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Landlord’s Guide to Selling a Rental Property with Tenants in Place

 

To sell or not to sell, that is the question. The COVID-19 pandemic has forced landlords to examine their investments in a whole new light. Lost rent, eviction moratoriums, and rent freezes have taken a toll on many property owners across the country. However, steadily low-interest rates combined with high demand and low supply of homes on the market have many wondering if now is the time to sell. Join us as we examine the reasons why you should sell your investment property plus how to navigate tenant rights when selling a rental property below.

When to Consider Selling a Rental Property

Landlords choose to sell their rental properties for a variety of reasons, including life and financial changes. That said, it is hard to ignore the benefits of a successful rental property business. A steady income stream and property appreciation make this a worthwhile investment. However, sometimes circumstances will advocate cutting your losses and selling while you can. Check out these examples of when to consider selling a rental property below.

  1. Becoming a Landlord was Not in Your Plans
  2. Personal Circumstances Have Changed
  3. It Needs More Repairs Than You Can Recoup in Rent
  4. Keeping High-Quality Paying Tenants is Difficult
  5. The Neighborhood Has Seen Better Days
  6. The Property is Gaining or Losing Value

Becoming a Landlord was Not in Your Plans

Not every property owner sets out to be a landlord and can quickly become overwhelmed by the tasks required to manage a rental property. “Accidental landlords” are most often created through the inheritance of a property. Therefore, renting is a viable option while deciding what to do with the property long-term. If owners cannot or are unwilling to commit the time and effort needed to manage a rental successfully, it is time to consider selling.

Personal Circumstances Have Changed

As we mentioned above, not everyone is in a position to commit the time and effort required to handle one or a portfolio of rental properties effectively. Therefore, many landlords consider selling a rental property as they become older or shift their focus to retirement and free time. Additionally, sometimes owning rentals no longer fits into your short- or long-term goals. So, when that happens, selling might be the way to go.

When to Consider Selling a Rental Property

It Needs More Repairs Than You Can Recoup in Rent

When expenses drastically outweigh profit potential, a landlord is in trouble. For example, if the property needs a new roof and major systems show their age, repairs can run tens of thousands of dollars. Rental rates can only recoup so much of that cost, and if rental rates are already maxed in your area, landlords are unlikely to see a positive return for some time. Therefore, selling is a potentially better financial decision for your ROI.

Keeping High-Quality Paying Tenants is Difficult

A rental property’s profitability hinges on reliable rental income. Therefore, if a tenant refuses to pay, is habitually late, or cannot pay, the landlord suffers. Consequently, the eviction process is also very time consuming and expensive. Landlords who have difficulty keeping a paying tenant in the property may consider selling. Between the lost rent and the cost of high turnover, it is no longer a worthwhile investment.

The Neighborhood Has Seen Better Days

Location is the number one rule in successful real estate investing. It sets the tone for pools of prospective tenants, appreciation rates, and rent prices. Therefore, if the neighborhood begins to decline from increased crime or loss of area businesses and job growth, it directly affects landlords. So, staying on top of local market trends is essential. If the area is declining, landlords should sell before their property value declines too much.

The Property is Gaining or Losing Value

Another reason selling is a good idea is to cash in on a home’s growing value in favorable market conditions. This equity can then roll over to future investments or create a nice nest egg, depending on your goals. Alternatively, when a property is losing value, hanging onto it could jeopardize your financial future. So, if the area real estate market is on the decline, get out while you can. Check out a helpful online home value estimator to help determine the current market conditions.

Selling a Rental Property with Tenants in Place

When your rental property is vacant, selling is straightforward. However, when a property has tenants in place with an active lease, the process takes extra care and communication. So, before doing anything, thoroughly check into landlord-tenant laws and requirements in your state.

Every lease should contain an early termination clause. This is the best-case scenario if selling a rental property is your most profitable option. One of the benefits of this clause is the ability to terminate the lease under certain conditions, one of which is an owner’s need or desire to sell.

That said, when your lease does not include an early termination clause, selling a rental property is a bit more complicated. So, continue reading below as we examine various considerations when selling a rental property.

  1. Wait for the Lease to Expire on its Own
  2. Consider a Cash for Keys Incentive to Vacate
  3. Offer to Sell to Your Tenant
  4. Keep the Active Lease and Still Sell

Wait for the Lease to Expire on its Own

One option is to let an existing lease run its course. If tenants pay their rent as part of a lawful lease, it entitles them to stay through the end of that lease. As the end of the lease approaches, notify your tenants of the intent to non-renew the terms so you can sell the property. The advantage of this option is the landlord fulfills their obligation under the agreement while making a clean break. Alternatively, the downside is waiting to sell could put your property on the market at an unfavorable time.

Consider a Cash for Keys Incentive to Vacate

There are instances where tenants may jump at the chance to get out of their lease early. Therefore, an owner provided incentive or offer of payment to vacate could be the push needed to get a tenant out early. We have all heard the saying “money talks,” but figuring out just how much money is more complicated. That said, landlords can consider calculating the cost of moving expenses or even a new security deposit elsewhere. The benefit here is that the offer encourages a speedy exit and, therefore, faster speed to market for your property. However, tread carefully; offering a cash incentive could cost big, so always weigh every option.

Consider a Cash for Keys Incentive to Vacate

Helpful Tip: Need extra help understanding whether cash for keys incentive is the right choice? Check out our blog.

Offer to Sell to Your Tenant

What if your great tenants really love the home? It does happen, and what better person to sell to than someone already there? Therefore, it is not a bad idea to let your tenants know you intend to put the property on the market. While you do not want to compromise profit for convenience, offering the sale to tenants first could pay off in many ways. That said, the ideal situation is traditional financing when selling a rental property to your tenant. If not, owner financing may bridge the gap until the tenants secure a traditional mortgage. The downside is the tenant may begin requesting added repairs or conditions as part of the contract sale.

Offer to Sell to Your Tenant

Keep the Active Lease and Still Sell

In certain situations, an already rented property is a plus to a new buyer. Especially when a buyer is looking for investment property themselves. Specifically, marketing to investors means the new owners will decide whether to continue renting or non-renew once the existing tenant’s lease term ends. On the downside, selling a rental property as a rental property limits the pool of buyers to just those looking for investment potential. However, if you find a new landlord, the transaction could be quicker and smoother than the process to remove a tenant.

Marketing Considerations for Selling a Rental Property with Tenants

You may own the property, but a tenant with an existing lease has legal rights. That said, when selling and showing a home with tenants in place, you need to consider the tenant’s rights. Whether the tenant intends to leave or stay on with a new owner, the existing landlord can do things to make the process a smooth one. Keep in mind; an untidy or unhappy tenant can damage first impressions and sabotage a potential sale. Therefore, do your best to ensure their cooperation from the start. Check out these marketing considerations for selling a rental property below.

How to Market and Sell a Rental Home with Tenants

  • Agree on Convenient Showing Times – The home could indeed be shown with as little as 24 hours’ notice. However, try and give tenants as much notice as possible. Keep in mind; it is a disruption to their daily lives despite your eagerness to sell. Therefore, communicate and determine what times do not work for the tenant’s schedule and what works best. Ideally, set a few days and times during the week that the tenant agrees to make the home available.
  • Emphasize Cleanliness – No buyer wants to walk into a messy home. So, preparing for marketing takes the initiative on the owner’s part to ensure the property is well kept.

Emphasize Cleanliness

Thus, hiring a vendor to spruce up the landscaping and offering professional cleaning services to the tenant is key to successful showings. Additionally, if the tenants are in the process of packing, consider offering temporary storage. If that is not an option, request that they consolidate boxes in a singular location as much as possible.

  • Use Virtual Tours When Possible – Virtual tours are a great asset in real estate marketing. Not only does it showcase the home, but it also allows potential buyers to tour anywhere and at any time. This helps to weed out individuals who are not serious and, in turn, cuts down on in-person showing requests. Tenants will appreciate your effort to limit people coming through their living space, especially during the pandemic.

Tenant Free Showings

  • Tenant Free Showings – Limiting buyer and tenant contact is best for a few reasons. One is that buyers want to freely tour a home without oversight or interference from the residents. Secondly, with COVID on everyone’s mind limiting person-to-person interaction is best for all parties. Therefore, this is where predetermining agreed showing times can come in handy.

Bonus Tip for Selling a Rental Property with a Tenant

  • A Paying Tenant is a Selling Point – Investors looking to purchase your property will see an existing tenant as a potential bonus. After all, it saves them the expense of marketing and turning over the property, at least initially. However, if the current tenants have a poor payment history or are behind in rent, this is not a good sign. It is not worth retaining a tenant who will not consistently uphold their lease obligations. Therefore, an owner can either choose to offer an incentive to vacate or proceed with an eviction. If you have no choice but to get the tenant out, ensure this occurs before marketing the property for sale.

Final Thoughts

No matter why a landlord decides to sell when the property is occupied, the stakes are higher. That said, the key to success is understanding local laws pertaining to tenant rights and maintaining clear communication with your existing tenants. Doing so will help the process of selling a rental property go as smoothly as possible. Looking for a way to make managing your rental goes as smooth as possible? Consider expert investment property management from Bay Property Management Group! We pride ourselves on balancing tenant satisfaction with the owner’s ROI while maintaining an excellent standard of customer service for all. Give us a call today to learn more about our full-service approach to property management.