How To Sell A Home With Tenants?

Posted by Eric Peterson on Wednesday, April 7th, 2021 at 2:07pm.

 

Because we offer free home staging and help coordinate make ready for landlords our company attracts a large number of homeowners who call when they decide to sell a rental property. This year more than ever we are getting calls from landlords who want to sell properties with a tenant living in the home prior to the lease ending.

Why Are Landlords Selling?

With the eviction moratorium landlords are concerned about tenants not paying rent. We have had several landlords contact us who are ready to throw in the towel because despite not getting rent they still are required to pay property taxes, insurance and make repairs. Several others are selling because the tenants won’t move out after their lease has expired and they have been given notice. Others are ready to sell because the tenants are not allowing access to the property and the landlord is afraid of how much damage the tenants have done.

In addition, as tax assessments have been sent out many landlords are calculating how much in property taxes they will pay this year and in 2022. One property owner told me he estimates his tax value will go from $315,000 in 2020 to $515,000 in 2022. Who knows what the tax rates will be in 2022 but it’s hard to imagine property taxes not increasing significantly with those jumps in value for landlords who don’t have the luxury of Homestead Exemption caps. It’s also not likely with all the apartments being built a landlord will be able to increase rent to match the tax increase.

The other tax consideration that causes landlords to call us to sell is when they approach the “2 in 5 Capital Gains Tax Exclusion.” This is where you may be able to avoid paying capital gains taxes if you lived in the home for 2 of the previous 5 years. We often see landlords make a huge financial mistake by renting the home for 3 years and then deciding to sell. This exclusion is one of the best parts of owning real estate and something you should research about your situation prior to turning any owner-occupied property into an investment property.

Finally, savvy investors review their investments every year and ask if there is something else that would give them a better return. Often less experienced investors will only look at how much money they are making. The best investors know the question isn’t if you are making money, the question is if there is a different investment that can make you more money while also considering time spent on the investment and risk. For example, owning real estate isn’t as liquid as investing in the stock market and it’s never as passive as you might imagine unless you want to hire a property manager which will reduce your returns.

Why Sell A Tenant Occupied Property?

This is a great question and something we often discuss with landlords who want to sell. There are several reasons you may want to sell a tenant occupied property rather than waiting for the tenant to vacate the home.

In some cases, having a tenant already in place in the property is attractive to potential buyers. Buyers will be assured they won’t have extra leasing expenses and a vacant home if they are buying as an investment property. We do work with many investors and we may already have a buyer for your home so contact us to see if this is an option.

Something that is important to understand is a lease stays with the property even if the home is sold. That means when you sell a home with a tenant the sale does not terminate the lease. The new buyer inherits the old lease and can’t kick out the present tenant. Any pro-rated rent along with deposits should transfer with the sale as well.

Other landlords may simply need the money for a better investment and can’t wait for the tenant’s lease to expire. One landlord we are helping found a great deal on a vacation home but he needs the money from selling his rental property. The owner of the vacation home isn’t willing to wait 6 months for the lease to expire to sell the home so the landlord has no choice but to sell the property now.

How To Sell A Property With Tenants?

We’ve talked about the financial reasons to sell a home with tenants and now let’s talk about whether it’s a good idea or not. If you aren’t under pressure to sell with a tax deadline or have another time sensitive opportunity the decision may come down to the condition of the property and how cooperative the tenants will be for showings.

It is possible to sell a home sight unseen where a prospective buyer will make an offer without seeing the inside of the home prior to making the offer. Usually, the buyer will then see the inside of the home during the inspection. The advantage of selling this way is you are only disturbing the tenants when you have a solid offer. The disadvantage is you are reducing the buyer pool for your home because many buyers will be scared off by making a financial commitment without seeing the condition of the property.

If the condition of the home is poor then you may be better off waiting for the tenants to vacate. Buyers today are very concerned about the overall cleanliness of a home and may be scared off if they think the home is not a healthy environment.

Because we help sell rental properties on a daily basis, we have a great system to get any necessary make ready done quickly and affordably. Our contacts with reliable contractors can help get estimates before the tenants move out and get any make ready schedule as soon as the home is vacant which will minimize the time before your home can be on the market. A little minor TLC will help get you the most money and also help defend your equity when an inspection is done.

If the condition of the home is good then our next consideration is if the tenants will cooperate with showings. Your lease should spell out the tenant’s requirements for cooperating with showings and if they will allow a lockbox to be used for showing access.

The best thing we can do to help tenants cooperate is show compassion to their situation and give reasonable notice for showings. Most tenants don’t enter a lease expecting the home to be sold. Understandably they will be anxious and also, they won’t be happy about being inconvenienced with having strangers come into the home. In most cases we can offer to hold a couple open houses which will minimize the number of times the tenants will be inconvenienced.

In my experience when a landlord starts off the process without showing any empathy towards the tenant’s situation things start off on the wrong foot. Because we have so much experience selling tenant occupied homes, I believe I am able to work with tenants for showings better than an agent who hasn’t been through selling a tenant occupied home before.

Other ideas that have worked are paying for weekly house cleaning so the home will show better and avoids tenants complaining that prospective buyers made the house dirty. Some landlords will offer their tenants a financial incentive if they cooperate with the sale. In extreme cases some landlords have offered to let tenants out of the lease and move with no penalty, and some have even paid tenants to end their lease early.

Remember To Give Notice

Finally, remember to give notice. If you have decided it’s time to sell your rental property it is very important to review your lease. Chances are your lease converts to month to month if notice is not given by either the landlord or the tenant. Don’t count on your property management company to provide notice in a timely manner. Be sure to let your property manager know you want to sell and ask them to give notice or if you are managing the property you will need to do that yourself.

What’s The Next Step

We specialize in helping landlords sell their investment properties. The next step is to contact us to figure out what strategy will get you the most money when you decide to sell. We recommend contacting us at least a month prior to your lease ending. Or you can contact us today to see if we already have a buyer for your home. Whenever you are ready call us at 512-791-7473 .

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