Selling a home when it is being rented is not the easiest of tasks, although if you have no other choice, consider the following facts and ideas in order to make the process workout in your benefit.
- Property management. If you working with a property management company, you will need to contact them to obtain a copy of the current lease agreement. This will show you the term remaining on the lease so that you know your obligation to the tenant. I recommend sending a certified letter to the property management company for this document to create a paper trail from this point forward. Remember, not all homes sell quickly, so you may still need the services of a property management company. Inform them that you are planning on selling your property and they too can also help guide you with suggestions of dealing with this process while it is rented.
Property management companies resign tenants for 6 month and 12 month terms quickly to guarantee their occupancy levels, so timing is critical here. If the lease was just renewed, it can interfere with your efforts to sell your home. Reading through the lease agreement and the property management agreement on file to determine how best to move forward.
- Tenant cooperation is vital! Often the best approach is to simply have a conversation with the tenant. Explain to the tenant that you want to make this experience as convenient as possible for them and with their help, come up with a common ground for showings. On occasion, I have had pre-arranged ‘showing times’ on Tuesdays and Saturdays between 1:00-3:00. With a couple options, tenants don’t feel so put out. Remember, tenants have rights, so if you can’t come to an understanding, you may simply need to start the eviction process. (Be sure to check with local and state regulations regarding tenant eviction.) It’s also important to have your agent help communicate with them as he/she will be the one reaching out to them when an appointment is needed.
- Realistic expectations. The typical fear of a tenant is that hundreds of people will be walking through their home without notice! This is not the case. Often investment properties are marketed with no interior inspections until an offer is presented. Of course this will delay the sale process and is not recommended. Most commonly, you can require your agent to simply pre-screen the potential buyers and encourage the buyer’s agent to stick to the guide lines set in the MLS for pre-arranged showing times. Tenants also need to understand that they will not be forced to move without proper notice. Rental regulations protect tenants in this situation, although most tenants are not familiar with the eviction rules, so take time to educate them on this topic and you will get more cooperation.
Of course, it is to the seller’s advantage to serve written notice to the tenant once they decide to sell in order to eliminate a long eviction if the future buyer wishes to occupy the property.
- Tenant wants to stay! Often, sellers are selling a rental property and the tenant is happy and wants to stay! Remind the tenant that many of the buyers are also investors and looking for good tenants. Encourage your tenant to cooperate and show pride of occupancy, as the next buyer could be the new landlord. This also gives you an opportunity to clean the carpets, touch-up interior paint and fix a leaky faucet, as it will make a tenant happy and the potential buyer will appreciate the condition.
- Don’t offer a discount! Sellers are often sympathetic about selling a rental property and try to create ways to motivate a tenant to gain cooperation. While this is good, also remember to avoid giving cash discounts. If you are selling to an investor, the first thing the investor will look at is current rental figures and they will want to see proof of rents. So, if you have reduced your rent to help motivate a tenant, this will hurt your CAP rate. Also, it has been proven that this approach will also not benefit the seller, as many tenants do their best to avoid a move-out so that the rental discount continues longer than anticipated. Past experience has shown that a cash incentive after the sale is more helpful. Consider it a ‘move-out’ credit to help with relocating or a ‘tenant assistance’ fee for helping keep the property clean and presentable. This fee is negotiable…it could be as low as $250. To $1,000.
- FACTS. Understand that the seller will be required to disclose all known facts about the property, and if the tenant stays, there will be additional disclosure needed. On this note, the tenant will be asked to verify a tenant estoppels form. This verifies how much deposit was originally made and the monthly rent paid. Keep in mind, the tenant is also very helpful if asked “What is wrong with this property?” So, if you know of a problem, rest assured, the tenants does also and will eagerly share it when asked. The lesson here is, make repairs early, because you will not only have a happy tenant, but the tenant will be able to answer honestly with “Everything works fine.”
- Closing costs. Selling an investment property includes some additional tax consequences. Talk with your CPA or tax advisor regarding the sale of your investment property before you begin marketing your property. Investors often choose to use a 1031 Tax Deferred Exchange to reinvest their profits in a sale. Due to the complexity of the exchange be sure to consult your CPA for a recommendation.