Selling a Property with Tenants
With the strength of today’s real estate market, many owners of investment properties are considering whether or not it makes sense to list the property for sale. While rental markets remain incredibly strong, cashing in on historic property values and pent up buyer demand due to low inventory can feel incredibly appealing, as may no longer having to manage the property, tenants, and everything that comes along with that package. Investors are then left wondering…
What about my tenants? What happens to them?
There are several paths an owner can take when dealing with a property occupied by tenants, some of which will ultimately rely on what their relationship with those tenants is like. When we work with our investors, following are the options we recommend.
Wait to list the property until the tenant’s lease is up. This isn’t necessarily an ideal option as it doesn’t allow the seller to take advantage of the current market, but it does allow them to see the lease through for the benefit of the tenant. The tenant will have time to find housing and they won’t need to worry about a new, unknown landlord taking over their lease.
Wait to close on the property’s sale until the tenant’s lease is up. This allows an owner to list the property, lock in a buyer, but still personally honor a tenant’s lease by not finalizing the sale until the lease is up. There is some risk with this option as it provides a buyer with time to back out of the deal while everyone waits for the lease to expire, but most likely not without forfeiting their earnest money deposit. There are also some buyers that will not want to wait to take possession of the property, depending on how long they would need to do so, so the pool of buyer prospects may be reduced.
List the property and transfer the tenant’s lease to the new owner. As leases are legally binding documents, they are (typically) not voidable with the sale of a property and the new owner must abide by the contracted lease terms. Some buyers will not want to deal with tenants, particularly if purchasing a single-family home that they intend to live in, so there’s a chance that this will be a deterrent for some buyers.
Offer the tenant cash for keys. Providing a financial incentive to a tenant in exchange for them handing over the keys to their home allows a seller to list the property sooner rather than later while also avoiding transferring a lease to a new owner. For great tenants, this allows an owner to feel good about supporting them in their transition to a new housing solution. For not so great tenants, an owner can remove a potential roadblock to a buyer wanting to commit to a property.
Regardless of which route a seller chooses to take, it’s important to always provide the appropriate amount of notice to a tenant, depending on state laws and/or the terms of their lease. Owners will also want to consider the potential tax implications of selling an investment property, so talking to an accountant is always a smart preparatory step to take.
While there are additional factors to balance when listing a rental property for sale, it is very possible to do so while also maintaining consideration for the wellbeing and best interests of a tenant. Who knows - a tenant that loves the property may even become an investor’s best prospective buyer!
ABOUT THE AUTHOR:
Faith Irek, Sales Agent, REALTOR®, Breakwater Realty Group Co-Founder
Faith grew up on an equestrian farm outside of Portland, Maine and returned to the state after graduating from the University of New Hampshire with a Business degree. She brings over 17 years of high-level marketing and digital management experience to her real estate career and enjoys creating effective and creative promotional campaigns that support Maine homeowners in the sale of their property. Faith is equally as devoted to finding her buyer clients homes that they both adore and feel safe in, and is committed to a client-forward approach that leaves no stone unturned in pursuit of the best deal possible.
Faith resides in Falmouth with her family. She enjoys live music, kayaking, golf, and is learning to both refinish furniture and to not kill her houseplants (one of which is far easier than the other!). She will drop everything to pet a dog and will never pass up an opportunity to visit a county fair. She is the former Corporate Vice President of the Hugh O'Brian Youth Leadership Maine chapter and enjoys finding new opportunities to support her neighbors in need of a helping hand.
207.233.8177 // faith@breakwaterrealtygroup.com