There are no federal, state, or local regulations that prevent the owner of a rental property from selling it while renters live on the premises.
However, it can present some challenges. Sellers should plan carefully before listing tenant-occupied properties on the market.
Here’s what you need to know about selling rented properties.
The Lease Agreement Survives the Sale
When you sell a renter-occupied property, the lease agreement transfers to the new owner. All terms carry over, no exceptions.
The security deposit also transfers, so make sure you deliver it to the buyer at closing, along with the last month’s rent if you collected it.
When you sell the property, provide your tenants notification of the new owner’s name and contact information for rent payments, maintenance issues or anything else.
Challenges with Long-Term Leases
Month-to-month rental agreements or leases with nearing expiration dates don’t present a problem in most cases. Sellers can simply non-renew the lease contract to clean and sell the property vacant.
But lease agreements that contain a fixed term — with a specific lease ending date — can cause issues for sellers.
I recently encountered this situation. Because the market is so hot right now, a long-term property management client of mine wanted to sell his rental property. All well and good, except in August of last year, we negotiated a two-year lease contract. Justin Bieber’s song “Stuck With U” comes to mind.
Tactics for Selling Occupied Properties
What if you are stuck with tenants in a long-term lease? There are a few tactics one can take.
First, you can approach your renters about leaving early. You never know what a situation may be and there is a chance they may agree.
If they aren’t keen to move, you could make an offer for your renter to leave early, AKA cash for keys. Provide them an amount to have them leave early. Make sure you get a signed agreement of this arrangement. Additionally, do not pay the agreed upon amount until they have completely vacated, and the premises is in satisfactory condition.
Finally, you could offer the property to your current tenants to purchase. In fact, in many states renters get the right of first refusal: you have to offer to let them buy it before listing it for sale. You can optionally offer them a discounted sale’s price, since you don’t have to pay a real estate agent’s commission.
Not all renters will agree to leave. It’s not ideal; to begin with it inhibits showings. If the condition is less than favorable, it may not present well for showings. And the income versus expenses may not work well for an investor purchasing within a hot real estate market or an increase in interest rates.
You may end up deciding to hold off on a sale until the lease expiration is closer. But what if you decide to sell anyway?
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Watch Out for Harassment Rules
Do you want them out? Probably, that certainly would make life easier. But tread very carefully. A tactic I have seen and that rarely works, is being extra attentive to bad behavior or mistreatment of the rental.
If you have failed to conduct routine inspections or ignored ill-treatment of your property; be careful about bringing this up “all of a sudden.” The last thing you need is to be in front of a district court judge as your tenant recounts that everything was fine until you approached him about selling the place. It just does not look good for you and remember, most judges tend to be tenant-friendly.
This could be considered harassment, which is not looked upon favorably.
Pros of Selling an Occupied Property
It is quite possible that the property could sell either to an investor or even a buyer willing to wait until the lease agreement expires. If you are dealing with a tough tenant, you will be free!
Additionally, you may be able to take advantage of a hot real estate market and get a strong return.
Cons of Selling Rented Properties
As spoken of earlier, showings can be tricky with occupants. First there are schedules to coordinate. Or perhaps the tenant does not want anyone going in without them being home.
The most common problem is the unkempt home. Showing a messy or dirty property provides many investors with ammunition for a low-ball price.
Sellers typically want the broadest possible pool of buyers for their properties. However, selling a renter-occupied property narrows the field of potential buyers to mostly investors. And savvy investors buy properties at a discount, compared to “retail” homebuyers.
When it comes time for renewal, make sure that you explore all avenues before offering a long-term lease renewal. If you have any inkling or desire to eventually sell, you may be better off putting your current renters on a month-to-month lease.
Unless you must sell for personal financial reasons or hardship, it’s usually best to hold on to renter-occupied properties. Speak to your financial adviser about it, as they may offer other suggestions. This is what my client ended up doing. He decided he was going to wait to sell closer to the expiration date of the current lease.♦
Have you ever sold a tenant-occupied property? How did it go?
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About the Author
Deni Supplee is a landlord, real estate investor, and licensed Realtor with nearly 40 years’ experience in real estate. She frequently hits the road RVing with her husband Jerry, and loves the freedom that rental income gives her to spend more time with her family.