How to Sell a Tenant-Occupied PropertyAug 26, 2021
Selling a tenant-occupied property presents a host of challenges for you and your seller. Unless you have experience working with such properties, you will more than likely run into issues you didn't think were possible. If you are prepared, you can lay the foundation for a smooth selling process by educating your seller and arming yourself with the tools needed to sell a rental property.
How Can REALTORS Sell a Tenant-Occupied Home?
When trying to sell a tenant-occupied home, REALTORS must accept that they have two clients: the seller and the tenant. While your fiduciary responsibility lies with the seller, the tenant is a vital part of the equation. It's your job to educate your seller on how to make the process run smoothly, including how and what to communicate with their tenant.
The first step for any agent should be to advise the seller to seek legal counsel if needed. An attorney can help them review their rental contract and any clauses that are specific to selling their property.
Second, you can direct them to hud.gov to view state-by-state tenant rights.
Finally, prepare yourself to present all possibilities to your client. Sellers can work with their tenant through the sale of the property, wait until the lease expires, work with an iBuyer, or work with an institution. There are pros and cons to all four options as well as solutions that agents should be aware of.
1. Work With the Tenant
Imagine how distressing it would be to look out the window and see a For Sale sign.
Finding out that the property you call home is for sale can be an emotional process. This is why it's so important to involve the tenant. And while the seller should communicate with their tenant, you should too. You will need their cooperation throughout the process.
That said, even if you do everything right, tenants can still create obstacles to the sales process, intentionally or not.
- They can make it difficult to sell the home by refusing to accommodate showings or lingering during showings.
- There is no guarantee that they will agree to home staging or cleaning to the point that the property is in showing condition.
- According to Nolo.com, "Most states' laws give tenants the right to remain in a rental property after a sale until the lease or rental agreement expires." This limitation alone might limit the pool of buyers you have to choose from, as not every buyer will want to wait to move in.
A good REALTOR is prepared to solve these problems before they arise. You can advise your seller to hire a cleaning crew to take on the burden of keeping the property in "show ready" condition. The seller can reduce the tenant's rent as a gesture of goodwill or even offer the tenant a flexible move-out date. Finally, you might choose to advise your client to sell their property "as-is," though that will reduce their potential for maximum profit.
- The property will appeal to investor buyers
- If the renter takes care of the home, it will show better than an unoccupied home
- Your seller will continue to receive revenue to help cover property expenses
- The renter might be a potential buyer for you or your seller
- No control over the properties pre-showing condition and cleanliness
- Scheduling showings with the tenant can present an obstacle
- Most leasing contracts require that the tenant be given 24-hour notice (or more) prior to showings
- Might turn off buyers who don't want a home with a tenant in place
- Timing the contract closing with the end of the lease can be a challenge
2. Wait Until the Lease Expires
If working with the tenant isn't an option, your seller can wait until the lease expires. An unoccupied property will solve many of the pains mentioned above. For example, the seller will have complete control over the property's condition, and of course, it will be easier to show.
The downside is that vacant homes are historically harder to sell. According to Ryan Shaw, founder of The Real Estate Witch, "A study from the Appraisal Institute found that vacant houses sold for 6% less than occupied houses and stayed on the market longer." Also, your seller will have to cover the cost of property upkeep and possibly even the cost of staging the home to make it more appealing to potential buyers.
- Control over the home's condition
- Available to show 24/7
- Seller will have to carry any costs associated with the home
- Vacant homes are harder to sell
- A vacant home presents possible home security challenges
3. Work with an iBuyer to Sell a Tenant-Occupied Property
When preparing a listing presentation for a tenant-occupied home, presenting the option of using an iBuyer alongside a traditional listing contract is a no-brainer. Trying to sell a tenant-occupied home is one of the top reasons why sellers are choosing iBuyers, so preparing and presenting this possibility sets you apart from the competition in the mind of your seller.
It’s important to note that iBuyers cannot sell occupied homes. Instead, this is a solution that works alongside waiting until the property is vacant.
If your seller is willing to wait until the tenant moves out, using an iBuyer will knock out many of the pain points created by selling a vacant home. First, it eliminates the need for your seller to clean and stage post moveout. Second, the seller can avoid making cosmetic repairs as an iBuyer will focus solely on significant issues that might impact the home’s marketable value.
Finally, working with an iBuyer creates the ability for a quick cash close. The seller won’t have to carry the cost of owning the home and can coordinate a closing after the tenant vacates the property.
Of course, there are downsides to using an iBuyer. The downside that will most significantly impact your seller is price. The net sales price is typically less than it would be if your seller sells through the MLS.
- No need to stage or clean the home
- Flexible closing date
- Solves many of the challenges creating when trying to sell a vacant property.
- Seller may net less than selling through the traditional sale process
- iBuyers will only buy the property once it’s vacant
4. Work with an Institution to Sell a Tenant-Occupied Property
Finally, there is the possibility of working with an institutional buyer.
Institutional buyers have been working heavily in the residential market post-COVID driven by globally low-interest rates and the quest for higher yields. They work with fixer-uppers as well as homes that are ready to rent.
Institutions can eliminate many of the pain points created by the options presented above. First, your seller’s tenant can stay in place with mild disruption. Second, there's no need to stage the home or clean it as there are no showings, no open houses, and no visits from an appraiser. Finally, the home remains occupied which means a continued revenue stream for your client.
- Home can remain tenant-occupied
- No need to stage or clean the home
- Your seller will continue to receive revenue through closing
- Institutions may charge fees, increasing the seller’s cost to sell
Modern REALTORS Know How to Sell Tenant-Occupied Properties
Put yourself in the shoes of your investor seller: One REALTOR shows up, performs a traditional listing presentation, and doesn't mention any of the challenges of selling a rental home. A second shows up with a traditional presentation and knowledge of the challenges a seller will face when selling a tenant-occupied property. A third agent shows up with a traditional presentation, knowledge of selling rental homes, information regarding institutional buyers, and prepared offers from multiple iBuyers.
Which REALTOR would stand out to you? A prepared agent is a successful agent.