There may come a time in the real estate investment industry when you might need to sell a property. Whether you’re moving on to other properties, getting out of the field altogether, or you have another urgent cause for needing to let the property go, selling a house with tenants never seems like the right option.
While selling a rental property with tenants can be difficult and differs largely from a more traditional real estate transaction, there are many ways you can make it happen without going crazy from stress!
The key is that you understand what your goals are, how you can accomplish them, and what the tenant’s rights are throughout the process. After all, selling a rental property with tenants on a lease means you have to continue to follow the terms of said lease throughout the sale.
Landlords should be familiar with how to follow through with this type of sale in case they ever find themselves in a situation where they want to sell. It is possible to unload a property without breaking the lease; here’s what you need to know!
Table Of Contents For Selling Rental Property With A Tenant
- Can I Sell A Property That Has Tenants In It?
- With Or Without Tenants: Which Sales Wins?
- Tenant Rights: What You Must Tell Your Tenant
- How To Sell A Rental Property With Tenants
Can I Sell A Property That Has Tenants In It?
Landlords who have taken on too many properties or decided to move in another direction may ask the question: can I sell my property if it’s rented out to tenants right now? Some landlords cannot fathom ever wanting to sell while a property is occupied and bringing in rent, but there are some situations when selling a rented property does make sense.
In the end, it is legal to sell a property that has tenants in it as long as you do not force them to leave the property or change the terms of their lease before the end of their lease period.
Is it better to sell a house with or without tenants? That’s a tough question to answer because the situation is going to be different depending on what type of property you own, what type of tenants you have rented the property to, and where the property is located.
Selling With Tenants
In some cases, selling a rental property with tenants on a lease is very easy to do. Many real estate investors may be looking to expand their portfolio with little effort, and buying a rental property that comes complete with tenants included can make that expansion even more straightforward.
Additionally, there are cases where you need to get out of the rental game as soon as possible. Even when you have income from the rent, it might not be what you want to do anymore. In cases where you need out ASAP, selling with tenants makes more sense because you can sell without needing to wait for their lease to be over.
Selling Without Tenants
Generally speaking, it is easier to find a buyer when you are selling a rental property with tenants currently living there once they have moved out.
When you are marketing a house that has tenants currently living in it, you are limiting the potential buyer pool. Only those that are interested in becoming landlords or already working as landlords are going to find the prospect of managing a property to be worth the investment.
Selling the property once the tenants have moved out, on the flipside, allows you to market to anyone interested. Whether they want to live there themselves or rent it to someone else, they will view the property. A larger sales pool will usually lead to more significant offers, so this can be a big bonus if you are willing to wait out the tenant’s lease.
What rights do tenants have when the house or property that they are living in is being sold? Ultimately, the rights that they have do not change.
This means that if they are signed into a one-year lease, that lease must be upheld if there is not an exit clause or other means of ending the terms of the lease.
Long-term lease tenants cannot be forced to move out of a property unless you or a direct family member are moving into the property, and that’s not the case if you’re going to be selling it off to someone else! If the tenant isn’t willing to end the lease on mutually decided terms, you will be responsible for finding a buyer that will take over the lease.
If your long-term tenant does not want to move out until the lease is over and you cannot find a buyer who will take over the lease, you will need to wait out the lease period instead of selling.
One way to circumvent this becoming an issue is to include a sale termination clause in your lease. This clause alerts the tenants, at the time of signing, that you are considering selling the property and may be asking them to move out early.
The specific terms of this type of clause would give notice windows, payouts, and other information that would be required should you find a buyer while the tenant is still living in the property.
If you don’t currently have a termination clause written into your lease, you may want to consider adding one in the future to make your lease more complete and workable.
Now that we’ve covered some of the most important background information that landlords like to know as they start thinking about selling rental property with a tenant living there, let’s get into the actual step-by-step instructions for what you need to do to make the sale happen.
Step 1: Research Local Laws
Before you talk to your tenants or list the property in any way, be sure to do your research about selling a property with tenants currently living in it. Every state has their own landlord and tenant laws, and you are responsible for abiding by them even when selling your property.
To look up your state’s laws, use this database to select your state, and then search for real estate or rental laws on the state level.
Armed with information about notice, sales, and other pertinent factors, you’ll be able to complete the sale more efficiently and legally.
Step 2: Review Your Lease
The next thing you will want to do is review the terms you agreed to with the tenant when both parties signed the lease for the property in question. Other than state and local laws, the lease is the overarching legal agreement that the sale will need to follow to be legal.
Does your lease include a sale termination clause? Does it give any information about the required notice for showings, repairs, or other appointments that you may need to schedule on the property because of the sale?
Take careful notes about these things from the lease. Once you have gathered that information, you will be able to more confidently move forward with your sale.
Lease Term: Short Or Long
Another factor you will want to double check in the lease is the lease term period. If the lease is for one year, you will likely need to find a buyer who is willing to take over the lease or wait until the tenant moves out.
If the lease is for a shorter term such as a month-to-month lease, you can plan to market the property but also plan to end the lease with a standard lease notice of either a 60- or 120-day notification depending on what state you are operating in.
Step 3: Notify The Tenants
You need to notify the tenants of your plan to sell the property. Whether you are confident that you will find a buyer or not before the tenant’s lease is over, you still need to let them know that you will be marketing the property and may even need to do some showings.
The form that you need to send out to the tenants is relatively simple, and we have an example copy that you can use. The key items to include are:
- Your plan for the property
- If and when showings will happen
- Notice information for how long in advance they can expect to know about showings
- How you will communicate information to them about the potential sale
- Details about any incentives you plan to offer them to keep the place tidy for viewings
- Local and state law recaps about the sale and showings
Giving the tenant all of this information will help soften the blow that they might experience when you first tell them that you plan to sell the property. Most renters do not consider that their landlord may choose to sell the property while they are living there, and it is important that you understand any frustration the tenant might feel about the change.
By giving the tenant a lot of detailed information and communicating with openness about the process, the tenant will see that you are willing to make the process as smooth for them as possible.
Step 4: Consider The Tenant
In a way, this step is optional, but we find that many landlords who skip this step end up coming back to it later when they cannot find a buyer. So, we recommend that you consider it now rather than later!
There are two ways that you might be able to sell the property without needing to find a buyer willing to take on your tenant:
- Sell the property to the tenant.
- Pay the tenant to leave early.
In the first case, you should always consider asking the tenant if they are interested in buying the property once you have decided to sell it. While you may want to try the open market, some tenants may be saving up to buy their own property and find this to be a great opportunity. And it never hurts to ask!
If the tenant is not interested in purchasing the property, make them an offer to leave the house before the lease is over. Usually, we recommend offering a sum equal to one month’s rent. While it might seem astronomical at first, the value of being able to market a house without any tenants inside is well worth the cost.
If the property is currently occupied by a tenant that is not up-to-date on rent or has otherwise caused many issues, we recommend that you try to pay them to move out early if possible. While many investors are willing to buy an occupied property with reliable tenants, few will want to take on an already existing problem tenant.
Step 5: Market The Property
If you’ve made it to Step 5 and are still continuing to the market with your property that is currently rented, it’s time to focus on finding the right type of buyers. You’re going to be trying to find someone that is either:
- A landlord
- A real estate investor
- A want-to-be landlord
- Someone not quite ready to move, but looking already
All of these potential buyers could be interested in your property even though it has tenants. For some, buying a property with tenants already locked in is a great way to transition into making money off new land. For others, it affords a great learning opportunity.
Either way, you’ll want to make sure that you advertise the currently leased status of your property as a positive, not a negative.
Remember: You are going to meet a lot of buyers who aren’t willing to take on a tenant at this time, and that’s okay! Keep your focus on finding the parties that are going to see the tenant presence at your property to be the asset that it is.
Step 6: Sign Over The Lease
Once you’ve found a buyer that is willing to take on your long-term tenant, you will need to sit down with the tenant and the buyer to sign over the lease. The original lease will still be valid for the tenant to live at the property, but the landlord responsibilities will now belong to the new owner instead of you.
Additionally, we recommend that you fill out an estoppel agreement. This document will give confidence to you, the buyer, and the tenant to ensure that all legal loose ends are tied up and transferred properly.
Finally, you’ll need to transfer the security deposit and any accrued interest gained on the deposit to the new owner.
That’s it; you’re out of there!
Selling A Rental House With Tenants Is Doable
Don’t be afraid to try to market your rental property, even if you have an active lease with the tenants currently living there. The worst thing that could happen is that you won’t find any buyers and you wait to try again until the lease terminates at the end of the current lease period.
It is possible to sell a rental property that has an active lease if you:
- Give proper notice to the tenants
- Keep communication lines open
- Market to the right audience
The critical point to remember is that long-term leases do not become invalid just because you sell a property. A lease gives the tenant permission to live at a property, not to live at a property owned by a specific person. That is why it is essential to keep the tenant in the loop and find a new owner that will abide by the lease.
Once the rental lease transfer to the new owner is complete, you’ll be happy that you found a way to step away at the right time without breaking any laws!