Selling a tenant-occupied home can be more difficult than selling a vacant property. It’s important to understand the terms between you and your tenant in the lease agreement. Typically, we recommend waiting until your lease is over to sell, but we understand that changing markets and other factors sometimes make it unavoidable to wait.
Before putting your tenant-occupied property on the market, make sure to review your lease agreement.
It is easier to sell a property with a month-to-month lease as long as you give your tenant proper notice. Most states require landlords to give their tenants 30 days notice prior to their move-out date, but California requires landlords to give at least 60 days notice.
To notify tenants, mail or deliver a letter to your tenants letting them know the date their lease agreement will be canceled and when they will need to move out.
Selling an occupied rental property with a fixed-lease becomes more complicated; however, you have a few different options for handling tenants.
4 OPTIONS FOR HANDLING TENANTS WITH A FIXED-TERM LEASE
The easiest option for a fixed-term lease is to wait until the lease agreement is up and your tenant has to move out before selling your property. At first glance, selling your home before the end of your lease may seem like the quickest and most profitable option, but there are additional factors when selling a tenant-occupied home that could actually extend your property’s time on the market, as well as its selling value.
Here are some of the drawbacks to selling your property before the lease expires:
Unreliable Move-In/Move-Out Date - Sometimes tenants do not want to leave at their required move-out date. This is called holding over. If you list your property on the market before your tenant has moved out, you risk the possibility of your tenants holding over and not providing keys at the end of their lease. This will impact your ability to schedule repairs, hold showings, and it will extend your home’s time on the market.
Showings Can Be Challenging - When you list your home on the market, you’ll have potential buyers who will want to see it. Scheduling showings with tenants still living in the home presents multiple issues. First, you will have to coordinate showing times with your tenants schedule. Interested buyers might have to book a showing after work hours, which would interfere with your tenants evening.
Secondly, with a tenant-occupied listing, you won’t be able to stage the home. On average, staged homes receive 7-10% more on their asking price than vacant or tenant occupied properties. If your tenants have not moved out, the house might not be extremely clean, especially if there are children or pets. Potential buyers have a harder time seeing themselves in the home when there are other people’s belongings in every room. The same goes for vacant properties. If there is no furniture in the home, buyers struggle to picture themselves in the home.
No Time To Update - After having tenants living in your home, sometimes for years, you probably want to upgrade appliances or do major renovations to improve your sale price. These normally cannot be done when you have a tenant.
2. Offer Cash-For-Keys - If you decide to list your home on the market before your tenant’s lease is up, you might consider negotiating a monetary settlement with your tenant in exchange for them to vacate your home before the lease is up. This is commonly referred to as “cash for keys.” This strategy is effective, but costly.
When deciding how much to offer you tenant, consider these strategies:
Cover their moving costs
Pay the security deposit and first month’s rent for your tenant’s new home.
Pay the difference in rent costs. If rent for comparable properties is higher than what you’ve been charging, offer to pay the difference between what our tenant will likely have to pay and what they have been paying you, times the amount of months left on the lease.
Remember your tenant is under no obligation to accept your offer or agree to move out before the lease is over. When approaching tenants, it is always best to be respectful and upfront about your intentions.
3. Sell With The Lease - If you plan on completing the sale before your tenant’s lease is up, the buyer is required by California law to honor the existing contract through the remainder of the lease. Selling to an investor is the easiest way to ensure your buyer understands and is willing to be the new landlord. For commercial properties, having existing tenants is actually a good selling point since the potential buyers do not have to search for tenants when they purchase the property.
4. Offer Your Tenant - If your tenant loves where they live, they might be interested in purchasing the property. Here are a few common ways you can sell the property to your tenant:
A lease-to-own with a one-time, non-refundable option fee that allows tenants the right to purchase the home within the year, at a set price. In the meantime, they keep paying rent.
A lease-to-own agreement that is structured so a portion of the rent goes toward a down payment.
A seller-finance agreement. You, as the property owner, serve as the lender, instead of a bank. The tenant agrees to make payments to you over a period of a few years, often with one balloon payment. The biggest benefit for the seller is the money you’ll make in interest on the debt. In order to take advantage of this type of sale, you’ll need to own the home free and clear, without a mortgage.
Selling your tenant-occupied property can be tricky, and it is important to know your legal options. Give us a call - we would be happy to help!