Scenario: You’re ready to give up on the landlord business, or maybe you just want to unload one of your investment properties. Selling a tenant occupied property can be a lot harder than you think.
If a tenant is on a lease, the lease remains in effect for its full term and they have the right to live there until the lease expires. It is not in the tenant’s best interests to help you sell so they can limit your showings and not show the property in its best condition.
Unless you have the tenant’s cooperation, they can hinder your sale and not bring the highest price. Generally, it is a bad idea to offer your investment property for sale tenant occupied.
It sounds real easy to have your tenant pay the rent up to and move out right at the close of escrow, that sounds good in theory, but very seldom happens.
You can avoid these problems with the proper planning.
Speak to your accountant.
It is best to speak with your accountant before you make a decision instead of after you have sold the property. If you have lived in the property and claimed the property as your principle residence for two out of the last five years you can sell your property as a principle residence any maybe take your profits tax free.
The rule is a married couple can make up to $500,000 profit and a single person can make up to $250,000 profit and PAY NO TAXES.
If this property has been claimed as a rental on your taxes and you have never lived there, you will either pay capital gains tax or you can defer your taxes through a 1031 property exchange. If you chose to do a 1031 exchange, there are very strict rules you must adhere to, or the IRS will disqualify your exchange.
If you chose to perform a 1031 exchange, you have to identify a specific property within 45 days and close escrow within 6 months. You need to know your market and you need to be able to find a suitable replacement property within the time frames allowed.
If your goal is to get out of the landlord business for whatever reason, you might find it easier to just pay the taxes. Your taxable profit is determined by subtracting your base price you paid for the property, any capital improvements and the cost of sale from your sales price. You might find that your tax liability is not that bad.
The bottom line is to consult with your accountant, determine your tax liability and develop a strategy BEFORE you offer your property for sale.
You will make more money and sell the property easier if the property is vacant.
It is not in the tenant’s best interest for you to sell, so don’t count on them being cooperative with the showings and keeping the property in its best condition. As an agent, it is very common to see tenants requiring 24 hour notice to show and only a one or two hour window. The property will not be cleaned up, the window coverings will be closed, the lights will be turned of and the property will show dark and cluttered.
Unless you price it very competitive, you usually will not receive full price offers under these conditions. But that is not what we want, we want multiple offers, over asking price
Lease or Month to Month
If your lease agreement is a long term lease (other than month to month), the lease remains in effect through its full term and a sale does not cancel the lease. Most buyers will pay the highest price if they are going to live there and a tenant in place with bring you a lessor price.
You can offer the tenants incentives to cancel their lease. It is all negotiable but one way to do it is to offer to return their deposit and give a certain amount of money upon them signing a new lease and an additional amount upon vacating the property and leaving it is good condition.
If the tenants are on a month to month, and you are not in a rent controlled area, you can just give them notice to move. If they have occupied the dwelling less than on year, you only need a 30 day notice. More than one year, 60 days’ notice. Although, it is always better to be considerate and flexible. Try not to give notice during the holidays because no one wants to move during the holidays.
Again, this is where planning comes in. The optimal time to sell any property to generate the most activity and net the highest price is the springtime. Although, sometimes we do not have the luxury of taking advantage of the best timing.
Plan on giving the tenants notice two months prior to lease expiration and they will start looking for another place.
Offer the property to the tenant
You might find that the tenant had been thinking about purchasing and they are interested in purchasing your property. If they express an interest, make sure you have them qualified by a competent lender before you enter into a transaction.
The last thing you want is to enter into a transaction that does not close and you are left with a tenant with a bad attitude that is still in possession of your property.
Proper planning and qualifying avoids bad situations.
Some planning and a little consideration goes a long way
If you are planning to sell your tenant occupied property, start communicating with your tenant and arrive at a solution that benefits both of you. I have seen situations where tenants have been extremely cooperative and I have seen them at their worst. The last thing you want is a hostile tenant. No matter what type of tenant you have, it’s crucial to know where landlord rights begin and renters’ rights end.
Download my complete Seller’s Guide, Consider It SOLD