When you’re an owner or landlord, selling a tenant-occupied home can be a real hassle. Not only must you consider all the legal and practical aspects, showing the property with renters living in it can be a turn-off for some prospective buyers. If the tenant feels pressured, they may decide to hire a lawyer and put up a fight. Whatever your situation, here’s how to ensure that selling a property with tenants goes smoothly for everyone involved.
What is a Sitting Tenant?
A sitting tenant is someone still renting a property that the owner wants to sell. As specified in the lease or rental agreement terms – along with state or local law – a sitting, or “in situ,” tenant may or may not retain the right to live in a property even after it sells.
Can I Sell a Property with Sitting Tenants?
Most landlords eventually ask themselves this question. Yes, it is possible to sell a property with a tenant still living there. In most states – including Illinois – tenants in situ have the legal right to remain in a rental property after closing unless the lease or rental agreement has already expired.
Is It Hard to Sell a Rental Property with Tenants?
Selling a property is always easier when it’s empty. Depending on the local real estate market and the motivation level of prospective buyers, having a tenant in place could be a minor inconvenience. In other cases, a tenant-occupied home might be a real deal-breaker when you have investors looking at it.
For any prospective investor who is also a landlord, taking possession of a rental property that already has renters living there under contract is mere “icing on the cake.” Conversely, buying a house that contains a tenant without a lease or rental agreement is something that the average real estate investor will never do.
What Rights Do Sitting Tenants Have and What Are Your Options?
As a landlord, it’s vital to understand all your sitting tenants’ rights before selling a house. 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, why not offer them the opportunity to buy the property?
If the sitting tenant is not interested or is unable to purchase the property, your options include selling your home through a traditional real estate agent or broker, putting your 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 the agreement’s terms. Once the rental or lease agreement has expired, if the tenant refuses to leave when the house is sold you as the property owner have the right to take legal action – including eviction proceedings.
The Pros and Cons of Selling with Sitting Tenants
Consider these points before putting your tenant-occupied property up for sale:
- Type of property. If your property is in a renter-filled complex or an area with a lot of renters, most investment-leaning buyers probably won’t lose interest if tenants are living in it. Your property’s market price is also important, as people are more likely to purchase a higher-priced property if they plan on making it their residence.
- Terms of the tenancy. Once the tenant is renting month-to-month, ending the tenancy merely requires the amount of notice as specified under the law. If your home is in a rent-controlled area, be sure to research the laws concerning the buyer ending the rental or lease agreement. Review how much time is still left on the lease and whether it would be in your best interests to terminate the tenancy before closing. Residential real estate investors are typically excited about having long-term tenants, while homebuyers who plan to move into the sale property immediately are usually 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 a winning proposition for most investors. If the lease is due to expire soon after closing or the tenant is month-to-month, the property may also attract buyers who desire to live in the home themselves. Conversely, 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 inside and out will be an asset during the selling process. On the flip side, any tenant that is messy, unresponsive, and uncooperative could hurt your chances when it’s time to sell.
How Does a Sitting Tenant Affect Property Value?
Selling rental property with tenants on a lease will affect its resale value. For starters, 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, you could see the property value drop by 30 to 40%.
In the end, the figures will go up or down based on factors that include location, buyer demand, and the overall housing market. If there is a pool of potential investors anxiously waiting to snatch up any available rental property – occupied or not – your prospects and return-on-investment (ROI) will be much better.
Marketing Considerations When Selling with a Tenant in Residence
When selling a rental property with tenants in situ, factors like whether the tenants will be staying on post-closing, along with your property’s size and layout, will influence how to advertise the property – for example, as both a primary residence and investment.
If they are not seeking immediate possession, some homebuyers won’t care if there is a tenant still living in the residence. However, other interested parties may be turned off by the idea. If you do decide to sell a tenant-occupied home, working with a happy and cooperative tenant will make the marketing process much easier.
Here are five ways to make life easier for you and your tenant(s):
Schedule mutually convenient showing appointments.
In most cases, the notice required for entry is stipulated by the lease. As a show of good faith, let whoever is listing the house know that the tenant needs to be notified within a specified amount of time (24 hours, etc.) before showing the property. If your tenant asks that the property not be shown at specific times, try to honor those requests. Keep in mind that the tenant can always be contacted by the listing agent if shorter notice is needed.
Respectfully ask the tenant to not be there.
No homebuyer or property investor likes to be shadowed by a resident, notably one who is unhappy about having to move out. Respectfully ask your tenant to leave the property temporarily anytime a showing appointment is scheduled. If they hesitate, “sweeten the pot” by offering them free movie tickets or a gift card to a nearby restaurant so they can spend time away from home doing something they enjoy.
Offer to assist with property maintenance.
Another tenant-appeasing idea is to hire a lawncare or cleaning service for them while the property is still on the market. After all, since your tenant no longer has a “vested interest” in the rental home, shouldering more of its upkeep responsibilities will help ensure that it looks appealing to prospective buyers so that you can field more offers.
Help them find a new place to live.
If you own additional residential properties, make the tenant aware of any pending openings that might be of interest. If you don’t have other open investment properties, consider offering your tenant the contact information for reputable landlords you may know that 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. If you are a lenient landlord who allows tenants to get behind on their rent, now is the time to be assertive and insist that any back rent be paid in full. As a bargaining chip, you can always forgive the delinquency in exchange for the tenant moving out. If all else fails and the tenant cannot pay rent, pursuing an eviction through the court is always a possibility.
Your Residential Property Sales & Leasing Experts in Chicago
Selling a rental property in Chicago with existing tenants takes special marketing skills and expertise. At GNP Realty Partners, we are a full-service real estate brokerage with extensive experience representing clients in residential sales and leasing transactions. Our dedicated professionals can also provide residential property management expertise for single-family homes, high-rise condos, townhomes, new developments, and more. Allow GNP Realty Partners to take your investment to the next level by contacting us today!