Is it time to sell that investment property, even though you have tenants in it? In this article we're going to walk through your options, and explain how to sell a home with tenants in it.
So you've decided that it's time to sell your income property. Congratulations! It's important to remember that investment properties are businesses, and deciding to sell, while it can be emotional, is often the right decision. You've done the hard part (making the decision), but what are your options to actually carry through with your decision?
Either choice is doable, but it's important that you fully review the mechanics of each (don't worry - we're going to walk through them!), and there are potential pitfalls that you need to be aware of. We're living in a COVID-19 world, and in many parts of the country you're simply not allowed to evict people right now, so that needs to be taken into account. The good news is that real estate values haven't dropped (at least not yet), so you probably haven't lost any equity through this whole mess.
There's also a very good chance that if you're reading this, that you have tenants in your property. Selling a home with tenants currently living in it can be challenging, and a tenant could make or break the sale. Planning well in advance, openly communicating with the current tenant, and being willing to make a few compromises will help make the selling process successful. Let's take a look at the options on the table.
Gives you time to plan and execute on any updates: If your property needs updates, and your plan is to sell on the open market, waiting until lease expiration may make sense. If will give you time to make a plan of action on cosmetic updates, and make things ship shape prior to listing the home. This could get you a higher sale price.
Remove timing issues: Homes can sell quickly - especially ones with strong rental history. If your market has a shortage of rental options, then you could find yourself in a bit of a pickle if the house isn't actually deliverable at time of sale. By waiting until the lease is done you'll avoid these issues.
Carrying costs: If the property has a mortgage on it (and most do!), then every month you wait to sell is another month where you have to pay out on the property. This can rack up pretty fast, especially if it takes a few months from the time of listing to actually get someone under contract to buy, and even longer to close. Adding additional time waiting for the lease to expire increases these costs.
Markets can shift: As mentioned, we're in a weird situation with COVID-19. No one really knows what could happen in a few months, or how long the current reality is going to last. If a market shifts while you're waiting for the lease to expire, then you could lose out!
If you're going to wait for the lease to expire, the first thing you need to do is notify your tenants in writing that you're going to not be renewing their lease. Once it has expired, you'll want to move quickly. Think about selling to Simply. We can give you an all-cash offer even before your tenants have moved out. If you like the offer, we are able to close quickly and reliably, on a date that works for both you and your tenant's timeline.
Potentially built-in staging: Homes that have furniture in them (that is tasteful and well placed) sell better than ones that are empty. If your tenants keep a neat and clean home, and their furniture is tasteful, then you can save money on staging the property empty.
Built-in income for investors: If you are charging market rent, then many investors have no problem inheriting tenants. It saves them time and money marketing the property, and creates instant cashflow
Tenant belonging show poorly: If your tenants have broken, junky, or otherwise unappealing belongings, or if the property is heavily cluttered, then this can be a detractor to potential buyers. No one likes to take over responsibility for a mess.
Angry tenants can make life difficult: You've just told your tenants that they potentially will have to move out of their home. That probably won't sit well. You're then asking them to clean and keep the property in a "ready to show" condition, as well as be ready for strangers coming through for showing and open houses. This could create tension, and make things hard to do.
You will probably have to give a little to get what you want/need. Offer your tenants reduced rent for a few months while you're marketing the property (in exchange for keeping it ready for showings). You could also offer incentives for early move-out, or pay for their moving costs. You could also consider selling to Simply. We regularly buy homes with tenants in place, and don't care about the condition of the property. You'll get a cash offer for the property as-is, and not have to worry about showings, cleaning, or even paying any fees (yep - you'll pay zero fees).
There are two common types of leases: month-to-month and fixed-term. You should know which your's is, but double-check it, especially if you (a) use a property manager, or (b) have had the tenants for a while, and have renewed the lease several times.
Check to see if the lease has an early termination clause. If it does, you can force your tenants to vacate the premises with proper notice (usually 30 days). If not, then you'll probably be forced to wait until the lease has expired. In normal circumstances (non COVID-19) you do have a caveat - if the tenant has failed to pay the rent, or has violated lease terms, you may have recourse otherwise unavailable per the standard terms of the lease. In the current COVID-19 reality, you may still not be able to evict them, even if they haven't paid on time. Lease violations are dependent on your area's laws and regulations.
Send your tenants a letter, informing them that you intend to sell the property, and notifying them of the date their lease agreement will be canceled, and on what day they'll have to move out by. Most states require between 30 and 60 days notice, but double check the local laws. This should be something that your lawyer will note when they review the lease. You'll also need to find out what your ability to show the property looks like, and may take a bit of negotiating with the tenants.
If you're a local landlord, it may be best to meet with your tenants in person - bring coffee, or meet offsite for lunch. If you're not local, then a phone call or Zoom video call can be good enough. Answer their questions respectfully - you're majorly upsetting their world.
If your tenants have lived there for a long time, maybe they want to buy the home from you! There are a few ways to handle this, but to start its best to simply put it on the table. You could either do a lease-to-own agreement with an option, which would be a one-time non-refundable fee that gives them the right to purchase the property within the year, at a determined price. Meanwhile, they keep paying rent. You could also structure a new lease where a portion of their rent goes towards their down payment. This could take a couple of years, and there would be a balloon payment at the end (which their new mortgage would pay). Usually, to do this, you would need to own the property free and clear. Be VERY WARY of anyone that brings up the idea of either a "wrap mortgage" or doing a deal "subject to". These deals, while usually legal, can be complicated, and could potentially trigger the original mortgage's "Due On Sale" clause. Click here to learn more
Trying to figure out how to sell a home with tenants can be reasonably simple, provided that you take time to prepare yourself, and make sure to openly communicate with your existing tenants, as well as your potential buyers. Of course, as we've mentioned, there is always the option to sell to Simply, where we are able and willing to buy rental properties that have existing tenants, as-is, for a fair cash offer. You'll skip the headaches of preparing the property, listing it, going through the process of open houses and showings, and having to deal with your tenants (at least to the same extent!). If you're interested - click the button below!