Selling a home with tenants in place can be a daunting task for landlords and property owners. While it may seem like a complicated process, understanding the rights of both the landlord and the tenant, as well as the various steps involved, can make the experience more manageable. This comprehensive guide provides all the necessary information to navigate the process of selling a tenant-occupied property.
What is a Sitting Tenant?
A sitting tenant is a person who is currently renting a property that the owner wishes to sell. Depending on the terms of the lease or rental agreement, as well as state or local laws, a sitting tenant may or may not have the right to continue living in the property after it has been sold.
Can You Sell a Property with Sitting Tenants?
The short answer is yes; it is possible to sell a property with a tenant still living there. In most states, including Illinois, tenants have the legal right to remain in a rental property after closing, unless the lease or rental agreement has already expired. However, selling a property is generally easier when it is empty, as having a tenant in place can be a minor inconvenience for some prospective buyers or a deal-breaker for others.
The Rights of Sitting Tenants and Your Options as a Landlord
As a landlord, it is crucial to understand the rights of your sitting tenants before attempting to sell the property. You are legally required to notify each tenant with a Letter of Intent that you wish to sell the property. If you think they might be interested, you can offer them the opportunity to buy it.
If the sitting tenant is not interested or unable to purchase the property, your options include selling through a traditional real estate agent or broker, putting the property up for auction, or selling it to a home buying company at a reduced price.
By law, a sitting tenant cannot be forced to move out before the end of the lease or rental agreement unless they are violating its terms. If the tenant refuses to leave after the agreement has expired, you, as the property owner, have the right to take legal action, including eviction proceedings.
The Pros and Cons of Selling with Sitting Tenants
Before putting your tenant-occupied property up for sale, consider the following points:
Type of Property
If your property is in a renter-filled complex or an area with many renters, most investment-leaning buyers probably won’t lose interest if tenants are living in it. The property’s market price is also crucial, as people are more likely to purchase a higher-priced property if they plan on making it their residence.
Terms of the Tenancy
Review the remaining time on the lease and whether it would be in your best interests to terminate the tenancy before closing. Residential real estate investors typically prefer long-term tenants, while homebuyers who plan to move into the property immediately usually do not.
Buyer Demand
A property with an existing tenant who is up to date on rent under the terms of a lease or rental agreement is attractive for most investors. On the other hand, you might see less interest if the tenanted property is a single-family house that families might want to move into as soon as possible.
Tenant Characteristics
A tenant that communicates well and keeps the property neat and tidy will be an asset during the selling process. Conversely, a tenant that is messy, unresponsive, and uncooperative could hurt your chances when it’s time to sell.
How a Sitting Tenant Affects Property Value
Selling rental property with tenants on a lease will impact its resale value. The market for tenant-occupied properties is significantly smaller than that for properties that homeowners can live in or investors can develop right away. In general, selling a property with a sitting tenant who is under a temporary tenancy agreement could devalue your property by up to 25%. If the tenant is under a long-term agreement, such as an assured tenancy, the property value could drop by 30 to 40%.
However, these figures can vary depending on factors like location, buyer demand, and the overall housing market. If there is a pool of potential investors eagerly waiting to purchase any available rental property, your prospects and return-on-investment (ROI) may be more favorable.
Marketing Considerations When Selling with a Tenant in Residence
When selling a rental property with tenants in situ, factors like whether the tenants will stay post-closing, along with your property’s size and layout, will influence how to advertise the property. Some homebuyers won’t mind if there is a tenant still living in the residence, while others may be put off by the idea.
Working with a happy and cooperative tenant will make the marketing process much easier. Here are five ways to facilitate the process for you and your tenant(s):
- Schedule mutually convenient showing appointments. Try to honor your tenant’s requests regarding property showings and give them the required notice, as stipulated by the lease.
- Ask the tenant to not be there during showings. No buyer likes to be shadowed by a resident, especially one who is unhappy about having to move out. Offer incentives for your tenant to leave temporarily during showings, such as movie tickets or restaurant gift cards.
- Offer to assist with property maintenance. Hiring a lawncare or cleaning service for your tenant while the property is on the market can help ensure that it looks appealing to prospective buyers.
- Help them find a new place to live. If you own additional residential properties, make the tenant aware of any openings. If not, provide contact information for reputable landlords who may be able to help them find a new place.
- Insist that they are up to date with rent. Rental properties with delinquent tenants can be a red flag for potential investors. Be assertive and insist that any back rent be paid in full, or consider forgiving the delinquency in exchange for the tenant moving out.
Preparing Your Property for Sale
Before putting your tenant-occupied property on the market, take the necessary steps to ensure it is ready for sale:
Inspect the Property
Conduct a thorough inspection of the property to identify any necessary repairs or maintenance. Addressing these issues before listing can help prevent potential roadblocks during the selling process.
Obtain Legal Advice
Consult with a real estate attorney to ensure you are adhering to all applicable laws and regulations regarding the sale of a tenant-occupied property. This includes understanding your rights and responsibilities, as well as those of your sitting tenants.
Choose a Real Estate Agent
Select a real estate agent experienced in selling tenant-occupied properties. They can help you navigate the complexities of the process and provide valuable guidance on pricing, marketing, and negotiating with prospective buyers.
Closing the Sale
Once you have found a buyer for your tenant-occupied property, there are several steps to complete before closing the sale:
Review the Lease or Rental Agreement
Ensure that you understand the terms of the lease or rental agreement and how they may impact the sale. This includes any clauses related to the tenant’s right to remain in the property after the sale, as well as any potential penalties for early termination of the lease.
Communicate with the Tenant
Keep your tenant informed about the progress of the sale and any potential changes that may affect them. Maintaining open communication can help prevent misunderstandings and foster a more cooperative relationship throughout the process.
Finalize the Sale
Work with your real estate agent and attorney to finalize the sale, ensuring that all necessary paperwork has been completed and that both you and the buyer understand the terms of the transaction.
In conclusion, Selling a property with tenants in place can be a complex and challenging process. However, by understanding the rights of sitting tenants, the potential impact on property value, and the various marketing considerations, you can successfully navigate this process. By following the steps outlined in this guide, you can achieve a successful sale and ensure a smooth transition for both you and your tenant.
