Selling Tenant Occupied Rental Property

Do you have a rental property you would like to sell – but have questions because it’s occupied by tenants? You’re not alone. Many landlords chose to take advantage of the favorable sales environment over the past few years to cash out on their rental properties. Selling an unoccupied property is always preferable for a number of reasons, but not always possible when timing of the sale is critical. Having a lease and tenant doesn’t prevent sale of the home, but it does potentially raise some issues we’ll cover in this article.

The best case scenario is to sell the rental home to the tenants who already live there. In those situations, everyone has a common goal and the complexities of dealing with a tenant move-out, repairs, and security deposit disposition are eliminated. The only major consideration is whether or not to engage an agent to represent one or both parties to ensure all is in order and the transaction goes smoothly. For landlords of managed property, the property management agreement may also contain provisions related to sale of the property.

If the tenant is within a few months of the end of their lease, the property can be offered to potential owner-occupants. Otherwise, a purchaser also buys the remainder of the lease and tenancy and must also step into the landlord’s shoes to wrap up business with the tenants at the end of that lease. When a tenant is “short” and the end of the lease is near, it’s important to ensure proper notice of termination or conversion to a shorter term if desired. Many leases contain an automatic renewal provision, so missing the deadline to give notice or modify the renewal period means the tenant could be entitled to stay for another renewal term as defined in the lease.

When tenants are in the middle of a lease, the landlord/seller is more limited. The unit can still be sold but unless the tenants agree to terminate the lease earlier to facilitate occupancy by the purchaser, the new owner will be required to honor the terms of the lease. That’s fine for an owner who doesn’t want to occupy the property but effectively limits the pool of potential buyers to investors. The first step is to have a conversation with the tenant (through your property manager if the rental unit is managed) to understand whether they’re set on staying through the lease term or might be open to modifying the lease term.

Regardless of the status of the lease, if the property is occupied and placed on the sales market you’ll need a certain level of cooperation from the tenants in order to market it adequately. Generally tenants have nothing to gain from the sale of the property, so motivation to aid the process is quite low. Virginia landlords have a right of access to the property with reasonable notice (72 hours) but uncooperative tenants can make it problematic to schedule showings.

While empty properties can be presented totally vacant, clean, and staged with tasteful furnishings - such is not the case when tenants are living in the home. Even tenants who cooperate with the showing process and allow unfettered access will not undergo a lifestyle overhaul to accommodate the sale. Poor housekeeping or questionable decorating can be deterrents for potential buyers, therefore getting the tenant invested in the process is a good strategy. Consider offering something of reasonable value like a month’s free rent when the property sells or other compensation to elicit the tenant’s cooperation since motivation can wane over time. Be careful to craft the offer so it is based on results and not an up-front giveaway.

There are many layers to the sale of an occupied rental property. Flexibility and having a good relationship with the tenant will pay dividends when you need their cooperation. Having the counsel of an experienced property manager and sales associate can be invaluable throughout the process. The Real Estate Group has managed and sold thousands of homes in Hampton Roads for our landlord clients. Let us show you why our team of experienced managers and associates are the RIGHT CHOICE for all of your real estate needs.

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