on local laws that extend tenant protections
Even when state eviction moratoriums wind down, keep an eye on city and county legislation that may extend protection for local tenants. In San Diego County, for example, the government recently passed a controversial ordinance that prevents landlords from evicting tenants for any reason, other than major health or safety threats. The ordinance went into effect on June 15 and will last through August 15, 2021 — maybe longer. Up north, Marin County also extended COVID-19-related eviction protection through September.
- Look for silver linings
Whether you’re considering unloading your home due to loss of rental income caused by COVID-19 or are ready to list it for other reasons, the post-pandemic era promises to be an opportune time to sell. Kram anticipates many landlords will seek to cash in on a very strong residential housing market.