It’s certainly possible to sell your investment property while it’s occupied with renters. However, this introduces complications regarding both the lease and the potential sale.
Let's take a look at your various options to decide which next steps make the most sense for your unique situation.
Putting the property on the market with tenants
The advantages: From a financial standpoint, it’s advantageous to continue to collect rent for as many months as possible while the property is still in your name. By getting a jumpstart on the selling process rather than waiting for renters to move out, you theoretically ensure ongoing income to cover expenses instead of leaving the home empty.
Additionally, buyers looking for an investment property may appreciate that you already have occupants, saving them the work of finding their own. However, this will apply to a smaller pool of candidates.
The cons: Experts say that the most successful open houses are strategically staged so prospective buyers can imagine what it’d be like for them to live there. This means that the space should be devoid of personal photos or personal touches. Your tenants’ questionable artwork or strange furniture choices can subtly discourage viewers. Plus, it’s likely that they won’t keep the house as spotless as if it was vacant.
Additionally, it’s worth acknowledging that not all tenants may be thrilled with you selling the property, mainly if they had hoped to renew the lease and no longer have that option. This may make them begrudgingly compliant at best, uncooperative at worse.
Their poor attitude can sabotage you in numerous ways, so it’s crucial that you keep good relations with your tenants. This may mean giving them significant discounts on their rent and financial assistance with moving, particularly if you’re the one to break the lease early.
Waiting until the tenants’ lease ends
The advantages: Essentially, you are freed from the burden of the cons mentioned above. You can stage the property; however, you wish and have more flexibility to show the home without worrying about providing advance notice. What’s more, your tenants tend to respond better to this option, meaning that you have to financially appease them less.
The cons: You can potentially lose a significant amount of money as you wait for your house to be sold. If the closing is only weeks after putting it on the market, your gamble will have paid off. However, if you are forced to wait for months before a buyer comes along, you’re responsible for piling mortgage payments, taxes, and utility bills without the aid of incoming rent.
An alternative is to consider selling an iBuyer, a company that will provide a cash offer for your property in its current state. As noted in this article, such companies enable home sellers to choose their own closing date and complete the process in a matter of days, preventing any financial hemorrhaging from a property that is slow to sell. However, the downside is that the initial cash offer will most likely be less than if you wait for a traditional buyer.
What and How to Communicate with Tenants
Notes on Breaking the Lease
You can break the lease early only if there is an early termination clause. If this is the case or the renters are month-to-month, try to ideally give them as much forewarning as possible while keeping in mind the terms of your agreement.
In the scenario where no such clause exists, you can offer your tenants a significant cash offer to vacate early. However, approach this with the mindset that they’re doing you a favor, meaning you shouldn’t be upset if they refuse.
How to start the initial communication
Keep in mind; you may be delivering a crushing blow to your tenants. For this reason, it’s best to let them know using their chosen form of communication (text, email, or phone call) and then offer to meet in person to answer their questions. By giving them fair warning before your sit-down, you give them time to move past shock to think about what questions they need explained.
Key points to touch upon
As mentioned above, it’s customary to reduce rent and to provide financial help with moving. However, you choose to lessen the blow for your tenants, make sure it’s one of the first points you touch upon.
If you are showing the property with your renters present, acknowledge that you’re causing a disruption to their lives and consider how you can show your gratitude for their cooperation.
Minimize the amount of responsibility they have to shoulder by hiring a maid service, as well as asking if there are particular times and days that would be particularly inconvenient for house showings. Remember, you’re legally obligated to give at least 24-hours notice before the showing.
If applicable, let the tenant know that you’re open to selling them the property
This has the potential to be a win-win, especially because it saves you the cost and work of marketing and showing the property. RentPrep has an excellent article that explains in greater detail about what selling to your tenant would entail.
This is different than a rent to own scenario, which you may have heard about in the past.
A tenant buying your property should be a reasonably straightforward sale. One of the more significant advantages is that you won't need to pay a real estate agent's commission.
A Little Bit of Consideration Goes a Long Way
To summarize, a courteous attitude towards your tenants is essential throughout the entire process. By letting them know you appreciate their helpfulness and financially compensating them for their troubles, you ultimately are more likely to have a smooth home sale.
Other Excellent Huliq Real Estate Posts
Get more sound real estate advice in these previously published articles.
How do you know it is time to move - are their signs you should be moving out of your current home? There sure are! In the article at Huliq, get some helpful tips to know you should be moving on from your current residence.
New homeowner mistakes to avoid - buying your first home comes with significant financial responsibilities. You certainly don't want to blow it so find out some of the more common blunders you'll want to avoid making.
About the author: The above article on selling your rental property with tenants was written by Chris Chiarenza. Chris is the Founder and President of DealHouse. Since 2009, he has dedicated his career to helping families profitably navigate the Long Island real estate market.