Selling a Rental Property with a Tenant
Thinking of selling an income property this year? What happens if it is tenant occupied? What are your options?
Selling a rental property with a tenant is a little different than selling your own home. Updating your property, making repairs and preparing for showings can all be tricky when you have tenants. There are also differences between selling a leased house and a fully rented apartment building.
Selling an occupied rental property has its advantages and disadvantages. In your specific situation, will the tenants make your property more valuable to potential buyers? Or would it sell more easily, and for more money, if it were vacant? Take the time to evaluate your options and decide which scenario is best for you, and discuss it with a real estate agent who knows the local market well.
Sell to Your Tenant
Are your tenants looking to buy a home in the near future? Selling to a tenant can be a great solution to selling your rental property. They are already familiar with the building, and know how it has been maintained. They may love the location or the neighborhood, and prefer to stay.
Before listing your property, approach your current tenants to see if there is any interest. In most states and provinces, the tenant has the right of first refusal, so you actually must offer them the chance to buy the property before you list it on the open market.
If your tenant is interested, they could buy the property with a traditional bank mortgage, or you can explore other options. Owner-financing or lease-to-own are options than can give you a higher sale price. They can also offer other benefits like tax breaks, since you don’t get the sale money as a lump sum, but rather in interest and steady cash flow. Be careful and do your research before taking on any kind of creative financing deal. There are even obscure legal ways of structuring the deal so that you do not have to foreclose if the tenant buyer defaults, but rather go through the eviction process (which is substantially shorter and less expensive).
List the House as Tenant Occupied
Selling a single-family house that is tenant-occupied can be done. However, since the new owners will need to uphold the lease agreement and follow landlord-tenant laws, it can greatly reduce your prospective buyers.
Buyers stay away from tenant-occupied homes for many reasons. Some are looking for a home for their family, and can’t wait six months to a year for the current lease to expire. Most buyers have never been landlords, so won’t even look at leased homes – they don’t know what to do in this situation. Other buyers may worry the property has not been well maintained or cared for, since it is not owner occupied.
Sell to Another Investor
If your rental property is a duplex, triplex or apartment building, chances are your target market is other real estate investors. A fully-rented building may be a great selling point if you have quality tenants and good rental rates. Selling to another investor can be quick and easy, since you don’t have to worry about evicting or buying-out tenants. Your rental would generate cash flow immediately for the new owners, which is appealing to investors. Generally the price is lower however, since you’re selling “wholesale” to an investor rather than “retail” to a homeowner.
Wait Until the Lease Agreement Expires
Depending on the type of rental, it may be best to wait until your tenant’s current lease agreement expires before trying to sell. Consider who will be your potential buyers. If you are selling a house, for example, your potential buyers will mostly be families looking to buy their own home. They likely won’t be interested in buying a rental property with a current tenant.
Before your lease term expires, you must give your tenants the appropriate non-renewal notice to vacate the property. Check your area’s landlord-tenant laws to see how much time you must allow for tenants to vacate. Once your property is empty, it will be much easier to make repairs, paint and clean. Your property will always be ready for showings – potential buyers won’t have to try and look past any furniture and clutter. You will also have the freedom to show your property as needed, without worrying about giving tenants the appropriate notice.
Buy Out the Lease
Another option is to buy-out the remaining lease from your tenants. In this situation, a lease buy-out means the landlord would offer a sum of money to their tenant in order to terminate the lease early. Landlord and tenant can negotiate the final sum, based on moving costs, monthly rental rate and remaining term of the lease. Once both parties agree to the lease buy-out amount and time-frame, they would sign a new agreement.
Tenants don’t have to agree to a buy-out, but they often will. Although there is a cost to buying-out your tenant, selling your empty property will likely be easier and quicker. Once your property is empty, you can make the necessary updates and list it for sale.