How To Sell A Rental Property With Tenants
Selling a house with tenants on a lease is a lot easier than you might think if you focus on these three fundamentals:
- Understand your local landlord tenant laws
- Determine your target buyer
- Streamline the process for tenants and buyers
Understand your local landlord tenant laws
The first fundamental step in selling your rental property is to understand the local landlord-tenant laws. In Baltimore City, for example, tenants have the right of first refusal to purchase the property. This means you must give your tenants the right to purchase your rental property by matching the highest and best offer you receive from other buyers. If your property is in a jurisdiction that requires a right of first refusal be given to the tenants, you should reach out to your tenants with a formal notice of intent to sell informing them of their right to purchase the property. Most tenants will confirm that they have no intention to exercise their right of first refusal -- you should request this in writing.
If your lease is expiring, it is always easier to sell a vacant property and you may want to provide a notice of non-renewal and a notice to vacate. Notice to vacate commonly provides tenants with 60 days from the first day of the month.
Many landlords do not want to incur the carrying costs of a vacant house, so they will keep their tenants in place on a month-to-month lease once their lease term expires. This opens up the pool of buyers beyond rental property investors to primary residence buyers who may decide to provide notice to vacate to the tenants once they assume ownership of the property. In today's housing market, with record low inventory, many primary residence buyers are willing to purchase a tenant-occupied house.
When it comes time to show the property to buyers and provide access to inspectors and appraisers, you should always provide your tenants with as much notice as possible and no less than 24 hours notice. Looking at this from the tenant's perspective, it's an inconvenience to be required to provide access to your home on short notice, so go out of your way to be as courteous and appreciative as possible!
Determine your target buyer
If your rental property is leased for a longer term (i.e. 1+ years remaining on the lease), then your pool of buyers is limited to rental property investors. Rental property investors are disciplined in what they are willing to offer, so you should not expect to receive offers at "market value". This means your rental property in the midst of a long-term lease is not worth the same it would be worth if it were vacant and ready for a primary residence homebuyer to purchase. For rental property investors, the numbers need to make sense as it relates to target cap rate and cash-on-cash returns.
Certain rental properties have such extensive deferred maintenance that the only likely investors are fix and flip and rental property investors who are comfortable with major rehab projects. These buyers carefully estimate rehab costs in order to determine how much they are willing to buy your rental property for. These buyers may keep tenants in place in the near term while they complete other projects and prepare for the renovation of your rental property.
Many landlords do not feel comfortable "breaking the lease" in order to sell a property. It is possible to break the lease by incentivizing your tenants to vacate. The is commonly referred to as "cash for keys", a term also used in eviction proceedings.
Streamline the process for tenants and buyers
- Provide as much details as possible to prospective buyers
- Screen prospective buyers before they schedule a tour
- Schedule one safe showing instead of individual showings
- Communicate courteously and proactively with your tenants
- Eliminate contingencies that can result in the transaction falling apart
- Work with a title company that can close quickly
- Provide clear communications to tenants regarding the status of the sale and transition to new ownership
Provide as much details as possible to prospective buyers
When you provide thorough details about your rental property to prospective buyers, it will answer many of their questions and allow them to decide if they are seriously interested in taking the next steps in the process (tour, offer). This is where you can weed out people who are just going to waste time for you and your tenants.
We recommend providing the following:
- high quality pictures and 3D walkthrough
- lease terms (monthly rent, lease expiration, tenant performance)
- details on age and condition of fixtures and systems (roof, HVAC, flooring, siding, appliances)
- comparable home sales "comps"
Screen prospective buyers before they schedule a tour
Require prospective buyers to provide photo ID and proof of funds. For trust and safety purposes, you want to make sure you know who you are allowing into your property. This is especially true if you are allowing a prospective buyer to tour your rental property without you being present. Drivers license is the standard form of photo ID documentation.
Going one step further than photo ID, you should require all prospective buyers to confirm their financing method and provide you with valid proof of funds.
Valid proof of funds:
- Online banking screenshot
- Bank account statement
- Brokerage account screenshot
- Brokerage account statement
- Pre-approval or pre-qualification letter from lender
- Commitment letter from hard money lender or private lender
If prospective buyers resist your proof of funds request, you should encourage them to redact any information they deem sensitive. Requiring proof of funds will eliminate wholesalers who tell you they are cash buyers but they really don't have any money or intention to buy your property.
Schedule one safe showing instead of individual showings
Most buyers will need to walk a property before they are comfortable submitting an offer. Even if you provide an inspection report and a 3D Matterport home tour. The last thing you want to do is coordinate one-off showings of a tenant-occupied property. This is why we recommend scheduling one safe showing for multiple qualified buyers once you have enough interest in the property. This will also send a clear message to prospective buyers that they need to submit a competitive offer if they want to buy the property.
Communicate courteously and proactively with your tenants
Give no less than 24 hours notice of scheduled showings, show appreciation for their cooperation, and let them know through your communication and actions that you are doing everything you can to reduce the inconvenience caused to them by this home sale process.
Eliminate contingencies that can result in the transaction falling apart
We always recommend selling your home in AS IS condition and setting very clear expectations with prospective buyers that you will not be conducting repairs or negotiating based on inspection results.
The most competitive and attractive offers when selling your tenant-occupied rental property are offers that have no contingencies. That means the buyer is not likely to back out and you therefore are not likely to have to deal with re-starting the home sale process to bring in another buyer. On this note, if you are able to successfully make buyers compete and you generate multiple attractive offers, it's a best practice to have the runner-up confirm with you that they will be willing ready and able to close if the winning buyer falls through for whatever reason.
Work with a title company that can close quickly
Title companies and closing attorneys frequently cause unnecessary delays due to disorganization and lack of proactive communication. This is especially true during a hot housing market. Be sure to check in every 2-3 days with the title company to see what they need and how you can assist in order to close on time.
Provide clear communications to tenants regarding the status of the sale and transition to new ownership
Once you've sold your rental property (congrats!):
- Make sure any security deposits, pre-paid and pro-rated rent are transferred to the new owner/property manager
- Send an introduction via email and/or SMS connecting the tenants and the new owner/property manager. Confirm with the tenants that their security deposit (if applicable) has been transferred into the care of the new owner/property manager. Confirm with the tenants that all future rent payments, communications and maintenance requests should be sent according to the new owner's instructions.
Selling your rental property with tenants is even easier with OfferMarket's Get Offers managed service.