As the residential real estate market has improved, many rental owners are considering selling their properties. Several years ago, owner occupants decided to rent their homes when they could not find a buyer or net enough from the sale to pay the mortgage. Some rental owners are now deciding it is time to try to sell the home again. This time they’re trying to figure out how to sell a tenant occupied home.
The simple solution is to wait until a lease has ended before putting the property on the market. Many rental owners need the rental income to pay the mortgage on the property. There are also tenant-rights protections that limit the options an owner has to remove a lease-abiding tenant. Finding a way to sell a tenant occupied home may be the right path for the rental owner.
The challenge of selling a tenant occupied home is often not related to the market, but the tenant. If the tenant is not cooperative toward the selling effort the owner’s options are limited. In all states tenants have rights. As long as the tenant is fulfilling the terms of the lease, they have the right to enjoy their residence. The challenge is gaining a tenant’s cooperation with the showings aspect of the sales process. The goal becomes how to make the tenant a neutral factor and not a hindrance to any possible sale.
Some great tenants keep a home in good condition and are cooperative. The reality is that a tenant can have a negative impact on a home that’s on the market. The home may drop in value because of the condition of the home and the lack of access for agents and prospective buyers. Or it may eliminate potential owner-occupants from considering the home since they need a place to live also.
Many real estate agents recommend waiting until the tenant’s lease expires and sell the home vacant. Agents are reluctant to sell a tenant occupied home because they expect resistance to allowing visitors into the property and assume the condition will be less than optimal. Yet, not all rental owners can afford to have their home vacant for a few months during the selling process. Also, some investors will be attracted to a home already occupied with a paying tenant. The owner’s decision starts by identifying what kind of home they own and who is the prospective buyer.
Selling the home when the lease ends
Most real estate agents would argue that a seller should wait for the rental agreement to expire. Eliminate all the risks associated with selling a tenant occupied home. After the home is vacant, make cosmetic fixes, clean up the home, and sell it vacant.
Waiting may be especially important if you have a difficult tenant or one who is unhappy. The last thing you want is to make showing the home more difficult. A disgruntled tenant could easily create bad smells or leave the home a mess. The result is that your property looks less appealing to potential buyers which will have a dramatic effect on the offers you receive.
If you have difficult tenants and suspect they won’t be cooperative, simply let the lease run out. There is little debate that the home will show better without a tenant.
On the other hand, selling a vacant rental unit isn’t always ideal for the rental owner’s finances. It can take months from the time the home goes on the market until it’s sold. These are months where there is no rental income and ongoing expenses such as utilities and maintenance. There may also be concerns about property damage to a vacant home such as theft or mechanical failures. This can be especially difficult for the rental owner where the home has been a long-term financial burden. In the case of those rental owners, it may be much better to try the alternative.
Sell a tenant occupied home
If you decide to sell a tenant occupied home, start by deciding the most effective path to success. This path must include your tenant. This may be much easier if you have a good relationship with your tenant. A good relationship starts with prompt response to maintenance and limited issues associated with payments. No matter who is at fault, understand the tenant blames the landlord.
Tenants rarely are eager to help rental owners market their home. Realtors are reluctant to show homes that have a tenant in place because of the potential headaches associated with an uncooperative tenant. The owner must find a way to change both of these factors for the benefit of a sale.
If the rental owner has decided to sell a tenant occupied home the first, most important step, is communication. Many tenants will immediately react to the news of their home being for sale by looking for a new place to live. They’d rather just move on and not have to deal with keeping their home clean all the time, plus showings and phone calls from agents. If income maximization is the goal, the owner must create a plan to avoid bad relations with the tenant during this crucial period.
The following are considerations and solutions to encourage a tenant to be your partner in the sale.
Understand Your Tenant’s Point of View
Your tenant lives in this home and chances are, they don’t want to move. From their point of view, you are asking them to inconvenience themselves by allowing strangers to wander through “their home” at all hours of the day and possibly the evening. When you sell the house, they also believe they will be forced to move.
Any experienced home seller can share the frustration of selling a property while living in it. The constant effort to keep it immaculate and always available for buyers to visit. Homeowners have a financial motivation to put up with the inconvenience. Renters, especially if they are not eager to move, have no motivation other than kindness to keep the home pristine and open to a constant stream of prospective buyers.
If you want to have a chance of selling that house, you need a plan. You need to try to get the tenant on YOUR side so that you can sell the house quickly. Otherwise, your tenant can be your worst enemy for a successful sale.
How A Tenant Can Make A Sale Difficult
Here are a few quick examples of how the tenant can make your home sale very difficult:
- Not cooperating with showing requests
- Leaving the home in displeasing fashion
- Locking certain rooms so nobody can see them.
- Sharing a list with the interested buyer of problems, real or imagined, with the home.
This last issue is common because unlike when you sell a home that you own, tenants can’t be made to leave the home just because there is a showing. This problem can occur during a buyer’s inspection or later drive-by . The tenant is living in fear of an ownership change. They have no financial interest in the sale and only can imagine things likely changing for the worse, with a new owner. The tenant may say they will be cooperative and agree to leave the premises in showing type condition. Later they become worried and decide to plant themselves in the middle of the decision-making process.
The one thing you don’t want is an angry tenant. An angry tenant can easily damage, in many different ways, any chance of success for a sale. If they meet the potential buyer they can offer information on how the property is maintained, any problems the home might have and the quality of the neighborhood. If they are angry, they may readily share information that could damage your potential sale.
One additional piece of advise, don’t try and sneak the home on the market and avoid telling the tenant.
Gaining Tenant Cooperation
True success for a sale includes a strategy of pricing well and a tenant motivated to cooperate as a partner in the sale. The first, and most important, step is to communicate with the tenant exactly what is happening. Sit down and explain to them that their home is going to be for sale and you would like them to help. Review specific agreements made in their lease in the event of a sale. Most importantly, make sure they know their tenant rights protections and the terms of the existing lease. Even with a change of ownership, they have the right to remain in the home until their lease expires. Finally, start the sales process by asking if they want to buy the home. Maybe your buyer is already living in the home and just needs guidance as to how to make it their own.
Once a tenant is reassured of their legal rights, their biggest concern will be how strangers gain access to the home. Promise them that they will be notified prior to any showing of the home. Let the tenants know that they will also be notified prior to any home inspections or appraiser visits. Offer to set up a protocol for how and when the home will be shown. The tenant should be reassured that there will be established hours for showing the property and that the contact person for the listing will be a Realtor rather than the tenant or the owner. Tenants should be told the keys won’t just be handed out to anyone who wants to see the place. An agent or the owner will accompany prospective buyers.
Explain to the tenants your expectations for cleanliness, such as making beds, keeping dishes out of the sink and cleaning the floors. Remind the tenants to keep cash, jewelry, firearms, prescription drugs and anything embarrassing out of sight of prospective buyers.
Finally, simply show compassion to ask the tenant what could be done to make the process easier for them.
Motivating The Tenant to Assist The Sale Process
Many tenant concerns go away when presented with a proposal to become the owner’s partner in the sale process. Here are several ideas that have been utilized, successfully to make the tenant your partner.
- Offer to compensate the tenant for every time they allow someone to view the home. For example, consider paying them $10 every time the home is shown, payable once the house closes.
- Offer to give the tenants a gift certificate to a store of their choice when the home closes.
- My preference is to create a lease addendum that provides an outline of the expectations of the owner and their agent during the selling process. The Addendum addresses conditions of cooperation and in return offers the tenant a rent concession through the time of the sale.
The first and most important condition in a lease addendum is that the tenant will cooperate with showings and inspections by leaving the premises (just like owner occupants are encouraged to do). Establish hours when access will be available on terms the tenant agrees (within reason). Also be as specific as possible about expectations for cleanliness.
Decide
After deciding that you want to sell a tenant occupied home, you will need to determine a game plan for success. This game plan will likely cause you to incur some extra costs. Experience shows that obtaining tenant cooperation will lead to a quicker sale. If you’re not really committed to selling now, or if your expected buyer will be an owner-occupant, just let the tenants know the lease will not renew.
The best option to preserve cash flow is to motivate your tenant to help you sell the home. If the tenant is really stubborn, and you need to sell now, you may have to resort to a cash for keys plan. This offer basically is a buy-out of the lease to move the tenant now in return for compensation for their leaving the home in great shape prior to the lease end. If the tenant is already struggling with timely rent payments this will certainly prove to be a lot easier and less costly than an eviction.
With communication, understanding, and incentives, you can be successful in convincing your tenant to be your partner in the sale.
