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.
With the cost of rent rising in 92% of U.S. cities and the addition of 23.7 million renters in 2018, owning rental property continues to hold a huge appeal for people who want a stream of passive income as well as a solid real estate investment.
Trouble is, selling a house with a tenant can be as big a headache as finding a suitable tenant in the first place. The terms of the lease come into play, as do landlord-tenant laws and state statutes. Your state’s bar association outlines landlords and tenants rights and responsibilities, such as providing reasonable notice to enter the property barring an emergency.
Plus, even if you have a good relationship with your tenant, that person generally won’t be as invested in the property as you are. Matt Mauro, a top-selling agent in Des Moines, Iowa, who helps clients sell their rental properties explains:
“A tenant has no incentive to not only make the home available but to show it in the condition that would maximize its appeal, therefore maximizing its value.”
To make that process a little easier on everyone—your renters included—we’ve broken down specific considerations and options for selling a house with a tenant.
Determine the best path for selling your rental property
When selling a house with tenants, it’s not as simple as weighing, “Should they stay or should they go?” Different factors come into play, such as why you’re selling, when the lease expires, and your relationship with your tenants.
“When I’m dealing with a client that has a tenant in there, I’m trying to make friends with the tenant because I need them as an ally. I need them to help me, and if they have a good relationship with the landlord, they’ll do it sometimes without any incentive. That’s not always the case,” Mauro said. “If it’s a mess, if it looks like bombs have gone off in there, there’s dirty diapers on the floor, and there’s pets to deal with, you’ve got to get them out.”
With that in mind, let’s review your main options:
Option 1: Wait until the lease expires
If you have a month-to-month situation, or if the lease expires within two or three months, your best bet may be to wait until the lease expires.
Ryan Fitzgerald of the Forbes Real Estate Council calls this the “best-case scenario” because of the flexibility. Although this puts you on the tenant’s timeline, you won’t have to deal with coordinating showings around the tenant or worrying if the place will be in peak condition.
“We’re going to get more money for it if we can just get them out of it and get it cleaned up. It’s going to show easier,” Mauro added.
Just give the tenant proper notice. The American Apartment Owners Association (AAOA), the largest landlord association in the country, also has a searchable state map to familiarize yourself with residential rental agreements and relevant statutes.
According to the AAOA, 30-day notice is typical—along with any accommodations or incentives you find reasonable, such as returning the security deposit sooner or in full.
Option 2: Sell the house with the tenant living there
With a fixed-term lease that has another 60 or 90 days, you’ll need the tenant to cooperate in order to sell the house.
Make sure they keep the property in show condition and agree to leave within 24 hours’ notice for showings, so that they aren’t underfoot when potential buyers arrive, Mauro said.
Taking over an existing lease is a tough scenario, however.
According to Rentec Direct, an Oregon-based property management company assisting more than 14,000 property managers nationwide, purchasing an investment property with existing tenants means immediate cash flow. But buyers can be hesitant about relying on the previous landlord’s screening process, as well as the terms of the current lease.
“If the previous landlords were not increasing the rent yearly or were not performing regular seasonal inspections, you may find that your new tenants balk at the changes you must make to protect your investment,” Rentec Direct notes.
Talk with your real estate agent about what to make a “condition of the sale,” such as returning the full deposit to the tenant at the end of the lease, or any other previous agreement.
Option 3: Work out a special arrangement with the tenant
As long as a tenant pays rent on time and doesn’t violate any terms of a lease, he or she likely has the right to live on the property until the lease ends. However, if your tenant has been less than ideal and violated the lease terms, you may have the right to terminate the lease early.
Some common reasons are failing to pay rent (or continuously paying late); damaging the property; becoming a nuisance to neighbors; or engaging in illegal activity on the property.
If your lease does not have an early termination clause, you still can offer potential buyers a clean slate by incentivizing your tenants to leave early. In real estate terms, this might be a “cash for keys” agreement, sometimes used in lieu of eviction, where a landlord offers a sum of money to vacate the apartment within a certain period of time, the AAOA says.
But if you and your tenants have been amicable, there’s no need to frame it this way. You can offer a discount on rent, help to pay for their moving costs, or cover their next security deposit in exchange for leaving a little earlier, as well as keeping the house clean and accommodating showings.
Option 4: Offer the chance for your tenant to buy the property
If your tenant has enjoyed living in your rental, he or she could be the ideal buyer. After all, they know the home well and already have moved in.
Offering a tenant the chance to buy your property avoids listing, staging, and showing it, although you may want to have an inspection to check for any unknown issues. You’ll still need a real estate agent to draft the purchase agreement and close the sale, but the agent isn’t as involved as with a regular sale, Mauro said.
“I have had that happen a couple of times,” Mauro said. “The negotiation’s already been done. They know what they’re buying the property for. I’m just facilitating, kind of quarterbacking the whole transaction to closing.”
Other considerations for selling your house with a tenant
Regardless of which avenue you choose in selling your rental home, you’ll want to gather pertinent information and monitor these important details.
Review your tenant’s rights
In addition to reviewing your state’s landlord-tenant laws, look over your lease agreement again to be sure you don’t lose track of the following items recommended by Avail, an educational platform for landlords:
- How much notice you need to give your tenant about vacating, regardless of whether you have a fixed-term or month-to-month lease. “It might be month-to-month, but with 60-day notice,” Mauro said.
- How much notice the tenant needs before showings and inspections
- Transferring security deposits and rent receipts to the new owners. You’ll also need to notify the tenant where the deposit was transferred.
- How to pay rent moving forward. If your tenant is remaining in the property, make sure he or she knows the new owner’s contact information, since the new owner will inherit the lease.
Use effective communication
Although you may be used to communicating with your tenants verbally, it’s a good idea to provide written notification of your intent to sell the property so that the tenant formally knows whether the potential new owner will assume the terms of the lease, said RentPrep.com, a Buffalo, N.Y., company that provides Fair Credit Reporting Act screenings of potential tenants for landlords.
The company has a letter template for owners selling property that you can modify to suit your needs, including inserting how many hours of notice you’ll provide before showings and how you’ll notify the tenant about these.
“Today’s tenant wants to text. Younger people want texts. Even older people like myself text,” Mauro said. Phone calls and email also work well to touch base about showings and inspections.
Expect that tenants may not always cooperate, but praise them for being helpful
Unfortunately, even if you provide your tenants with incentives to cooperate during the sale process or leave early, sometimes they still don’t leave.
You could have the right to evict your tenants for not leaving as agreed. An eviction is essentially a lawsuit against your tenant and is a legal process that can take anywhere from a few weeks to a few months, according to Rentec Direct.
“Every part of the eviction process must be followed exactly or a landlord risks delaying the process, potentially allowing a renter to continue living on his property rent-free,” Rentec Direct says. If you take any illegal steps to force them to leave, such as raising the rent suddenly or changing the locks, you could owe your tenants money.
Your best bet is to convince your tenants they have a stake in the process, so they’ll consider themselves partners or allies, which can go a long way. This extends to your real estate agent treating them respectfully as well.
“You want the tenant to like you as the agent as well and feel like you’re giving them ample notice for showings and stuff like that, and honoring their efforts in keeping the house together. Telling them what a great job they’re doing and how great things look and how much you appreciate it. Showing some gratitude if they are playing ball,” Mauro said. “That’s all key.”
Header Image Source: (Roberto Nickson/ Unsplash)