How to Unload a Rental Property with Existing Tenants

Landlords often realize, based on a complex variety of factors, that it is a good time to sell a rental property. Perhaps the market is perfect for sellers and you've just gotten evidence that you'll get a great deal; other times, it is simply a cash flow issue for the next stage in your rental business development.

  • Friday, March 29, 2019

  Tips   

Landlords often realize, based on a complex variety of factors, that it is a good time to sell a rental property. Perhaps the market is perfect for sellers and you've just gotten evidence that you'll get a great deal; other times, it is simply a  cash flow issue for the next stage in your rental business development. Regardless, the decision to sell a rental property often happens out of sync with the lease cycle. Here are some things to consider when you want to sell a home but currently have tenants living there.

Consider Your Rental Agreement

You may have a variety of circumstances with your current tenants in a property you wish to sell. For instance, if your tenants are already on a month-to-month lease, getting them on board with showing the property and switching ownership may be easier, or they may choose to move out quite quickly. With long-term tenants, however, the operation can be a bit more tricky.

This is an excellent time to revisit your rental agreements and evaluate what you have already agreed to with these tenants. You don't want to do anything that invalidates the agreement in your choices as you proceed, but you also may realize that you need to change your agreement to ensure you have wiggle room for conducting showings or sale of the property in future rental agreements. Work with a realtor who has sold rental properties before and get their professional opinion on the situation with your current tenants.

Consider the Tenants

Your relationship with your tenants has a big impact on how you approach the potential offloading of the rental property while they live there. 

Contentious Relationship with Tenants

If your tenants have posed problems, such as noise complaints, property damage, or late/missing rent, it is especially valuable to offer clear notice with more than enough time for your tenants to consider moving to a new location. If you cannot recommend these tenants to a future owner of the building, you may need to make it clear that you expect past indiscretions to cease or you'll have to invoke the terms of the rental agreement. The best circumstances would be to forge as good of a relationship with these tenants as possible in order to create a peaceful path to the property's sale, without any missing back rent or property damage. That being said, if the relationship remains strained, you may want to consider whether it would be better to make it clear that the home will no longer be available for the next lease cycle and wait until you can part ways at that moment. 

Positive Relationship with Tenants

When you have an excellent relationship with your tenants and know that they will make great tenants for a future property owner, you still have responsibilities to communicate well to them. Figure out, once you've given them the appropriate notice (this varies by state), what their desires are, and whether they'd prefer to move, to remain under new property ownership, or to consider a lease-to-own or other purchase plan. A great tenant may also want to consider moving into a different property you own, since a great tenant-landlord relationship can be hard to find. Make this choice with as much respect and notice as you can.

Talk to the Tenants About Purchase Possibilities

If you want to save a little time and effort searching for a buyer, and you have tenants who may consider purchasing their home, look into what this would entail. You want to get a real estate attorney involved, since they already occupy the home and a casual agreement in these kinds of cases is not a good idea. Get everything worked out legally, whether you want to count future rental payments toward a down payment, want to sell it to them in a traditional sale, or some other agreement that works better for them, like another year of renting before committing to purchase. Make sure the arrangement works for you both; if their proposed path forward doesn't help you unload the property when and how you need it to, you have the freedom to say that it isn't a good path for you. 

Give The Right Amount of Notice (More Whenever Possible)

Even if you are anxious to sell a property, giving notice will make everything so much simpler. For one thing, excellent notice will sometimes prompt tenants to find a new place to live quickly, at which point you and your tenants can mutually terminate the lease. For another, good notice helps tenants to grow accustomed to the idea and to the fact that you'll need to conduct showings. Even reasonably neat people will probably need to do an extra pick-up around the home to show the building in its best light, and if you are asking this much from them, you'll want to give them plenty of time. Lastly, states have legal requirements, with a fixed term lease or with month-to-month,  and staying in compliance is very important for property owners.

Options If Your Tenants Aren't Interested in Moving Out

  • Some leases do include an early termination clause, which essentially lets the tenant know before they signed that you could possibly give notice and sell the property. If you don't have these already but have a suspicion you might offload a property in the next lease cycle, talk with your tenant about this option.
  • If tenants don't want to leave and you'd really like them to, sweeten the pot with a move called "cash-for-keys." This is essentially an incentivized dissolution of your lease agreement, where you offer to pay their moving costs, a new security deposit amount for a future place, or another agreed-upon sum as soon as they move out of the property.
  • If the tenants still don't want to leave, you have the option of selling the property with an active lease. You will have fewer potential buyers, but if the property market is right, you can still find a seller. You'll transfer the lease agreement into the name of the new owner and the tenants will (in most cases) retain the same rights and terms unless both parties choose to renegotiate them. For some buyers, this will be desirable, especially if you can vouch for the tenants.

Work Through a Reasonable Showing Schedule

Whether your tenants are in the process of finding a new place or intend to remain through and after the sale, you'll have to work out a way to make showings work with your tenants. Here are some tips for being a great landlord and still maximizing the value of the showings your real estate agent can host:

  • Work out a notice plan with your real estate agent; your tenants will probably want 24-hour notice of any showings and may want to block off certain times that they do not want showings to happen. Make sure all parties understand these conditions and agree to them.
  • If your tenant isn't the best at maintaining the property at a high level, let them know that you'd like to spring for a cleaning service or yard service in order to get the best possible future property owner for the location. Do this in a diplomatic way that doesn't insult the way they keep the property but rather emphasizes that you don't want to waste their time or efforts when you are the one who needs the location to be pristine.
  • Incentivize your tenants not being around during showings; it is disconcerting, after all, to have another person in a space while you evaluate whether or not to buy it. Offer a gift card for a meal or coffee outing in exchange for the tenant vacating during the time of an open house or promising showing. If the entire residence is vacant at specific times, such a school hours or work hours, try to schedule some showings during that time.

Market Dependable Tenants as a Bonus

Since having tenants already in the building will make your target market other rental property businesses, most likely, you can let them know the value of having a tenant already present. Marketing for tenants and setting the rent can be tough choices, especially for first-time investment property buyers, and your knowledge can be part of what makes the property desirable to your potential buyers. 

Clear Up Everything With Your Tenants Before Closing

If there is any back rent due or a deduction from the security deposit that must be made (based on a contingency of the sale, for instance), settle everything with the tenant before the transferal of ownership. Since the owner becomes the landlord officially, getting anything you are owed after the fact becomes much more complicated.

As you can see, selling a property may be more difficult or more complex with a tenant, but it also may make it easier to sell and a better buy for your future customer. With forethought and communication, you can maintain your reputation as an excellent and fair property owner while generating the cash flow or property strategy that you need for your next steps. For more help with making your rental properties successful, contact us today!



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