Selling a Property with Tenants

How do I Sell a Rental Property with Tenants?

When it’s time to sell your rental property, but it is currently occupied, there are two main ways you can handle this as a landlord: Waiting for the lease to expire before selling without renewal, or listing while your tenants are still living in the home. There are pros and cons to both options.

In the aftermath of Covid lockdowns and eviction moratoriums, many homeowners who’ve experienced difficulty with tenants have soured on the idea of continuing to rent out their properties going forward. In addition, the real estate market is booming right now in Washington, which means that landlords who may have been holding out on selling to see an increase in their equity may be coming to the conclusion that there may never be a better time to list their rental properties than now. Compound all of that with the Federal Reserve increasing their rates this year (which will have a negating effect on the demand side of the housing market), and many sellers are starting to feel immense pressure to offload their properties ASAP.

Of course, if you’re a landlord thinking similarly about selling your house, one of the things that may be stopping you is that there are people currently living in it. Selling with tenants can be a challenge at the best of times, and a tenant can make or break a sale. To help avoid your tenant negatively impacting your listing, you’ll need to plan well in advance, communicate frequently and candidly with your tenant, and make some compromises with them in order for your sale to run smoothly and be a success. Next, we will explore some of the pros and cons of each option.

Option 1: Wait for the Lease to Expire

Pros

Allows Time for Improvements: If you’re able to wait for your tenants to vacate, you’ll be able to clean, perform cosmetic repairs or updates, and generally touch up the property before listing, which could help you end up with a better deal and/or a better sales price.

Can Alleviate Timing Issues with Closing: In this hot housing market, your listing could sell faster than you were originally planning, and depending on the terms of the lease and regulations of your city, county, and state – you may have trouble getting your tenants out before the new owners are supposed to take possession. However, if the home is not occupied when you list it, you no longer have to worry about timing and can simply accept the best offer.

Cons

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.

Market Could Sour: Waiting for your lease to end could take several months and during that time interest rates can increase (as they are now), demand can fall, or supply can rise.

Option 2: Sell with Tenants in the Home

Pros

Built-In Staging: When a home is furnished, buyers can more easily picture themselves living there. If the current tenants have kept the home clean and decorated it in a positive way that enhances the features of the home, it will be more desirable to potential buyers who view it.

It’s Attractive to Investors: Having tenants currently living in the home is attractive for buyers who might be looking to acquire the home as a rental property — you’ll be saving them the legwork of having to find a tenant!

Cons

Angry Tenants Can Ruin Showings: You’ve now told your tenant they have to move out soon or that ownership will change (and the new owners may not renew their lease). Now you’re relying on them to keep your home clean for showings, asking them to adjust their schedules around countless strangers walking through their living space (strangers who will end up displacing them), and trusting that they’ll cooperate with you on your sale and avoid driving away potential buyers? This can be a difficult pill to swallow, and uncooperative tenants can have a big impact on how the house shows – interfering with scheduling showings, driving away buyers with negative comments, or even letting the home fall into a mess or disrepair.

Current Furniture Could Reflect Negatively: If a tenant hasn’t taken care to coordinate their furniture, keep the home tidy, or if they’ve filled the home with too many personal possessions it could sour a buyer’s perception of your home as they walk through it. A messy tenant can also ruin listing photos, driving away potential buyers who would’ve liked your home otherwise.

Primary Homebuyers Don’t Want Tenants: Although investors may consider already-existing tenants to be a positive, buyers looking for a new primary residence don’t want to become landlords for any period of time before moving in and will avoid tenant-occupied homes.

Many Buyers May Not Qualify: Many homebuyers who obtain financing for their primary residence are required to begin occupying the home they purchase within 60 days of closing. If the current lease expiration is beyond 2 months out, many buyers will be driven away.

Landlord Solutions

There are several ways that you may be able to persuade your tenants to cooperate with your plans to sell, consider offering them a lower monthly rent in exchange for an agreement for them to communicate openly with you and show a clean and well-kept home. Other potential incentives you can offer are a flexible move-out date, reimbursing moving costs, paying for the tenants to stay in a hotel for a weekend while showings and open houses are held, having your agent help them find a new rental, or buying the tenants out of their lease.

Review Lease Agreement

However you decide to move forward, the first thing you should do is review the lease agreement that you have with your tenant. You should also look up the city, county, and state laws regarding notice to vacate requirements that you are legally obligated to give before listing or selling your home. Your real estate agent can be a great resource for local requirements, as well as offer tips for a successful sale with tenants in the home and act as a liaison.

Ultimately, the actions you can legally take — and when you take them — depend primarily on the lease agreement you’ve signed with your tenants.

Month-to-Month Lease

Make it known to your tenants, in writing, the date their lease agreement will be canceled and when they’ll need to have moved out. In most states, month-to-month leases require you to give them between 20 to 60 days’ notice – but make sure to check your local laws. Whether or not you can show the property while your tenants still occupying the property depends on your existing lease.

Fixed-Term Lease

If your lease includes an early termination clause, you can vacate your tenants with proper notice adhering to the process outlined in the contract. If not, you may have to wait until their lease expires. There is one notable exception: If your tenant has failed to pay rent or violated your contract terms, you may be able to terminate the lease early according to local laws and the language of your lease.

Messaging and Delivery

Being on amicable terms with your tenant if and when you decide to sell before they vacate is a vital step. Breaking the news on your plan to sell is the most important conversation to have with your tenants and can go a lot more smoothly when you consider not just what you’re saying, but also how you’re saying it.

Be Respectful

Breaking this news in person is best, it may be the most comfortable for everyone if you had this discussion in a neutral third-party location, maybe while out for a cup of coffee. Make sure to schedule out enough time to address all of their questions and concerns about the process.

When selling your rental property, it’s best to be open and honest with your tenant.

Offer Your Tenant the Chance to Buy

If your tenant has fallen in love with where they currently live, they could be open to buying your home. It’s okay to present your tenant with this option directly, but if they admit to being interested in purchasing, you’ll absolutely want to work with a real estate attorney. Here are just a few ways these off-market transactions can proceed:

• A lease-to-own with an upfront, one-time, non-refundable option fee that allows tenants the right to purchase the home from the owners within a set amount of time, at a set price. In the meantime, they remain a tenant and pay rent.
• A lease-to-own agreement that is structured (in writing) so a portion of each month’s rent goes toward a future down payment.
• A seller-financed agreement. This is where the landlord (you) serves as the lender, instead of a bank. With this kind of agreement, the tenant agrees to make payments (with a mutually agreed-upon interest rate) to you over a few years, often including a balloon payment. The biggest benefit for you, as the seller, is the money you’ll make from the interest paid by the buyers on the debt. In order to utilize this type of sale, you’ll need to own your rental home “free and clear”, without a mortgage balance still on the property.

Go Over the Details

It’s best practice to agree in writing on all things pertaining to the listing and sale, like how much notice you’ll give the tenants before showings (24 hours is usually the legal requirement), what time of day the showings will happen, and what the obligations of the tenant should be and what condition the home should be in throughout the process.

*The information provided in this article is meant for informational purposes only and is not intended to constitute legal,  financial,  tax,  or insurance advice.  Team Covington encourages readers to contact their attorney or other advisors for advice regarding these matters.