When you’ve decided it is time to sell your rental property, you have two general options: wait for the tenant’s lease to end and they move out to sell to an end-user, or sell your property to an investor while your tenants still occupy it. While selling your tenant-occupied home is an option, it can be more difficult than selling a vacant property. We normally 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, it is important to understand the type of lease agreement you have with your tenant. This will determine your legal options for selling.
MONTH-TO-MONTH LEASE VS. FIXED-TERM LEASE
It is easier to sell a property with a month-to-month lease because it will give the new owner the most amount of options. They can keep the tenant on the current month to month lease, raise the rent, or request that they vacate the unit. If you’re going to alter or end the terms or conditions of the existing month to month lease, proper notice is required. The state of Illinois requires at least 30 days written notice and a termination date that falls at the end of a rental period (usually at the end of the month). Since the lease is on a month to month basis, you do not need to provide a reason for termination as long as you give the correct amount of notice to your tenants.
Selling an occupied rental property with a fixed-lease becomes more complicated. If you plan to complete the sale before your tenant’s lease is over, you are required by Illinois law to transfer the existing lease agreement and security deposit to the buyer for the remainder of your tenant’s lease. This limits yourself to only selling to investors, and it can diminish your buyer pool by 50% or more. This is one reason why we recommend waiting until your tenants move out before selling your property.
Here are a few other drawbacks of selling a tenant-occupied property to consider:
Unreliable Move-Out - 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 tenant holding over and not providing keys at the end of their lease. This will impact your ability to schedule repairs and hold showings. It can extend your home’s time on the market as well.
Coordinating Showings - 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 tenant’s schedule. Interested buyers might have to book a showing after work hours or on the weekend--times when your tenant will most likely be home. This can cause unwanted tension with your tenant.
Secondly, with a tenant-occupied listing, you’re not in control of how well the property shows. To achieve maximum price and the shortest time on market, you’re going to want 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 are in the process of moving out, the house might not be very 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.
Updates and Renovations - You’ll most likely want to spruce the place up to improve your sale price after having tenants live in your property for years. Things like painting and cosmetic updates might be harder to complete with an occupied property.
Listing your property before your tenant’s lease is over presents added challenges to the selling process; however, if circumstances prevent you from waiting until your tenant’s move out, you have a few different selling options.
SELLING A TENANT-OCCUPIED PROPERTY WITH A FIXED-LEASE
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 can be costly.
When deciding how much to offer you tenant, consider these options:
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. Selling The Active Lease - If you plan on completing the sale before your tenant’s lease is up, the state of Illinois requires the buyer to honor the existing contract through the remainder of the lease. Selling to an investor is the easiest way to ensure your buyer is willing to be the new landlord. Having existing tenants in a commercial or multi-family property is actually a good selling point since the potential buyers do not have to search for tenants after they purchase the home.
4. Tenant Purchasing Options - If your tenant loves their home, 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.
TIPS FOR A SMOOTH SALE WITH TENANTS
Selling with tenants can be a challenge, but communicating openly and respectfully with your tenants will make the selling process easier. Here are some tips to keep in mind when selling your tenant-occupied property.
Be Upfront About Selling - Meet with your tenants about your intentions to sell the home. Keep the lines of communication open so they know what to expect.
Schedule Showings As Conveniently As Possible - Ask your tenants their preferred days and times, and try your best to adhere to those time frames. Give your tenants at least 24 to 48 hours notice before a showing. This demonstrates you respect their time and space. It’s also important to ask your tenants to leave while the showing takes place. To encourage your tenants to be more cooperative, consider providing an incentive. If you have to show the house on a Saturday morning, give them a gift card to a local coffee shop or restaurant so they can enjoy themselves while you show the home.
Do Not Put Signage In The Yard Alerting Neighbors Or The General Public - A sign could be seen as an opportunity for a passerby to knock on the door and request a showing. Let your tenants know if someone asks to see the home, they should never let them in. Instead, they should refer them directly to the listing agent for safety and best practices.
Communicate After The Sale - After closing on the property, send a message informing your tenants of the sale and the information they’ll need to direct their next rent payment to the new landlord.
Selling your tenant-occupied property can be tricky, so it is important to know your options and best practices. Give us a call - we would be happy to help!
