Some people plan to hold their investment properties ostensibly forever. They want to continue earning passive income for the rest of their lives, then pass those investment properties to their children.
But for everyone else, there will come a time when you eventually sell your rental property. At the end of a lease, when a tenant moves out, you’ll have a convenient opportunity to make the sale. But what happens if you want to sell the property and the tenant is still occupying it? What options do you have? And what path should you take to make this process as easy as possible for everyone involved?
Why Selling a Property Occupied by a Tenant Is Difficult
Let’s start by explaining some of the reasons why selling a property occupied by a tenant can be difficult. This isn’t an impossible task, but it does come with some key challenges, including:
- Legal complexity. Depending on the nature of your lease agreement and the location of the property, there could be some legal complexity in this case. The tenant may have a legal right to continue occupying your property, even if you would like them to leave. Because these laws vary by state and by city, it’s hard to make a blanket recommendation here, and it may take you some time to fully understand the legal options available to you.
- Variables in play. Every selling situation is somewhat unique. There are dozens, if not hundreds of variables to consider, making it impossible to treat every case as the same. You’ll need to consider things like the state of the market, the length and nature of your lease agreement, local laws, the level of cooperation the tenant is willing to provide, and more.
- Uncertain outcomes. It’s hard to know exactly what the best path will be because your outcomes are always uncertain. Most of the time, traditional homebuyers won’t be willing to wait out the remainder of a standing lease agreement, but you may find an exception to this rule. Conversely, even if you execute everything perfectly, there’s still a chance you’ll run into problems selling the property.
Month to Month Leases
If you have a month to month lease with your tenant, we will have significantly more flexibility in how you handle this situation. In most areas, landlords have the power to terminate month to month agreements without cause and without much advance notice; you can simply inform your tenant they have a fixed amount of time (usually 30 or 60 days) to leave.
Fixed Term Leases
Fixed term leases are much more challenging to contend with. As long as the tenant is continuing to pay rent and follow the terms of the lease agreement, they have a right to continue occupying the property until the lease agreement ends.
Uncooperative and Problematic Tenants
Having an uncooperative or problematic tenant is going to make selling the property especially challenging. You may not be able to show the property reliably to interested buyers, and the tenant may be at risk for defacing or destroying your property – especially if they know you’re going to force them out.
Dealing With a Tenant Who Refuses to Leave
Hopefully, your tenant will be willing and able to leave before you list your house for sale. But what happens if you have a tenant who refuses to leave?
These are some of your best options:
- Consider selling to the tenant. Maybe your tenant has fallen in love with this house. Maybe they can’t stand the thought of packing up all their possessions and moving somewhere new. Either way, one mutually beneficial arrangement could be selling to the tenant. This way, you’ll get the proceeds from the sale, and the tenant can keep on living at this property however they see fit. The only hurdle in your way is financing, since your tenant may not qualify for a conventional mortgage. If this is the case, you can consider taking the risk of seller financing, which allows you to be both the lender and the seller.
- Offer a buyout. Stubborn tenants can sometimes be persuaded with financial incentives. In most locations, you can legally offer a buyout, giving your tenant a cash incentive to terminate the lease early and vacate the premises by a certain date. The amount you should offer will vary depending on the situation.
- Try your luck with homebuyers. In a ravenous market, you can sometimes get away with selling an occupied property to prospective homebuyers with the understanding that these homebuyers will need to wait for the lease to terminate before they force the tenant out and move in. However, for the most part, homebuyers won’t tolerate this. It will be very difficult for you to close the sale with conventional homebuyers.
- Sell to other investors. If that fails, you can always sell to other investors, who will likely be interested in the property for its rental potential. In fact, selling a property occupied by a tenant can be an advantage in certain circles.
How to Make It Easier to Sell a Property Occupied by a Tenant
Thankfully, there are several strategies that can make it easier for you to sell a property currently occupied by a tenant.
- Time it right. Consider the timing of your decision carefully. Ideally, you’ll be able to wait until the end of your current lease before selling; This will make it easier on you and your tenant at the same time. You’ll also need to consider the dynamics of the current real estate market; in a seller’s market, you might have more flexibility in when and how you list the sale.
- Work with a property management company. Consider working with a property management company. Your property managers will help you with the ongoing management of all your properties, they can provide you with advice for how to sell, and they can even help you finalize the sale in some cases.
- Hire a good lawyer. Always consult with a lawyer before moving forward on your decisions in this area. It pays to know the law inside and out.
- Create backup plans. Your first plan may not go as smoothly or as effectively as you think. That’s why it’s important to create backup plans. For example, if your tenant refuses to accept a buyout, what’s your next course of action?
Managing a rental property all by yourself is difficult. Selling one with an occupying tenant can be even more challenging. But everything in the rental property management world gets easier when you have an experienced property management company at your side. If you’re interested in upgrading your approach to rental property management, contact us for a free consultation today!