Selling a Rental Property with Tenants In Situ

Can you sell your rental property for top dollar with tenants living in it?

Selling a house with tenants is a situation requiring extra care, as the process and outcome affect more people than the typical home sale. Strategizing to get top dollar for your rental property with tenants takes special consideration.

Here you’ll find all you need as a landlord selling a property with tenants in it.

Skip To:

• Defining "in Situ"

• Tenants Rights When Selling a Rental Property

• Communication with Tenants and Buyers During the Sale Process

• When to Sell an Occupied Investment Property

• Marketing Strategies to Sell a Rental House

• Listing Preparation Tips with Tenants in SITU

• Pro's and Con's of Selling a Tenant-Occupied Property

  
  

What Does “Tenants in Situ” Mean?

The term “tenants in situ” refers to a property being sold that is currently being rented by tenants who plan to continue leasing the property after it is sold.

Sometimes, landlords have a strong relationship with their tenants and choose to sell “in situ” as a benefit to the tenants or the new buyer. However, sometimes landlords selling their property are bound by tenants’ rights or lease terms that stop them from evicting or ending the lease.

Did you know you may not have to pay capital gains on an investment property? Read here about how to legally avoid capital gains on a rental property sale.

Tenants’ Rights When Selling a Rental Property

It’s critical to understand the tenants’ rights in your state when selling a rental house with tenants in it. Failure to understand them can lead to legal delays, disputes with tenants, or even lawsuits.

In addition, carefully review the lease that you had your tenants sign. Make sure you fully understand the terms of their lease, your obligations, and their obligations.

In Virginia, some of the legal considerations for selling a rental with tenants are: 

• 30-Day Notice: Month-to-month tenants must receive 30 days’ notice to vacate.

• No-Cause Termination: There’s no need to give a reason for the 30-day notice to tenants (it’s a “no-cause termination”).

• Early Termination Clauses: If your lease has an early termination clause that the tenant has agreed to, you may be able to use it to have them vacate the property before their lease is up.

• Security Deposits: Tenants do not need to pay a new security deposit; you will transfer it to the new rental property owner.

• Lease Terms Stay Intact: If a fixed lease has no early termination clause and you sell, the new owner must honor the existing lease terms when they purchase the property.

• Notifications: If the rental property is sold with tenants in situ, you need to tell the tenant about the sale and provide the name and contact info of the new owner.

• Utilities: If utilities are in your name as the landlord, make sure tenants don’t experience interrupted service during the transaction.

• Lease Violations: Leases may be terminated early in some cases if the tenant has violated or defaulted on the lease agreement in some way: damaging the property, doing anything illegal on the property, failing to pay rent, etc. (Tenants may have some additional rights here depending on the situation; always seek legal advice before pursuing an eviction.)

Landlord-tenant laws vary by state. Be sure to familiarize yourself with those that apply to your property.

Communicating with Your In-Situ Tenants

Remember that when you’re selling your occupied investment property, you’re selling your tenants’ home. Even though it’s quite legal to do so, here are some communication tips to sell your home quickly and smoothly:

• Inform your tenants early and in writing so they aren’t surprised by any requests or changes that happen.

• Set expectations for house showings, inspections, and closing timelines.

• Know your legal obligations of communication, such as how much notice you need to give them before entering the house.

• Reassure them of their rights, such as how the terms of their lease won’t change (including rent) through its end date and that their security deposit will be transferred.

• Use your tenants’ preferred method of communication to promote compliance and respect.

• Ask your tenants to provide 2- or 3-hour time blocks on set days you can use for block showings and open houses. This will help both of you plan and respect one another.

• Consider offering incentives for cooperation, such as providing gift cards, movie tickets, or mini-golf passes to use when they vacate the premises during showings.

• Overall, be open and honest with them throughout the process. There can be a lot of fear and uncertainty when your landlord sells your home. Being kind and transparent can encourage their cooperation.

And of course, be respectful and kind during showings and inspections. Remember, you’re entering their safe living space and they can’t do much about that.

Communicating with the Buyer of Your Occupied Rental House

You’ll also need to communicate thoroughly with the buyer to make sure the sale of your tenant-occupied house goes smoothly. 

• Let the buyer know important information about the tenants up front, so there are no surprises when they step into the home.

• Provide an inventory of what furnishings came with the house so they know what the tenants should take with them and leave behind when they move out.

• Provide clear, thorough documentation of everything a landlord might want to know.

Timing an Occupied Rental House Sale

If you want to sell your investment property while the tenants are still living there, it’s beneficial to think ahead about timing to get the most from your sale.

Know Your Primary Goal

Before moving forward with the house sale process, consider what is most important to you: selling your house fast or getting top dollar?

For a quicker sale, sellers with tenants may need to adjust the sales price based on the property’s condition. Updating or replacing major systems often takes more time when you have to coordinate with tenants in situ.

Maximizing your profit may take more time, as you’ll want to make sure that the property is in the best possible condition and has a strong rental history. 

Want to sell a Hampton Roads rental property fast? Our family-owned cash offer program can help!

Renewing Your Current Tenants’ Lease

Take a look at your tenants’ fixed lease – is it going to be up for renewal soon? If not, you’re fairly locked into the terms agreed upon unless the tenant agrees in writing to changing them..

However, if you know ahead of time that you want to sell the rental property, you can move your tenants to a month-to-month lease when it’s time to renew. This will offer both you and them flexibility during and after the home sale process. 

It can also be helpful to raise your tenants’ rent when they renew it if you plan to list. Rental income potential directly impacts the value of your house as an investment property, so it’s in your best interests to showcase the house’s full income potential.

Encouraging Your Tenants to Move Out

No way around it – certain tenants are simply a barrier to landlords trying to get top dollar while selling their rental home. Tenants who are difficult to work with, extra messy, or unreliable for timely rent payments can deeply devalue a rental property sale.

If you want to sell before your tenants’ lease is up but prefer them to vacate the property, here are a few ways you can encourage them to do so:

• Let them know early that you’ll be selling the property. Offer them a new lease that is month-to-month in exchange for mutually terminating the old one – and if needed, lower their rent price. Remind them that this will give them the flexibility to move out sooner if they wish.

• Offer a cash incentive to agree to an early move-out in legal writing. Moving can be expensive, so this consideration can go a long way and may have a strong ROI for you.

• Help them search for a new home, and consider offering to pay for some of their first month’s rent at their new place.

Remember that, ultimately, the decision to move out early lies with the tenant. In Virginia, they can legally remain in the house until their current lease is up if there is no early termination clause.

Selling to the Tenant

If your tenant doesn’t wish to vacate the property, you might consider selling the house to the tenant. There are a few strategies you can use to complete this, such as a lease-to-own or seller-finance agreement.

Marketing Your Rental House with Tenants In It

Selling a rental property with tenants is a distinctly different game than a traditional home sale – from a marketing perspective, at least. Handle the process with care to ensure the best outcome for you as a seller.

Know Your Target Audience and Speak Their Language

When selling an investment home with tenants in place, your property is likely to draw the attention of other investors. Investors tend to assess properties differently than a traditional home sale, with prospects looking for some type of return.

When marketing your property, consider the things investors are concerned about:

• Are the current rents under, at, or over market value?

  • Do you have a chance to raise them before selling?

  • Can the future buyer raise the rent if they make updates to the property? 

• How long does the tenants’ current lease last?

• Do the current tenants have a strong history of paying rent on time?

• What’s the property’s condition? The condition of its major systems?

When crafting copy for your listings, consider how you can highlight these key factors that investors will be looking for.

Pricing Your House with Tenants

When deciding how much to sell your occupied rental house for, consider the fundamentals of pricing an investment home:

• Condition: Adjust the sales price to reflect any needed upgrades or repairs.

• Location: You can’t change the location of your house, but you can highlight the benefits of where it sits in your marketing.

• Investment Performance: It’s all about the numbers! More on that below.

Be honest about each of these key categories, and present a price that reflects them to make sure your house sells in a reasonable amount of time.

Here’s one of our most popular articles on how to sell your home quickly.

Investment Over Presentation

Because you’ll likely be selling to another investor, they’ll be viewing the property through an investment lens rather than as their future primary residence.

Marketing for traditional home sales tends to be heavily focused on presentation. Investors, however, tend to be less emotional and more likely to consider facts and numbers in their analysis. They also realize that tenants living in a home means it won’t look like a staged model house – and that’s ok, as long as you have the information they are looking for.

Have the Numbers Ready

All that said, have the financial statements in order before you list. If investors are your target audience, they will be looking for a property that can provide them with some type of return: monthly cash flow, annual cash-on-cash return, or long-term appreciation. 

Be prepared to present prospective buyers with the last 12 months of rent rolls and a profit/loss statement for the past two years. Highlight their cap rate to show the potential ROI of your house. This is especially important if your property is a multi-unit or short-term rental property.

Trying to decide between operating a short-term rental vs. an annual rental house?

Preparing Your Rental House to Sell with Tenants

Selling a house with tenants in it, doesn’t usually require quite as much work on presentation as a traditional home sale. Of course, you still want to do what you can to present the property in the best light. Remember, this will call for excellent, proactive communication with your tenants who are living there.

• Have the property professionally cleaned, even while the tenant is occupying it.

• If your tenants are responsible for the yard, hire professional landscapers to manage it during the sale process.

• If major repairs are needed that might curb investor interest, have them completed before listing or price the house accordingly.

• Schedule professional real estate photos of the house when possible.

• Have your financials and documentation in order. In addition to the traditional home sale paperwork, be prepared to provide copies of leases, payment history, and any disputes with current tenants.

Pros and Cons of Selling a House with Tenants In It

Should you sell your house with tenants in it, or wait until they move out? Let’s weigh the pros and cons.

Pros of Selling with Tenants in Situ

• The property provides the buyer with immediate income – an asset for marketing

• You don’t need to ask good tenants to leave their home

• You continue collecting rent until the house is sold

• Your property has constant oversight of the tenants, so it’s likely in ready-to-rent condition 

• It’s likely your buyer will be an investor, making marketing and connections easier through shared interests and language

Cons of Selling with Tenants in Situ

• Tenants' rights limit what you can ask of your renters during the process

• Making updates and repairs is more complicated with tenants in place 

• Sellers with tenants often have to sell below market value

• Your buyer pool may be limited to mostly investors looking for a return

• You need to coordinate and communicate with tenants for showings

• Financing can be seen as higher risk by lenders

The Bottom Line

Selling a property with tenants in situ brings different considerations to the game than a traditional home sale does. Communication with your tenants and potential buyers is essential, and your options may be limited by your tenants’ current lease.

The most helpful thing you can do is to partner with a top real estate agent who has experience selling investment homes that can guide you through the best practices.

CGP Real Estate can connect you with a fast, free, no-obligation cash offer for your investment property – whether you have current tenants in it or not. Reach out to sell your Hampton Roads house fast for the best price our local investors can give.