There are many reasons for wanting to sell your rental property, even if it’s currently occupied. Some of the most common reasons include:
- You want to cash in on your property’s equity
- The property isn’t as profitable as you’d hoped, so you want to cut your losses
- You inherited the rental property and have no interest in being a landlord
- You’re moving and don’t wish to be a long-distance landlord and/or planning to buy closer to your new locale
- You want to trade in the property for something else (known as a 1013 exchange)
- You’ve decided to retire from the landlord business
Whatever the reason, it’s your property, so if you wish to sell it, you can do so. However, when you have tenants living in the property, there are some extra steps along the way before you can successfully sell. It will also depend what kind of lease they have: a month-to-month lease or a fixed term lease.
Handling Month-to-Month Lease Agreements
If your tenant is renting on a month-to-month basis, you need to give them proper notice that you are selling the property. This involves mailing or hand delivering a letter (or sending an email) to your tenant 30 days prior to the move-out date you’ve set. The required notice period varies by state, so be sure to look up your state laws.
You don’t need a reason to terminate a month-to-month lease agreement, which is one of its perks for you as the landlord. It’s called a no cause termination, so you don’t need to give the tenant a reason, but it’s always nice to be upfront with your tenants. To get started, send a letter with today’s date letting your tenant know that their tenancy will terminate in __ days (typically 30 or 60) from the date of the notice. Inform your tenant in this written notice to remove all possessions and to return the keys to you on or before the required move-out date. Mention the actual move-out date in the letter as well to ensure you are clear with your tenant and they know what is expected of them and by when.
Handling Fixed-Term Lease Agreements
Fixed-term leases include any lease that’s not month-to-month. Many fixed-term leases are based on a year-long tenancy period but can be shorter or longer. These leases require a more delicate approach since the lease isn’t automatically terminated just because a property changes ownership (unless the buyers intend to live there themselves). Before informing your tenants of your intent to sell, choose one of these five options when handling a tenant with a fixed-term lease:
1. Wait until the lease has expired
The easiest thing to do if you have a good tenant in the property is to wait until their lease ends. With a fixed-term lease, simply send them a 60-day notice of non-renewal (the most commonly used notice period with fixed-term leases, but check with your state laws first) to let them know that they will not have the option to renew their lease. After they’ve moved out, you can sell the property without worrying about it being occupied.
2. Sell the property with an active lease
Although this option may limit you, you can sell the property with an active lease. Some buyers may not be interested in buying an occupied rental property, while others may be fine with it. It’s important that the new owners agree to honor the tenant’s existing lease agreement, letting them live in the property until the end of their lease with the same rent payment per month (with the possible option to renew, if applicable). In almost every state, the lease agreement and security deposit must be transferred with the property, with the new owner replacing the previous landlord.
When touring the property with potential buyers, be mindful of the current tenant. Inform the tenant when you will be showing the unit, and give the tenant proper notice before entering the property, 24 hours or a few days’ notice depending on state laws. You can remind the tenant when you're about to show the property. You can also request that they're absent during the showing. Out of respect for the tenant, show the property at reasonable times, preferably during business hours.
3. Give your tenant incentive to vacate
If you want to sell your property right away and your tenant still has several months left in their lease, you can try to negotiate to get them to move out early. This tactic is called “cash for keys” and is a great way to incentivize tenants to leave before their lease ends. If you’re wondering how much to offer your tenant, you should focus on making up the difference for what your tenant will have to pay finding a new apartment in the area. If your rent is on the affordable side, then you could offer to pay the difference between what your tenant will likely have to pay and what they’re currently paying to you, times the number of months left on the lease. You’ll also want to consider the tenant’s moving costs and the cost of paying a new security deposit and other move-in fees.
The amount you offer really just depends on how much you can afford, what you think is fair, and how badly you want the tenant to move out of the property. Keep in mind, however, that the tenant is under no obligation agree to your cash for keys terms. If they don’t, you’ll have to wait until the end of the lease term to sell your property.
If the tenant is not willing to move out early, you can also offer them incentives to be flexible with the touring process. The tenant may agree to leave the unit while the tour is in process, take extra care of the property, or agree to weekend showings. Consider incentives like a reduction in rent for certain months, hiring a monthly cleaning service, paying their utilities, or a relocation allowance. Have a discussion with the tenant on what you both think is fair. Think of it as an exchange. For example, the tenant is willing to keep the property in top condition and to vacate the unit during showings if you're willing to give them a discount on rent.
4. Sell the property to your tenant
If you feel that this may be a possibility in your situation, you can offer to sell the property to your tenant. This may be a rare case when selling your rental property, but it’s still an option if your tenant is interested and financially capable of doing so. You can offer a seller financing arrangement in which you are the lender and the tenant makes payments to you (on a short-term basis) to buy the property. Keep in mind that you typically need to own the property free and clear or get approval from your mortgage lender to conduct a seller-financing deal.
5. Act on the early termination clause in the lease
Terminating a lease early based on a clause in the lease will only be an option if you have said clause in your lease. An early termination clause comes in handy in a variety of situations. The clause typically says that the lease terminates in 30/60/90 days, for example, after closing on the sale of the property. Even if you have no intention of selling your property at the time of lease signing, you never know what the future holds. Adding an early termination clause to your leases will allow you to end a tenant’s current lease if you do indeed sell your rental property. Simply provide the tenant with an early lease termination letter. To make sure you adhere to all state laws and local ordinances, create your lease with Apartments.com. Our full-customizable lease agreements allow you to create a lease that fits your property and your standards.
Oftentimes, buyers who intend to keep the property as a rental are fine with continuing the tenant’s lease until their move-out date (or beyond), so you may not have to worry about waiting until their end-of-lease date to sell, offering cash for keys, or terminating your tenant’s lease. However, it’s important to give yourself options when it comes to selling your property. As you make plans to sell, remember that your rental has become your tenant’s home, so treat the situation with care. It’s your right to sell your own property, but it’s always best to stay on good terms with tenants.
Frequently Asked Questions About Tenants' Rights When Selling an Occupied Rental Property
Do tenants have to move out once the property is sold?
In most cases, if the tenant has an active lease, the new owner will have to honor the lease agreement and become the new landlord for the remainder of the lease. An exception to this is if there is an early termination clause in the lease.
Can tenants refuse showings?
In most states, proper notice is required before a landlord enters the property. However, an uncooperative tenant can lead to an unsuccessful property tour. Suggest incentives to prevent this.
Should you offer a relocation allowance?
A relocation allowance is just one incentive that can help you navigate existing leases and current tenants. Consider offering a relocation allowance to a current tenant as an incentive to support the showing process.
