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There are many reasons for landlords to get into the real estate investment business, and there are just as many reasons for them to exit it. In other words, there may come a time where a property owner decides to put a rental home on the market and look for a buyer.
When the rental home is occupied by a renter, there are certain steps and conditions that come into play. It’s known as selling with a tenant in residence, and there are lots of things for landlords to consider before listing the home.
Does this mean that selling a rental house with tenants currently living there is impossible? No, but it does mean that you need to be very organized and clear with the tenants while doing so to avoid any potential anger or legal complications.
Today, we’ll answer some of the biggest questions that people have about this type of sale while also introducing a template form that can be very useful when you find yourself in this specific situation. With these tools, you can make a successful, smooth sale!
A Table of Contents for Selling a Rental House with Tenants
- Tips on Selling a Rental House with Tenants
- Free Sample Letter to Notify Tenant of Sale of Property
- Rights of Tenants When a Landlord Sells a House
- Who Might Be Buying?
- Occupied vs. Empty
- Communicating with Tenants
- Incentive Ideas for Tenants
- Selling My House with Tenants: Don’t Be Afraid!
We host a weekly video series called “Ask A Property Manager” and in episode #44 below Eric and Andrew discuss selling an occupied rental property.
The audio is a little rougher on this one, but the content is good. Feel free to skip ahead to 1:00 mark to hear them discuss this topic.
You can also find a lot of great resources on selling a rental property over at RealEstateInvesting.com. Just check out their Resources section.
Here’s a brief sample letter you can use to provide a letter to the tenant to notify them of your intent to sell the property.
This letter is to officially notify you of my intent to sell the property at the address of __________.
My intent is to sell the property occupied so the next owner will be assuming your lease. In order to make this process as smooth as possible, I’d like to try and answer any questions in this letter.
In the state of ______ it is required that I provide ___ hours of notice before showing the rental property to any prospective buyers. This will allow you time to have your residence in a clean and presentable manner.
I will try and exceed those minimum requirements in order to give you additional time before a showing. I will (email, text, call, send letter) to notify you on these showings.
These will be guided showings so prospective buyers will not be alone in the rental. That being said, it’s a good idea before showings to not have any small valuable items lying around.
I appreciate your cooperation through this process and upon sale of the rental property I will be transferring the lease and security deposits to the new owner. At this time I’d like to provide you a ____ bonus for your cooperation through the sale of the property. This will be provided after the final closure of the real estate transaction.
Please let me know if you have any questions.
The Notice: What Must Be Included?
As you can see, this notice is relatively straightforward, but it gives a lot of information to the tenant that they are sure to be curious about. What exactly, then, is the information that you should include when writing up your own notification?
When selling a property with tenants in it, you should always include the following breakdown of information:
Basic Identifying Information
Start with the date, the tenant names, and the property address. This identifying information is necessary to ensure that the tenant gets the right form that has been specifically created for them and their property.
What Will Be Happening
Next, let the tenant know what will be happening. Will there be showings? When will the property go on the market? Is there anything that they will be responsible for doing while the property is on the market?
The tenant is likely to have a lot of questions about the process that will happen from this point forward, so it’s best if you can give as much detailed information about how you will handle showings and marketing up front.
Of course, the tenant can contact you with more questions if need be, but it is better to give them as much information as you can as soon as possible so that they do not become stressed or overwhelmed when receiving this notice.
If possible, let the tenant know how much notice you are legally required to give them when you schedule a property showing. This will give them an idea of what type of notices and showing situations they can expect through the sale process.
Including a bonus for your tenants throughout this process is far from a requirement, but some landlords find that giving some additional relief to the tenant throughout the sale process helps to ease the transition.
In one of the more thorough explanation sections later in today’s interview, we’ll introduce some example bonuses that you may want to try out during your next tenant-occupied property sale.
Before we got farther into detail about how to sell a rental property with tenants in it, it’s important that we stop to talk about tenant rights. As you know, state and federal laws often put restrictions in place to protect the tenant.
When it comes time to sell a tenant-occupied property, there are some tenant’s rights that you need to keep in mind to ensure that you are not breaking the law at any point.
Know Your Local Laws
Let’s start off by reminding you that every piece of information that we give in today’s article is subject to local laws and restrictions. While we aim to provide information that can be helpful to landlords in any area, there are always some variations in the law.
Before you take any action, be sure to familiarize yourself with your local and state laws regarding tenant-occupied property sales. It is up to you to ensure that you know what the current codes are.
Tenants Don’t Have to Move Out
Some tenants will assume that they have to move out because you are selling the property. In most cases, that is not the case, and you may not be legally allowed to ask them to move out. If a tenant is in a long-term lease and you are selling during the lease, it may be necessary to find a buyer that will take over the lease.
The exact lease and sale situation will determine whether or not the tenant will need to move out.
For example, tenants on a year-long lease cannot be forced to move out early unless the property is going to be moved into by you, the owner, or by a direct family member who is purchasing the property. Even in this case, local laws may require you to allow the tenant to finish their lease.
If, however, the tenant is on a month-by-month lease, the lease can be ended with property notice of the upcoming. Depending on how long the tenant has rented the property, this can range anywhere from 60 days up to 120 days.
Leases give tenants permission to stay on a property, not to rent from a specific owner. Even if the house sells quickly, legal tenants do not have to move out right away.
Exception: Sale Termination Clauses
If you are considering selling your property soon, you may want to consider adding a sale termination clause to the property’s lease. The tenant would be made aware of your desire to sell, and you would be able to ensure that you can sell the property without a tenant if the new buyer is not interested in keeping a tenant.
Don’t Change Utilities
While you are marketing the property, you cannot make any changes to the utilities. This means no cutting off the water or electricity while you make the sale. Remember: You still have to keep up on all of your landlord responsibilities during the sale process!
For as long as you are the property owner and the tenants are living on your property, it is your job to follow the letter of the law and ensure that the space is in livable condition.
Schedule Fixes & Showings
State and local governments have created laws about how much notice you must give a tenant before a property showing or a repair technician comes to work on the property.
Since you are marketing the property, you will likely need to be scheduling both of these things. As such, it is very important that you give proper notice to your tenant about them.
For showings, giving notice is not only required by law, but it also can help to ensure that the property looks great during the showing. Tenants will have a chance to clean up any big messes and put personal belongings away as well. Additionally, the tenant has the chance to not be at home during the showing if they prefer to be away.
For repairs, you must give notice to the tenant according to the local law. This is for tenant convenience and safety, but it will also help you. If the repair man is scheduled to work on the washer but the tenant is in the middle of folding laundry when he arrives, there might be a problem.
Open and clear communication with the tenant throughout the process is part of their legal right, so be sure to follow through on that.
Remember that you are responsible for returning the tenant’s security deposit if they move out at the time of the sale. If they, however, are going to be staying on with the new owner, you will be required that hand over that money to the new owner, including any accrued interest.
Security deposits, prorated rent, and any other fees that you collected in order to protect the property during lease signing will need to be transferred to the new owner.
When a new landlord takes over the property from you, the tenant will be able to keep the same lease terms that you had agreed upon with them. Some tenants will worry about this during the process.
For example, you and the tenant may have agreed on a simple pet addendum for the lease that allows them to keep two dogs. The tenant may worry that the new landlord will require them to get rid of their dogs. That, however, would be illegal.
For as long as your original lease terms are intact, the tenant would be legally allowed to keep their pet(s). At the end of the lease period, however, the new owner could require lease changes before a new lease is signed.
Be sure that you explain this to your tenants when you let them know that you will be marketing the property. If they understand that their current lease will still be valid for however long is left on the lease, they are much more likely to be amenable to the idea of a sale.
There are several different types of buyers who might be interested in purchasing a tenant-occupied property. The first is the tenants themselves, and many landlords work out creative financing, like rent to own, with tenants who are already in place. Other buyers might be people who want to live in the property as their primary residence. In that case, landlords will have to follow their state’s laws for notifying tenants of the intent to sell and in most cases, wait for the lease agreement to expire and choose not to renew. Yet another potential buyer would be to another real estate investor, who would keep existing tenants in place.
No matter what, landlords must check out the laws and regulations that govern their state and follow the process to the letter in order to ensure that they are in compliance with every rule. Selling an investment property with a tenant in residence comes with a unique set of steps and landlords would do well to do their research first. There are certain notification timelines as well as the right to enter requirements that often differ from more standard processes.
For example, in California a landlord must deliver a written notice of intent to sell the property 120 days before showings can begin. Then, landlords can give tenants a 24-hour written or oral notice before a showing. Showings can only take place during reasonable business hours, and landlords must always leave written evidence of entry, like leaving a business card on the counter.
No matter who landlords think might be buying a property, they are beholden to the laws governing that transaction with a tenant in residence.
Many landlords wait until the tenant’s lease is about to expire, then list the empty property. Others try to sell the property while the tenant is still in residence. There are pros and cons to each approach.
Ideally, landlords would have the property vacant while trying to sell it. It’s always easier to get buyers more excited about an empty house or one that has been professionally staged. There also can be a negative association with a home that has been used for rentals versus one that is more neutral, and generally occupied rental homes are considered less valuable. An empty home can be fixed up properly and listed in its best condition possible. With a renter in place, the property might not appear its best to prospective buyers.
However, most landlords simply can’t afford to have their rental property sit empty for a few months just to make it look better to buyers. Keeping the tenant in place until a transaction is imminent to ensure that the property is generating income. However, tenants may not take care of the place very well, which would turn off prospective buyers.
In fact, if tenants really wanted to, they could probably figure out plenty of ways to discourage most buyers from making any kind of offer.
For example, tenants might purposely fail to notify the landlord about needed repairs or to alert them to any negative cosmetic issues. Or, when tenants don’t care for the property or even clean up regularly, it can further diminish its appeal to potential buyers.
It’s important for landlords to communicate with tenants so that everything goes smoothly. From keeping the property occupied to putting it in the best light during showings, tenants have a big part to play when landlords decide to sell investment property. The tenant needs to agree to cooperate or the landlord will have a hard time showing the property properly.
Notify Tenant of Sale of Property Letter:
- In writing, landlords should explain to the tenants a summary of their intent to sell.
- Landlords should remind tenants about their state laws concerning proper procedures for showing an occupied property that is for sale.
- Set up a considerate yet firm process by which landlords will notify tenants when the property is to be shown.
- Assure tenants that the landlord won’t allow dozens of unknown strangers to parade through the occupied property and that their safety and their possessions are of utmost consideration.
- Offer an incentive to the tenants if they assist in the process, such as keeping the place cleaner than average.
When landlords communicate well with tenants in residence, they are more likely to cooperate throughout the entire process and contribute to a successful sale.
Many landlords understand that it is a big shock for tenants to discover that the rental home they are living in will be sold. The fear of the unknown is always going to worry some tenants, and landlords can do their best to help tenants feel like they are not being kept in the dark.
Many landlords do offer incentives to tenants to encourage them to help out during the process of finding buyers, showing the property, and keeping it clean.
Here are just a few ideas for tenant incentives when they are in residence:
- A percentage off the monthly rent.
- Rent rebate when the property sells.
- Free weekend in an upscale hotel during an open house.
- Gift certificates after every positive showing.
- Gift certificates for every month the property is showing.
- Agreeing to pay moving expenses upon the sale of the property.
All in all, it’s better for the landlords to have an ally in the tenants rather than an enemy because a messy, uncooperative tenant can quickly thwart the interest of prospective buyers.
Landlords who want to sell their investment property while the tenant is in residence are embarking on a process that may or may not be successful. However, when done with the right approach and with the right incentives, the sale can be done legally, thoughtfully and profitably.
As you can see, there is a lot to consider when you are thinking about selling a house that currently has tenants in it. While this may cause you to back down from the idea of a sale, you shouldn’t let it.
Every aspect of managing a rental property can be overwhelming at first. When you signed your first lease with tenants, you were probably worried that you forgot something! Even if you were, it all worked out in the end.
The key to selling a house with tenants successfully is to keep everything clear and transparent between yourself and the tenant. By keeping them up-to-date with the marketing and ongoing sale, you’ll find that the process runs much smoother.
Know your rights and know the tenant’s rights. By keeping them in mind throughout the sale process, you’ll be able to successfully sell your tenant-occupied property in no time!