Selling a house with tenants in place can add an extra layer of complexity to the sale of an investment property. However, it is possible to do it with the right legal and ethical knowledge. Since you own the property, you have the right to sell your property at any time, even with tenants still residing in the home.
For a smooth sale, you will want to do all you can to minimize the impact on the tenant while maximizing your profitability during the sale. Read along, and I’ll equip you with information and strategies to help you navigate this type of sale.
Step 1: Evaluate the Lease
Identifying what type of lease you have in place is the first step in selling a house with tenants. Knowing the type of lease will help you determine your legal options. In most states, tenants have the right to stay in the home until their lease expires, no matter the type of lease. Consulting an attorney who knows your state and local laws will help guide you through this process.
The two most common types of leases are fixed-term leases and month-to-month leases. Let’s look at each more in-depth:
Fixed-term Leases
A fixed-term lease is a rental agreement with a predetermined start and end date specified by the contract. These leases can have a variety of different terms, but most commonly these leases are typically not automatically renewed. For the lease to renew past the end date, action must be taken from both the landlord and the tenant.
An early termination clause may allow the lease to be terminated by either party prior to the specified end date. This typically involves a termination fee or other type of financial considerations. If your lease has this type of provision, follow the process outlined in the lease agreement and consult an attorney before speaking to your tenants.
Pro tip: Consider offering additional cash to help with moving costs to lighten the blow. Enforcing the early termination clause could cause an otherwise model tenant to become defensive.
Month-to-month Leases
A month-to-month lease, or periodic tenancy, is a rental agreement that renews automatically every month until notice is given by either the tenant or the landlord. Each state will have its own laws in regard to the tenant rights and notice periods, but most commonly, 30 days is accepted and sufficient.
For state-specific information on tenant rights, visit the U.S. Department of Housing and Urban Development (HUD) or check your state government website. This information is typically under landlord-tenant law or tenant rights and responsibilities.
Resources for tenant rights by state (Source: HUD)
Step 2: Understand Your Options
Now that you know your lease type, it’s time to look at your options. There are several ways to sell a property with tenants. Review the options to determine which would benefit you and your tenant most.
Offer to Sell the Property to the Tenant
Some tenants are lifetime renters, while others are looking to purchase a home at some point in the future. Offering the tenant the option to buy the house first could be a viable solution for everyone. You get to sell the house, and the tenant gets to stay put. After you have consulted with a real estate agent to determine the property’s fair market value, you can approach the tenant with your offer.
Negotiate Cash for Keys
If you do not have an early termination clause in your lease, you can still talk to your tenant about breaking the lease. Cash for keys is used when a landlord offers a tenant money in exchange for agreeing to break the lease and move out. Offering cash incentives for tenants to move will greatly increase your chance of them taking you up on your offer, but it can be costly. Tenants will want it to be worth their while and have all expenses covered for moving, a new security deposit, and the first month’s rent in their new home.
Execute the Early Termination Clause
If you have exhausted the first two options and your lease has an early termination clause, you can enforce it by providing the required notice and monetary compensation. Try to be as considerate to the tenants as possible, offering to be flexible with private showings, scheduling pre-arranged open houses, and strategically placing signage to limit unwelcome visitors.
Wait Until the Lease Expires
An optimal solution would be waiting until the lease expires to sell your investment property. Vacant homes are easier to show, removing the tenant as an obstacle in the sale. If you choose this option, notify the tenants that you will be selling the home at the end of the lease, and they will need to be moved out on time. Providing them with a courtesy notice will help them prepare to find a new place to live while you work on getting the property ready to sell.
While this option may not always be feasible, depending on the length of the lease term left or the circumstances in which you have to sell, it does make it easier for all parties to prepare for the sale.
Pro tip: Vacant homes can feel empty and show all their imperfections. Consider staging the home to showcase the property features and show potential buyers what it would feel like to live in the home.
Sell With Tenants in Place
If there are no other options, you must sell the house with tenants in place. This means that the purchaser will become the landlord and will be legally bound by the lease that is in place. Selling a house with tenants is actually appealing to an investor. They will not have to work to find someone to occupy it at closing and will reap the benefits from the sale.
On the other hand, if you cannot find an investor to purchase the home, other buyers who wish to live in the house may be reluctant to make an offer with the tenants in place. If the lease is within three months of completion, consider offering incentives to purchase the property, such as offering seller credits or a reduced price.
Pro tip: If you aren’t in a rush and are willing to act as the lender, consider offering a well-qualified tenant owner financing.
Step 3: Consider the Pros & Cons of Selling a House With Tenants
The next step is to evaluate the pros and cons of selling a house with renters in place. Selling an occupied home can present a unique set of challenges. There are advantages, such as continued rental income for the landlord, as well as drawbacks, like scheduling obstacles. Awareness of these issues can help you make the best decision to sell the property.
Here is a breakdown of the pros and cons:
Additionally, there are a few other factors to weigh in your decision. When looking at market conditions, having a tenant may not be a huge drawback if you are in a seller’s market with higher buyer demand. On the other hand, more houses are for sale in a buyer’s market, which could limit your buyer pool. The length of the tenant’s lease also plays a part because a shorter duration of a lease may not be as deterring as a longer lease period.
Step 4: Work With the Tenants
Now it’s time to start talking to your tenants about their options. I recommend consulting an attorney or real estate agent professional to ensure you know tenant rights in your state before going into the conversation or providing notice.
When you sit down to break the news, consider these tips to have a meaningful and productive conversation:
- Be considerate: The last thing any person is expecting to hear is that they may have to move out of their home before they thought they would. Use positive language and come from a place of understanding to help encourage the tenants to cooperate.
- Communicate clearly: State exactly what you are looking to accomplish. What option did you decide to go with, and what would that look like for the tenants?
- Tell them what to expect next: Now that the tenant knows that you’re selling, tell them exactly what to expect next, from speaking with a real estate agent to getting the home ready to list.
- Offer to help find them a new home: Offering to help your tenant move on to the next phase of life can go a long way.
- Answer any questions: The tenants will likely have questions now and in the future. Be sure to answer any questions they have now and let them know they can contact you with additional questions.
- Solidify the plan: Before ending the conversation, make sure the tenants are clear on the plan, the next steps, and what you need from them.
There is always the risk of tenants getting angry and refusing to cooperate. Showing a home to a potential buyer while a tenant causes problems can be risky. Try finding ways to make the tenant less likely to sabotage your showings by offering compensation for cooperation. Offer a break on their rent or get creative with a gift card to their favorite restaurant if they have the property in show-ready condition and leave during the showing.
Step 5: Market & Sell the Property
Once you have decided if the tenant will stay during the sale, it’s time to determine the best way to market the property. Whether the tenant vacates or remains in the home, different strategies can be used to showcase it to investors and buyers who wish to be owner-occupied.
Here are some general tips to help you market your rental property for sale:
- Partner with a local real estate agent: Hiring a local real estate pro can get your property seen by more people. They can help you create an effective marketing plan to sell quickly or for the highest price.
- Strategically price the property: Consider whether you will be making repairs or selling the home as is. Price the home accordingly to remain competitive in the market.
- Highlight investment potential: Market the property to investors by offering a turnkey rental opportunity with or without tenants in place.
Marketing the property based on whether the tenant vacates or remains in the home is different. Let’s take a more in-depth look at each of these situations.
If the Tenant Vacates
If the tenant moves out or you decide to wait until the lease expires to sell, the sale becomes more traditional. Remember, a vacant rental property translates to lost income for the landlord, so you’ll want to sell the property as quickly as possible. Create a financial breakdown that showcases the potential rental income for investor buyers. If you plan to offer a turnkey property that any buyer can enjoy, highlight any renovations completed after your tenant moved out.
If the Tenant Remains
If the tenant remains in the property during the sale, you should address any challenges upfront to encourage a smoother transaction. It is inevitable that the tenant will experience some disruption and inconvenience during this process. Try to minimize the inconvenience by being transparent, offering a helping hand, and being considerate of the tenant’s needs.
The table below outlines common pain points tenants may experience if they choose to remain in the home for the duration of the sale.
Caution: Evicting a tenant is never easy, but selling a house with tenants who don’t pay rent is worse. Delinquent tenants are not profitable, and potential investors will be detoured from making an offer on your home. Even if they do, rent must be current at closing, so you could be stuck with the bill.
Bottom Line
Selling a property with tenants requires planning, clear communication, and flexibility. When you understand your options and work with your tenants, you will be able to smoothly navigate this process and achieve a successful sale. Remember that a good tenant can be a selling point for investors looking for turnkey rental properties, but poor tenants can make or break a sale.
