Selling a Rental Property with Tenants – What to Know?

Here, I will help you understand how to sell a rental property with tenants in it. Included is information to help you better understand how to get the most for your property when selling a rental property with tenants by targeting either other real estate investors or homebuyers searching for a home to live in. I have also included the pros and cons of selling a property with a sitting tenant.

What Is a Sitting Tenant?

You may have seen a property listed for sale described as tenant occupied and are asking what does tenant occupied mean? Tenant occupied means there is a sitting tenant. A sitting tenant is the tenant currently residing in the property. A sitting tenant is acting within the terms stated in the tenant’s lease or rental agreement.

Can I Sell a Tenant Occupied Property?

Typically, you can sell rental property with tenants. Exceptions to this would include anything to the contrary in the lease or rental agreement. Additionally, landlords should review local ordinances and state statutes about selling a rental property with tenants. There may be specific notices or other procedures which must be provided to the tenants.

Reasons Real Estate Investors Sell a Tenant Occupied Property

There are several reasons why a real estate investor could become interested in selling tenant occupied property.

• Rapid Appreciation – If the value of a property has appreciated rapidly the investor may want to cash-in on the property and move on to something else.
• Low Performance – Sometimes a real estate investment is a low performer for the investor, so he or she decides to sell the property. Overpaying for the property, charging too low of rent, or the property needing too much maintenance are all characteristics of a poorly performing investment property.
• High Performance – A real estate investor could have ended up purchasing a property that is performing well above the normal cap rate. The investor could sell the property at a lower cap rate and make a nice capital gain.
• Retirement – Real estate investors are mere mortals. Most rental real estate is owned by “mom & pop” companies. As these investors seek to retire they will sell off their rental properties.
• Better Use of the Funds Elsewhere – A real estate investor may be selling tenant occupied property to pursue an alternative investment opportunity.

The Benefits and Consequences of Selling A Tenant Occupied Property

Selling a tenant occupied property will attract some buyers but dissuade others. You should be aware of the pros and cons of selling tenant occupied property so you can make the decision about what is best for you.

Tenants Might Not Make the Best First Impression

Imagine a real estate agent bringing a buyer to your property only for the tenant to make a terrible first impression. Anyone can be obnoxious, defiant, and down right nasty.

Additionally, if the unit or home is a mess this will also negatively affect the buyer’s decision making. On the other hand, a model tenant could persuade a real estate investor to purchase your property over another.

Ongoing Leases in Place

An ongoing lease held by a tenant will affect who is most interested in purchasing the property. Real estate investors will be interested in a property where the tenant has a lease with a meaningful amount of time remaining. On the other hand, homebuyers looking to purchase a home to live in will be much less enthusiastic about buying the property.

Some tenants have a month-to-month lease. In those situations, real estate investors will be indifferent about the situation. However, many homebuyers wanting to live in the property will remain reluctant to move forward with a purchase. Homebuyers intending to live in the property may be fearful they will end up being the ones ending the tenant’s tenancy at the property. Most everyday homebuyers would rather avoid dealing with this issue.

Location and Property Type Matter

A property’s location will affect the type of buyers interested in the property. Homes which are located near jobs, schools, healthcare facilities, and places of day living like stores, restaurants, and a gym are attractive to all homebuyers. However, homes located on the outskirts of towns or in rural areas are more attractive only to homebuyers intending to live in the property. The reason for this is that real estate investors know it is difficult to continuously raise the rent rate at homes located farther from amenities.

The type of property matters a lot, too. Houses attract both homebuyers and real estate investors. Condos and townhomes attract more homebuyers. This is due to the fact many condo and townhome property owner associations make it difficult to rent out a property within the association. Multi-unit buildings are more popular with real estate investors than the prospective homebuyer looking for a place to live.

Is It Challenging to Sell an Investment Property with Tenants?

Tenants can make it more difficult to sell an investment property in several ways. First, tenants can demand the property only be shown at very specific and limited times. Secondly, the tenants can make the property look worse by keeping their unit in messy shape. This will turn off homebuyers and other investors.

Additionally, some homebuyers are reluctant to purchase a home with a sitting tenant. This is especially true for homebuyers searching for a home to buy and live in. Most everyday homebuyers are intimidated by the process of moving out a sitting tenant.

Can a Sitting Tenant Affect Property Values?

A sitting tenant can affect property values when selling a home. First, the tenant may be poorly maintaining the property. This will cause the property to look worse and drive down the value. Secondly, real estate investors will analyze the cash flow of the property based on the current tenant.

Some real estate investors are kind and keep their rents low. However, when it comes time to sell this will hurt the investor’s resale price. Real estate investors like to use the current income of the property to assess its current market value. Low kept rents will in turn produce a low market value when following the cap rate valuation method which is widely used by real estate investors.

Selling a House with a Tenant

There are some ways to improve the outcome of selling a house with a sitting tenant. Assuming as the seller you want the most you can get for the property the first step is to identify which buyer audience will pay the most for the property.

In almost all cases homebuyers with the intent to live in the property will pay the most for the home. Therefore, if the property is marketable to everyday homebuyers looking for a home to buy and live in, focus on marketing the property to them. Next, take a look at the amount of time remaining on the lease.

No Lease Term Tenants

A tenant without a lease term is maintaining the tenancy on a month-to-month basis. This will be attractive to real estate investors but also to many homebuyers. To further entice homebuyers market the property by stating the tenant will have moved out of the property before closing. This will get more homebuyers looking at the property.

Lengthy Remaining Lease Term

If the tenant has a lease in place with a long amount of time remaining on the lease it’s likely you will be marketing the property to real estate investors. Homebuyers who will pay more are looking for a place to live first. Investment is only a secondary benefit of being an owner. In this situation your marketing should be geared towards real estate investors. Alternatively, if you are confident homebuyers will pay more for the home, consider waiting until the tenant’s lease is close to expiring.

Removing the Tenant

Consider removing the tenant if you are keenly focused on selling the home to a homebuyer who intends to move into the home. Delay listing the home for sale until after the tenant’s lease expires and has left the property. Some tenants may move now if you cooperated with them to do so, too.

How to Market a Tenant Occupied Home for Sale

These tips to market a tenant occupied home for sale. Following these tips will help you attract the right audience for the home.

• Scheduling Showings – Work with the tenant to know when the property is available to be shown to prospective homebuyers. Additionally, consider funneling all of the showing activity into two days and times per week. This should provide enough options for homebuyers and is considerate towards the tenant.
• Clean up Together – If the tenant has the property looking messy, offer to help clean some things up. This includes renting a dumpster or hiring a house cleaning staff to come freshen up the property. Consider calling a landscaper to get the lawn looking better, too.
• Provide Details About Tenancy to the Market – Marketing up front to the target buyers for a property is always a good idea. When selling a property occupied by tenants, communicate details about the tenancy. This should include the term of the lease in place, whether or not the tenant will be removed before closing, and if the tenant will come with the property how much the tenant is paying in rent.

Photographic a Tenant Occupied Property for Sale

I think we all deserve to have some level of privacy, and you should feel that way too when selling your tenant occupied property. Work with your tenant when photographing the property for sale.

Start by telling your tenant you need to get some photos for the listing. Schedule a day and time for when the photos will occur. If you are using a third party for the photos let the tenant know. People are much more cooperative when they know what to expect. Lastly, encourage the tenant to be there when the photos are getting taken.

Property Owner and Tenant’s Rights When Selling a Rental Property

Before selling a property with tenants you need to understand sitting tenant rights. Owners and tenants have rights. Federal housing regulations, state statutes and regulations, and local ordinances regarding tenant’s rights come into play when selling a tenant occupied property. Here, I can not list all of these because each local area is different. Instead, consider these two strategies.

The first strategy is to see how cooperative the tenant will be with selling the property. Some people are understanding and rational. See where your tenant stands once confronted with this reality. Secondly, invoke the assistance of an attorney in your area specializing in investment real estate.

Conclusion

Selling a rental property with tenants in place is possible. How the property is marketed will affect whether other real estate investors, homebuyers, or both will be interested in the property. Getting cooperation from your tenant provides for a much smoother experience. Tenants can make an effort to make selling the property more difficult, so try to get their buy-in to the process if you can.

The Quadwalls Real Estate Team has helped many real estate investors sell rental properties. Feel free to contact us to learn more about how we can help you sell your Indiana investment properties including information about our low real estate commission fees in Indiana.