It’s certainly your house to sell. But tenant-occupied investment houses present unique challenges when landlords are ready to sell. You have two primary concerns that need to be dealt with. 1. The tenant has specific rights that you must comply with. Not complying can cause bitterness from the tenant and very possibly fines and/or fees if you violate their rights. 2. This second one is an offshoot from the first. Creating a hostile relationship with your tenants can only make the selling process more difficult. It’s often wise to go above and beyond your legal requirements.
Before you do anything beyond a little market research about the property value and sell-ability, you need to understand your options regarding the tenants. This begins by understanding your lease with the tenant. At most locations, a buyer will have to comply with the existing lease. This is a situation when you must understand your state and local regulations.
Here are common situations and options that you have.
Month-to-month lease. This is often the easiest to deal with. Your strongest sales position is when your house appeals to both buyers intending to occupy the house themselves and other investors wanting to place their own tenants (perhaps wanting to make a significant rent increase or do a rehab). On month-to-month, all you usually do is give the current tenants notice that they need to vacate. Be sure to follow your local lease regulations. You’ll likely need to give them 30 to 60 days’ notice. You need to financially prepare to go without rent income for several months while you market the property.
The lease is coming due shortly. You might want to simply wait out the lease before marketing the property. This works in your favor when the end of the lease coincides with the notice you give to vacate. You can also market to other investors during this time. Possibly those wanting a turnkey rental. However, most turnkey rentals have a long term tenant in place.
Offer to sell to the tenant. This serves two purposes. This could be your easiest solution if they qualify. If you’re looking for a passive income stream, you might offer seller financing. You probably already know a fair amount about your tenants that will make your seller financing decision easier. Otherwise, they’ll need to qualify for a mortgage. If you go with this option, you’ll want their preapproval in place quickly. Another possibility is a lease with an option to purchase if the tenants need a little more time to qualify. At a minimum, offering to sell to the tenants builds goodwill by giving them first consideration.
Market the property as a turn-key investment property. This can be your best option when a long-term lease is in place. However, this reduces your market size because owner-occupying buyers won’t be interested. Still, this is worth investigating with your local investment club, real estate agents, and property management companies. Another option with a long term lease is offering a financial incentive to rewrite and shorten the existing lease.
Undesirable or uncooperative tenant. This is your most unfavorable circumstance. These are tenants demanding strict adherence for the right of others to enter the property (such as 24 hours’ notice), or won’t keep a tidy house, or they are so disruptive that it’s the reason you want out of the landlord business, etc. Still, you have several options. If it’s bad enough, you may be able to break the lease for violations to force them to vacate. But be careful you stay within your landlord rights. If you unreasonably break the lease, you could face legal and financial consequences.
If it is only a matter of keeping the house clean enough to show, a financial incentive can work (or hire a cleaning service). This could be a small rent discount while the house is being shown or a larger bonus when the house sells. Be clear about what you expect in return for the financial incentive. At the least, you want the beds made and the dishes done before going to work and the house kept picked up. You might do a walk through to point out specific expectations. You probably also want them to leave the house for an hour whenever it is being shown (especially if they are unhappy about the sale). Reasonable advance notice will need to be arranged. Also, figure out a solution if they have pets or a unique situation.
Help tenants find another place. This can be the solution for several circumstances. This works if you don’t want to wait out the lease. Or possibly an incentive if you want them to move on short notice (less than 30 to 60 days). Or for problem tenants. If you have another vacant property, you could offer to move them into it by covering moving costs, transferring the deposit, and other appropriate incentives. You could also research comparable rents in the area. And then offer to cover moving costs and pay any difference in the rent cost for the remainder of the lease. To sweeten the incentive, you might also want to offer to pay the security deposit and first month's rent.
Always understand and comply with your local laws and regulations when selling a tenant-occupied property.
Please share your creative solutions for selling a tenant-occupied house.
Please comment with your thoughts, experiences, and tips for selling tenant-occupied property. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].