Selling a home with tenants in place

Many homeowners have rented out their place in recent years to tenants. When it comes time to sell the home, it is critical to understand how having tenants in the home can impact your home sale.

The market for owner occupants is bigger than the investor market

couch potatoOne of the most important things when selling a home is to make sure that it appeals to the broadest audience of potential buyers. There are way, way more buyers out there who want to owner-occupy a home or condo. They cannot occupy the home themselves if they have to inherit tenants with a long-term lease. Owner-occupant buyers will ignore homes with long-term leases in place.

Also remember that owner-occupant mortgages are given at much more favorable terms than investor loans. Generally, if you cannot occupy the home within 60 days, a buyer would have to either pay for the home with an investor mortgage or cash. No one looking to owner-occupy a home is going to ever choose those financing options.

You must follow landlord-tenant laws

When you sign a lease as a landlord, you are bound to a written contract with your tenants. You are also required to follow all applicable landlord-tenant laws in your area. The act of selling a home has no effect on leases that you have in place, so the new buyer inherits your lease terms.

One strategy a seller may employ is to try and remove the tenants prior to sale. If their lease expires, tenant removal is easy. If they have 6 months remaining on a 12-month lease, you will have to negotiate with them for an early cancellation.

If a lease is month-to-month, local laws may have special procedures that allow for termination of the lease to sell the home, but you need to follow the law exactly. The courts generally do not look kindly on landlords who don’t know local tenant laws, and you definitely don’t want to be on the receiving end of a tenant lawsuit.

Showing homes to prospective buyers when tenants live there is a hassle

Sometimes you might try to market the home while tenants live there. This can often be a sub-optimal way to get a home sold.

Remember that landlord-tenant laws require advance notice for the landlord to enter a rental. If the tenants want, they can insist on receiving the proper written notice before allowing a buyer inside. This could mean a 24-48 hour delay for buyers to see the home.

Tenants are also not incented to keep the home in “showroom condition.” Dirty dishes, dirty clothes and an unkempt appearance is going to lower the sale price you get for the home. Since tenants are not required to keep the home tidy, you may consider offering to pay for a cleaning service while the home is listed for sale.

Landlords looking to sell their home should have an upfront conversation with their tenants about the sale process. Make them aware of the process for buyers to see the home. If tenants are not cooperative with the selling process or are extremely untidy, it may pay to wait until their lease expires before selling the home.

Apartment investors generally like occupied buildings

If you are selling a larger apartment building with multiple units, the potential buyers are all investors. In this case, they may actually prefer that the building is occupied and generating rent when they purchase the building.

If apartment investors are inheriting a group of tenants, they are going to want to understand the lease terms they are buying. You need to have current, well-written leases and should also be able to demonstrate that you did the appropriate due diligence on the tenants who currently live in the building.