With the many ups and downs of 2020, there is no denying that it is currently a seller’s market in many areas. Historically low interest rates have pushed buyers to look, and low inventory puts sellers in the driver’s seat.
But what if you are trying to sell a property and it has a tenant? Are you able to take advantage of the market and list the property for sale? Unlike selling a home you live in, you have to think about the tenants and their rights on your property.
Determining when to list your investment property is probably the ultimate question. Selling a house with tenants is entirely possible, and there are several options. We will take you through some key considerations, as well as provide some tips for a smooth selling process. Keep reading to learn how to sell a house with tenants in it.
Option #1: Wait for the Lease to Expire
Your first option is that you can certainly wait for the lease to expire. In this case, you can make the tenants aware that you will not be renewing the lease, and they can make plans to move out.
There are a few advantages to the approach of waiting for the lease to expire. Once the tenants have left, you can make any repairs or updates to improve the property. Depending on how long the tenants have been there, you may want to freshen up paint or replace carpeting to prepare for a sale.
You will also avoid any timing issues with closing. Since the property is vacant, you would be ready to close at any time. You can certainly begin discussions with a realtor before the end of the lease and do any other preparations possible.
However, having a vacant property means that you will be incurring costs without any incoming rental income. You may have a mortgage to pay, property taxes, insurance, or other costs. And without knowing how long it will be until the property sells, these could add up.
If you wait for the lease to expire, there are different types of leases with varying requirements around when they end. You’ll also need to check the specific language of your lease agreement.
A month-to-month lease allows your tenants to renew the lease every month, usually for an indefinite period of time. Check the laws in your state, but to terminate a month-to-month lease will typically require that you give the tenants 30 days’ notice.
A fixed-term lease has a designated start date and end date. The lease may or may not have an early termination clause. If there is an early termination clause, it may trigger the end of the lease after the sale of the property.
However, without an early termination clause, the terms of the lease will need to be honored, even if the property is sold. You could have a discussion with the tenants and see if they are willing to end the lease early by amendment, but they are not required to agree to a change in terms.
Termination of the Lease
If the lease has a fixed term, another would be to evict the tenants. However, this can only be done if the terms of the lease have been violated. Valid reasons to evict tenants include:
- Failure to pay rent
- Violation of lease terms (such as smoking or pets)
- Significant property damage
- Subletting, if prohibited
- Breaking noise or health ordinances
- Health or safety hazards
If your tenant has not violated the lease terms in any way, then you are stuck.
Option #2: Selling the Property With Tenants Still There
If you list the property before the end of the lease, you will need to work around your tenants. One benefit is that you will have built-in staging. The property may feel warm and inviting to buyers.
Buyers that are looking to buy a property as an investment may find value in existing tenants. This is particularly true of commercial properties.
On the other hand, selling with tenants can be challenging. The tenants may be disgruntled about keeping the house clean or needing to leave the premises for a showing. If the tenants feel inconvenienced, they may be less-than-cooperative with your efforts to sell.
If the property needs repairs or updates prior to listing, you would also need to work around your tenants. Depending on what you plan to do, this may also be an inconvenience to your tenants.
Remember, the tenants are not invested in helping you sell the property. It is up to you to maximize the appeal for buyers, and you need your tenants to cooperate with you.
Here are some tips for selling a house with tenants:
Tip #1: Talk to Your Tenants
Make them aware of your plans to sell. Be respectful, and remember that your property is their home. Answer any questions that your tenants may have.
Tip #2: Offer a Reduction in Rent
While the property is for sale, a reduction in rent may make your tenants more agreeable. Showings and keeping the house clean will likely be an inconvenience.
Tip #3: Communicate Regarding Showings
You can legally enter the property to show it with proper notice, which is usually 24 hours. Work out the logistics of having your realtor contact the tenants, or if the communication will come from you.
Tip #4: Don’t Put Signage in the Yard
Signage may attract the curiosity of neighbors who will knock on the door while the tenants are there. Ensure that if anyone knocks on the door inquiring about the sale, the tenants direct the prospective buyers back to the realtor.
Tip #5: Schedule Showings Around Your Tenants’ Schedules
Understand work or other obligations that your tenants may have that could impact availability. After all, the tenants are being forced out of their home for a period of time to accommodate showings.
Tip #6: Make It Easy to Keep the Property Clean
You want the property to be good condition for showings so that it is appealing to buyers. Hiring a cleaning or yard service can ensure that the property stays show-worthy.
Tip #7: Stay In Communication Until Closing
Keep the tenants informed about the progress of the sale. If the tenants will continue to occupy the property after the sale, the security deposit is transferred to the new owners. Collecting rent will need also need to be worked out between the tenants and the new owners.
Tip #8: Be Familiar with State and Local Laws
Tenants have rights, and you don’t want to put yourself in a problematic position legally. You must keep to your end of the lease agreement, as long as the tenants hold up to their end.
Option #3: Sell the Property to Your Tenant
When you open up a discussion with your tenants about selling the property, you may find that your tenants are interested in buying. This option may be particularly attractive to long-term tenants.
Tenants can be great buyers. They know the property, plus you would not have to do any of the work needed to list the property for sale.
If your tenant is interested in buying the property, this could occur in several different ways.
Traditional Bank Financing
Your buyer may approach the sale with traditional financing from a bank. This will require that the tenants meet underwriting, credit, and down payment requirements.
If your buyer does not qualify for traditional financing, you could do seller financing. With seller financing, you are essentially acting as the lender.
Seller financing can be faster than traditional financing, but if you have a mortgage on the property, you will need to contact your bank for approval. You should also involve a real estate attorney.
Seller financing allows your income stream to continue with the buyer making payments to you, plus you will earn interest. However, you will want to qualify your borrower to ensure that the tenants – as borrowers – will make payments and keep the property in good condition.
You can also enter into a lease-to-own contract with the buyer. There are two types of lease-to-own agreements: one gives the buyer the option to buy at the end of the lease, and the other is a contract to buy.
In lease-to-own agreements, your tenant will pay a one-time non-refundable fee at the onset of the agreement. You can also structure this so that a portion of the rent paid goes toward the down payment.
If your tenant is interested but does not otherwise have a down payment, lease-to-own with a contract to buy might be a good strategy.
Option #4: Cash for Keys
A fourth option would be to incentivize the tenants with cash if they agree to move out of the property on a specific date. A true “cash for keys” is used more formally and has some legal implications (usually in evicting tenants). Still, you can do this more informally if you have a good relationship with your tenants.
You could combine a “cash for keys” offer with one of the other options discussed. For example, you could incentivize your tenants to move out before the end of the lease so that you can list it when it is vacant. Or, you can offer the incentive for the tenants to move out prior to the transfer of the property to the new owners.
There are several different ways you could offer cash to your tenants in exchange for ending their lease early:
- If it is going to be difficult for the tenants to find a new property at the same rent, offer to cover the difference for a period of time.
- Offer to cover the cost of moving, especially if it comes as a surprise to the tenants that they will need to move.
- Offer to pay the security deposit or first month’s rent on a new place.
Be aware that you are not permitted to harass your tenants. These types of offers may be most effective if you have had an amicable relationship with your tenants.
How Much is Your Property Worth?
With the current seller’s market, you may be wondering what your investment property is worth. Having a number may impact your motivation to sell.
You can start with an online estimate with a place like Zillow or Redfin. By entering the address, you can find the value of your property in seconds, based on industry insights and market trends.
With the seller’s market and your property value in hand, you may find that you want to sell the property quickly. The question then circles back to: what to do with the tenants?
Selling a House With Tenants Using Online Real Estate Buyers
The idea of selling a home can be stressful, particularly if you have tenants. It may seem like selling with the tenants still occupying the home will be tricky, and listing after the tenants have left may be too costly. So what is the solution?
You can start by answering a few questions about your home. If your home qualifies, you will receive an offer. If you accept the offer, someone will be sent to look at the house.
You will save on time and other expenses associated with listing your rental property. This will give you more flexibility to work with your tenants in a “cash for keys” scenario.