Can I Legally Sell My Rental Property With Tenants in It?

Options for handling tenants with a month-to-month agreement

If your tenant rents on a month-to-month basis, you likely won’t have a problem selling an occupied property as long as you give the tenant proper notice.

In general, landlords and tenants can end month-to-month tenancies by giving written notice at least 30 days in advance. Neither party needs a reason to terminate a month-to-month agreement, which is one of the main benefits of this arrangement.

However, it’s important to consult state and local laws and review the rental agreement to ensure you follow the required procedures. Each state has different rules and laws that control proper notice, so check the regulations in your area.

Options for handling tenants with a fixed-term lease

A fixed-term lease, on the other hand, has a defined rental period and may extend from six to 12 months. During the lease term, tenants agree to stay and pay rent and can’t be forced to leave unless they violate lease terms. Fixed-term leases are great for stable, long-term housing and landlords who want to avoid frequent tenant turnovers. When the lease ends, tenants can move or renew, or it may become month-to-month.

If your tenants signed a fixed-term lease, your options for selling during that term are more complicated because the lease doesn’t easily terminate just because of a change in ownership of the property. You can:

1. Wait until the lease expires

If you want to sell your property, it might be better to take the patient approach and wait for the current lease to expire. This approach requires a little planning and foresight but relieves you of the headache of dealing with tenants. There are several crucial benefits to waiting until the tenants have moved out to list a rental property.

First, the current rental income will dictate what the house is worth, says top-selling Huntington Beach, California, real estate agent Cheryl Coleman, who specializes in investment properties. If the tenants move out, you may be able to increase the rent, which will, in turn, raise the property’s value.

Another reason to sell a vacant property is that you can make any renovations to increase home value, common repairs, or upgrades without disturbing the tenants. It will also be easier to prep, stage, and show the home, Coleman notes.

The biggest drawback of waiting for your tenant’s lease to expire is the mortgage cost. If you are still paying a mortgage on your rental property, the time it takes to prep your home for sale may be an expense you don’t wish to accrue.

2. Sell the property to an investor with an active lease

If your tenant is up to date on their rent payment and has a preexisting lease or rental agreement, selling to a real estate investor might be the best option for you. Having a tenant already on the property offers real estate investors a time- and money-saving advantage by eliminating the need to find a new tenant.

One thing to consider is that selling the property to an investor limits your pool of buyers because you need to sell to someone who accepts and understands that a tenant is living on the property. The lease transfers to the new owner when you sell a property with a tenant on a fixed-term lease.

In commercial real estate contexts, having an existing tenant is a major selling point, according to Jacobs. “Investors are more apt to look at the rate of return they are receiving on their investment than other buyers might be,” he explains. “They are concerned with net operating income (NOI).”

All in all, a good tenant with a pre-existing lease or rental agreement who pays rent on time is a good asset for a real estate investor, and it may make them more likely to purchase your property.

3. Negotiate with the tenant for an early move-out

Suppose you have a motivated and qualified buyer ready to close the deal, and you need the property vacated. In that case, you should consider negotiating a settlement with your tenant to get them to leave the property before the lease expires.

The first thing to remember is that this requires the tenant’s consent. If the tenant doesn’t accept your offer, you’ll have to wait until the end of the lease to sell the property.

Keep in mind that negotiating with a tenant for an early move-out can be effective but expensive. If you decide to try this route, here are some tips to help you determine how much you should offer:

Cover moving costs: Asking your tenant to move out inconveniences them. It might be helpful if you offer to pay for some or all the moving expenses.

Make up the difference: To increase your chances of success, research comparable properties in the area. If the rental rates are higher than what you’ve been charging, offer to pay the difference to relieve the tenant’s financial stress.

Offer a payout: You may decide to offer cash in exchange for the tenant to modify the lease and move out. If the tenant agrees to your terms, then you have the chance to have the house cleaned, staged, and prepared for a seller. Ultimately, the amount you offer will be a balance between your available financial resources and what you stand to gain by getting your tenant to leave early.

Pay the security deposit: You can also entice your tenant to leave early by offering to pay a portion of the fees for a new place. Encouraging your tenant to vacate early by offering to cover a portion of their relocation costs, typically half of their first month’s rent and security deposit for a new place.

4. Sell the property to your tenant

What if your tenant loves living in your rental property? An easy way to sell the occupied rental property is to offer it to your current tenant.

There are a few ways that these transactions can happen:

Lease-to-own with a one-time, non-refundable option fee to purchase: Leonard Ang, CEO of iProperty Management, explains, “Agreements such as this are leases wherein the tenant pays an additional fee to have the option to purchase the property in question at some point during the term of the lease.”

Lease-to-own agreement: Also referred to as rent-to-own, the tenant rents the property but intends to buy it eventually. Ang points out, “In most cases, there is no down payment with these agreements. Rental payments take the place of a down payment instead.”

Seller-finance agreement: This type of transaction is when the seller acts as the lender and collects monthly payments from the buyer. Christopher Avallon, a broker and owner of Avallon Real Estate Group in Princeton, NJ, states, “In other words, the seller will agree to hold the mortgage for the property … If the tenant stops paying, it falls on the seller to start the foreclosure process. The foreclosure process is long and costly and could erase any profits from the house and then some.”

If you decide that seller financing isn’t right for you, you can always suggest that the tenants obtain their own funding to complete the purchase.

5. Execute an early termination clause in the lease

There are situations where tenants, even those in good standing, may be removed prior to the finished lease term. Some leases contain a “safety net” for landlords known as an “early termination clause,” which may be helpful in various situations. Typically, these clauses state that the lease will end in 30, 60, or 90 days once the property sale closes.

Here are some keys to a smooth sale with tenants

Communication is key to a smooth sale. Keep the lines of communication open with your tenants to avoid any unexpected or unpleasant surprises.

Know the laws

Each state has different laws when it comes to tenants’ rights. It would be beneficial for you to work with a reliable property manager, attorney, and real estate agent familiar with local laws and regulations.

Be upfront about selling

Communicate your intentions with your tenant, meet up with them, and be fully transparent about your efforts to sell the property and the impact that it will have on their lives. The impending sale might be a good time for you to sit down and allow your tenant to ask as many questions as they have.

Make showing times convenient and easy for the tenant

Tenants need at least 24 hours’ notice (or more, depending on the lease agreement) for showings. Respect your tenant’s schedule, and determine when you cannot show the property to prospective buyers.

Part of respecting your tenant’s schedule is asking them for their preferred days and times for showings and adhering to those days and times with fidelity. When you follow their schedule, you indicate that you respect their time, space, and privacy.

Make property upkeep easy for the tenant

Once you’ve decided to sell, offer to hire a cleaning or lawn service while the property is on the market. That way, you don’t have to rely on the tenant to keep the property show-ready, and you build some goodwill by lessening their workload.

Don’t put signage in the yard alerting neighbors and the public

Yard signs serve as an open invitation for passersby to ask for a showing. They act as a visible cue, encouraging potential buyers or renters to take the initiative to engage with the property. Make sure your tenants inform anyone interested to contact the listing agent directly.

Ask your tenants to be out of the home during showings

How awkward would it be for your potential buyer or investor to be followed around by the current resident? You owe it to your buyers to let them view the property undisturbed. You might consider springing for a gift card to a nearby movie theater or café your tenant can enjoy while you show the property.

Help the tenant find a new rental if the situation calls for it

If you own other properties, let the tenant know you have openings. You can also suggest local listings or put them in contact with someone who has available rentals.

Be certain the tenant is caught up with the rent

Landlords come in all shapes and sizes, and some are more forgiving than others in letting tenants get behind in rent. If your tenant is staying on the property, it’s time for you to act because a delinquent tenant is a poor selling point.

You might be able to leverage the behind rent to your advantage by forgiving the delinquent rent in exchange for the tenant moving out. Court action and eviction are potential options if the tenant cannot pay the rent.

Communicate after the sale

Once the deal is closed, Jacobs usually drafts a letter signed by the seller informing the tenant of the property’s sale and directing them to send their next rent payment to the new landlord.

“In many cases, the sellers take the buyer to the home and introduce him or her to the tenant,” says Jacobs. “I think this more personal approach is the most effective.”

When the property manager remains the same, there is simply a new owner behind the scenes. “Those tenants usually don’t notice any difference, as they pay the same management company after closing,” says Jacobs.

Should I sell my property with tenants living in it?

We have established that you can legally sell your rental property with tenants in it. The follow-up question is, “Should I sell my property with tenants living in it?”

Partner with professionals for the best outcome

The sale of a rental property can get complicated, especially when tenants are involved. That complexity is why you must work with professionals who have experience with these types of transactions.

An investor-friendly agent is well-versed in investor purchasing preferences, their financial capabilities, and the nuances of the investor market. Additionally, an agent who regularly works with investors can connect you with individuals or groups interested in buying your property.

Use HomeLight to find the perfect real estate agent and sell your home faster. The service is 100% free, with no strings attached. It takes only a few minutes to match you with an experienced agent who can help you navigate the murky waters of lease agreements and tenants’ rights issues.