Selling a Property With Tenants
Jan 19, 2021 brooklyn,Brooklyn Landlords,landlords,selling property
Once you’ve decided to sell a rental property, there are two routes you, as the landlord, can opt to go: You can wait for the tenant’s lease to expire before putting the property on the market or you can sell with tenants still in the home. As you might have guessed, there are pros and cons to either route.
Despite unheard of challenges this past year, many parts of the Greater New York Metropolitan area real estate market are booming. For those landlords who waited and held onto properties while waiting for their equity to increase, now may be the right time to sell.
Of course, selling an occupied dwelling has some drawbacks. Selling with tenants can be challenging and, depending on the tenant, can make or break your sale. You’ll have to plan well in advance, openly communicate with your tenant, and compromise to get the sale to work for all parties. Let’s explore the pros and cons of each option.
Option 1: Wait for the lease to expire
Allows time for updates: If you’re able to wait for your tenants to move out, you’ll be able to clean, do any cosmetic updates, and just generally spruce up the home before listing, which may help you snag a higher sale price.
Can alleviate timing issues with closing: In a hot real estate market, the home could sell quicker than you expect, and depending on the terms of the lease and regulations in your state, you may have trouble getting your tenants out. If the home is unoccupied when you list it, you can accept the best offer without having to worry about timing.
Mortgage carrying costs: Each month without tenants is a month when you’re on the hook for the mortgage payment. If it takes a few months to prepare your home for sale, list, accept an offer, and close, you’ll be responsible for the full carrying costs.
Once the lease has expired, you’ll probably want to get the property sold as quickly as possible. If you’re looking for an out and not the highest-possible price, consider selling it as is and sometimes land an all-cash offer before your tenants have even moved out. You can have an all-cash offer in-hand before your tenants have even moved out. If you accept the offer, you can close on your preferred timeline.
Option 2: Sell with tenants in the home
Already staged: Buyers appreciate seeing furnished homes—a plus for you if the tenant has taken care of it and decorated it nicely but…you can probably guess the con.
It’s attractive to investors: Some investors prefer to have renters in place. It makes everything that much easier for them and offers them immediate cash flow as soon as they take ownership.
Disgruntled tenants are bad mojo for showings: A tenant who’s just been told they have to move out is less likely to clean their place, keep it in showing-shape, and be ready at a moment’s notice to have their home shown.
In order to get tenant buy-in, consider lowering the rent for a few months in exchange for an agreement to show a clean and well-kept home. Other incentives might be a flexible move-out date or reimbursing moving costs.
Time to review lease agreement
Whichever option you choose, the first step is always to review the lease agreement already in place. You should also look up laws in your state regarding how much notice to vacate you are required to give. Your real estate agent can be a great resource for local legal requirements/
The actions you can take—and when—depend on what type of lease agreement is in place.
Send a letter to your tenants, letting them know the date their lease agreement will be canceled and the date they’ll need to move out. In most states, you need to give them either 30 or 60 days’ notice, but make sure to check your local laws. Whether you can show the property while they’re still living depends on your existing lease agreement.
If the lease includes an early termination clause, you can vacate your tenants with proper notice. If not, you’ll just have to wait until their lease is up. There is one exception: If your tenant has failed to pay rent or violated any lease terms, you may be able to terminate the lease early.
Give thought to how you break the news
These difficult conversations with your tenants go a lot more smoothly when you consider not only what you’re saying, but how you’re saying it. Think about how you’d want to hear the news and go with what’s respectful.
Offer your tenant a chance to buy
If your tenant really loves where they live, they might be interested in buying the home. It’s fine to approach your tenant about this option directly, but if they’re interested in purchasing, you’ll definitely want to work with a real estate attorney. There are a few ways these transactions can happen:
- A lease-to-own with a one-time, non-refundable option fee that allows tenants the right to purchase the home within the year, at a set price. In the meantime, they keep paying rent.
- A lease-to-own agreement that is structured so a portion of the rent goes toward a down payment.
- A seller-finance agreement. You, as the property owner, serve as the lender, instead of a bank. The tenant agrees to make payments to you over a period of a few years, often with one balloon payment. The biggest benefit for the seller is the money you’ll make in interest on the debt. In order to take advantage of this type of sale, you’ll need to own the home free and clear, without a mortgage.
Get it in writing
When it’s time to show, make sure you both know the agreed-upon terms and get it in writing:
- Notice before showings (usually 24 hours is the minimum, but check your state)
- What time of day the showings will happen
- What steps should be taken if the owner has pets (particularly dogs), e.g., ok in home or no?
- What condition the home should be in.