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Buying and/or selling a real estate property can often be an overwhelming experience. Most people buy or sell a home once in their lifetime. So they may be less familiar with the legal aspects and technical nuances related to a real estate transaction. The process can become even more stressful if you are selling a rental property with tenants on a lease. In that scenario, you then have to know how to navigate a sale without violating the tenants’ renting rights.
If you plan to sell a rental property but still have tenants leasing the property, you have two options:
1. Sell the Property with Current Tenants
In this arrangement, you can sell the property even with tenants currently on rental agreements with you. The new landlord cannot evict tenants until their lease term ends, even if that’s not until after the sale is complete. The only change that tenants will notice is they will start paying rent to a new landlord.
2. Complete Sale after Possession
In this case, you will have to enter into some kind of agreement with your tenant to vacate the property before the sale to the new owner is complete. It largely depends on the tenants how they respond to your request to vacate the property. Do they amicably agree to leave or ask for some kind of compensation in exchange for being asked to move out?
Can I Sell My Rental Property With Tenants In It?
The simple answer is yes. After all, it’s your property, and you have exclusive right over how it’s managed. However, just because you can sell doesn’t mean you should, especially if you have tenants. Most states require that landlords allow tenants the option to stay in their rental until their lease term expires. Before you list your property for sale, though, you should weigh the pros and cons of selling property with tenants in residence. Sometimes, allowing tenants to remain on the property before and after the sale may work out perfectly, but it may not always be the case.
Lease Terms: If you have tenants who have signed a month-to-month lease, you can simply end their lease by giving notice according to state law. If your property lies in a rent controlled area, consult with applicable laws to ensure that the new buyers can end the tenant rental agreement. Discuss with your real estate agent whether you should terminate the tenant’s lease or leave the decision to the new owner.
Potential Buyers: Most of the time, real estate investors are eager to buy a property with an existing tenant who’s in a long-term lease agreement and is up-to-date on their rent. If the property is on a month-to-month or short term lease, it is likely to attract both real estate investors as well as buyers who want to live in the property but can’t move immediately because of their current lease terms. But having a tenant with a long-term lease will put off those buyers who were buying for their personal use.
Property Type: If the property is in an apartment complex with multiple residential units, investment-oriented potential buyers will be interested in buying properties from owners who don’t have problems with the tenants.
The Market Price of the Property: High-priced properties are usually purchased by people who plan on living in them someday. Most people don’t invest in property solely for a passive source of income. Very few buyers will be interested in taking on a new property with a high mortgage but a low rent rate.
After-Sale Steps
Once the property is sold, it’s the outgoing landlord’s responsibility to inform their current tenants that the property was sold and provide the following:
• The new landlord’s name
• The new landlord’s contact details
• An address for service
• Any updates related to how rent payments should be submitted
The landlord should also tell tenants the effective date on which ownership will officially change. The landlord should inform the new owner of the tenant and provide him or her with a copy of the rental agreement if selling a rental property with tenants on a lease.
There are many reasons for wanting to sell your rental property, even if it’s currently occupied. Some of the most common reasons include:
• You want to cash in on your property’s equity
• The property isn’t as profitable as you’d hoped, so you want to cut your losses
• You inherited the rental property and have no interest in being a landlord
• You’re moving and don’t wish to be a long-distance landlord and/or planning to buy closer to your new locale
• You want to trade in the property for something else (known as a 1013 exchange)
• You’ve decided to retire from the landlord business
Whatever the reason, it’s your property, so if you wish to sell it, you can do so. However, when you have tenants living in the property, there are some extra steps along the way before you can successfully sell. It will also depend what kind of lease they have: a month-to-month lease or a fixed term lease.
Handling Month-to-Month Lease Agreements
If your tenant is renting on a month-to-month basis, you need to give them proper notice that you are selling the property. This involves mailing or hand delivering a letter (or sending an email) to your tenant 30 days prior to the move-out date you’ve set. The required notice period varies by state, so be sure to look up your state laws.
You don’t need a reason to terminate a month-to-month lease agreement, which is one of its perks for you as the landlord. It’s called a no cause termination, so you don’t need to give the tenant a reason, but it’s always nice to be upfront with your tenants. To get started, send a letter with today’s date letting your tenant know that their tenancy will terminate in a certain days (typically 30 or 60) from the date of the notice. Inform your tenant in this written notice to remove all possessions and to return the keys to you on or before the required move-out date. Mention the actual move-out date in the letter as well to ensure you are clear with your tenant and they know what is expected of them and by when.
Handling Fixed-Term Lease Agreements
Fixed-term leases include any lease that’s not month-to-month. Many fixed-term leases are based on a year-long tenancy period but can be shorter or longer. These leases require a more delicate approach since the lease isn’t automatically terminated just because a property changes ownership (unless the buyers intend to live there themselves).
Before informing your tenants of your intent to sell, choose one of these five options when handling a tenant with a fixed-term lease:
1. Wait Until the Lease Has Expired
The easiest thing to do if you have a good tenant in the property is to wait until their lease ends. With a fixed-term lease, simply send them a 60-day notice of non-renewal (the most commonly used notice period with fixed-term leases, but check with your state laws first) to let them know that they will not have the option to renew their lease. After they’ve moved out, you can sell the property without worrying about it being occupied.
2. Sell the Property with an Active Lease
Although this option may limit you, you can sell the property with an active lease. Some buyers may not be interested in buying an occupied rental property, while others may be fine with it. It’s important that the new owners agree to honor the tenant’s existing lease agreement, letting them live in the property until the end of their lease with the same rent payment per month (with the possible option to renew, if applicable). In almost every state, the lease agreement and security deposit must be transferred with the property, with the new owner replacing the previous landlord. When touring the property with potential buyers, be mindful of the current tenant. Inform the tenant when you will be showing the unit, and give the tenant proper notice before entering the property, 24 hours or a few days’ notice depending on state laws. You can remind the tenant when you’re about to show the property. You can also request that they’re absent during the showing. Out of respect for the tenant, show the property at reasonable times, preferably during business hours.
3. Give Your Tenant Incentive to Vacate
If you want to sell your property right away and your tenant still has several months left in their lease, you can try to negotiate to get them to move out early. This tactic is called cash for keys and is a great way to incentivize tenants to leave before their lease ends. If you’re wondering how much to offer your tenant, you should focus on making up the difference for what your tenant will have to pay finding a new apartment in the area. If your rent is on the affordable side, then you could offer to pay the difference between what your tenant will likely have to pay and what they’re currently paying to you, times the number of months left on the lease. You’ll also want to consider the tenant’s moving costs and the cost of paying a new security deposit and other move-in fees. The amount you offer really just depends on how much you can afford, what you think is fair, and how badly you want the tenant to move out of the property. Keep in mind, however, that the tenant is under no obligation agree to your cash for keys terms. If they don’t, you’ll have to wait until the end of the lease term to sell your property. If the tenant is not willing to move out early, you can also offer them incentives to be flexible with the touring process. The tenant may agree to leave the unit while the tour is in process, take extra care of the property, or agree to weekend showings. Consider incentives like a reduction in rent for certain months, hiring a monthly cleaning service, paying their utilities, or a relocation allowance. Have a discussion with the tenant on what you both think is fair. Think of it as an exchange. For example, the tenant is willing to keep the property in top condition and to vacate the unit during showings if you’re willing to give them a discount on rent.
4. Sell the Property to Your Tenant
If you feel that this may be a possibility in your situation, you can offer to sell the property to your tenant. This may be a rare case when selling your rental property, but it’s still an option if your tenant is interested and financially capable of doing so. You can offer a seller financing arrangement in which you are the lender and the tenant makes payments to you (on a short-term basis) to buy the property. Keep in mind that you typically need to own the property free and clear or get approval from your mortgage lender to conduct a seller-financing deal.
5. Act on the Early Termination Clause In the Lease
Terminating a lease early based on a clause in the lease will only be an option if you have said clause in your lease. An early termination clause comes in handy in a variety of situations. The clause typically says that the lease terminates in 30/60/90 days, for example, after closing on the sale of the property. Even if you have no intention of selling your property at the time of lease signing, you never know what the future holds. Adding an early termination clause to your leases will allow you to end a tenant’s current lease if you do indeed sell your rental property. Simply provide the tenant with an early lease termination letter. Oftentimes, buyers who intend to keep the property as a rental are fine with continuing the tenant’s lease until their move-out date (or beyond), so you may not have to worry about waiting until their end-of-lease date to sell, offering cash for keys, or terminating your tenant’s lease. However, it’s important to give yourself options when it comes to selling your property. As you make plans to sell, remember that your rental has become your tenant’s home, so treat the situation with care. It’s your right to sell your own property, but it’s always best to stay on good terms with tenants.