Selling Your Plesanton Rental Property: Tenant-Occupied or Vacant?

When it comes time to sell or do a 1031 exchange of your tenant occupied residential income property, you have some decisions to make regarding your tenant.

The questions we are often asked include the following. Do you sell the property with the tenant still in the property? Will I net more money without a tenant? Which option will create the least headaches?

These are great questions and the answer depends on a number of factors including your financial position and your tolerance for risk.

Let’s consider some of the advantages to keeping your tenant in place while you sell the property.

Firstly, you continue to receive an income while the property is listed for sale through to the time when it closes escrow. This is certainly an advantage if you have a monthly mortgage payment and even more so if there is a possibility of the property being on the market for longer than you may be comfortable with financially.
Assuming your tenant has been responsible and doing a good job of maintaining the yard upkeep, and you expect this to continue, having your tenant maintain curb appeal of your property while it is on the market means one less thing for you to deal with.
Do you have a long term tenant who has taken good care of the property with an excellent payment history? If so, and if the numbers make sense from an investment perspective, an investor maybe a good target to purchase the property while keeping your tenant in place. Investors like nothing more than taking on a stable tenant rather risking vacancy time and the unknown with a new tenant.

Being on the market for the tenant is certainly an inconvenience. In order to gain the support of your tenant, you may want to consider an incentive for their cooperation. For example, a rent credit to them when they move out if they have been helpful (eg. a percentage of the monthly rent from the time you listed the home until sold it’s sold or the tenants move out). Another option might be money toward payment of moving expenses.

So what are the disadvantages of selling your property tenant-occupied?

The house may not present well with the tenant. We’ve seen houses where you can barely move due to the tenant using the home as storage unit – this doesn’t make for a good showings or maximizing the sales price.

While most tenants are helpful, some unfortunately go out of their way to make your life, and ours, difficult! The predicament is that it’s not always possible to predict how your tenant will react once “their home” is on the market. Here are some challenges that may be encountered with the tenant occupied sale:

Tenants are required to be given 24 hours notice before a showing unless otherwise agreed. This can limit the number of buyers who are able to see the home.
For some tenants, no time is a good time for the home to be shown – Bad time, call me back tomorrow. I’m not feeling well. The house is a mess. Going away for the week and don’t want anyone in the home while we’re away. You get the idea.
Tenants who won’t agree to a lock box being placed on the home for showings, again greatly restrict showing agents and their buyers from being able to view the property
The tenant who goes out of their way to have the house looking as “messy” as possible.
And of course there is the tenant who feels obliged to discourage or turn away prospective buyers by exaggerating every negative about the home and neighborhood they can come up with. Why would a tenant do this? Simply because they don’t want to move!

The majority of tenant’s are understanding and great to work with and if you’ve been a good landlord, then your history with them to date is usually a good indicator of what to expect.

What about the advantages of vacating the property prior to putting it on the market?

Firstly, showing of the home is easy. Vacant homes typically get a lot more activity and interest because they are easy to show.

Potential buyers won’t be distracted by tenant belongings, especially if the tenant is untidy, lives in clutter or their possessions do not complement the house well – this can be a major distraction for many buyers who can’t see past the contents and they unfortunately end up just moving on to the next house.
You have the opportunity if needed to do relatively inexpensive improvements such as paint and carpet that can give you a significant return.
No one has to be concerned whether or not the tenant is going to move out at closing.

The potential downside to first vacating the property is that you have to first give your tenants notice to vacate, 30 or 60 days depending on how long they have occupied the property. You also need to check for any special terms that may have been in the original lease. If there is no rush to get the home on the market, then this maybe the more prudent route to take if you have concerns about your tenants.

So what would we recommend?

Every circumstance is different. If you know your tenants well, you might already have a good idea if they are going to help or hinder the sale of the property.

The best course of action for most tenants is to set up a time to meet with them and let them know that you have made a decision to sell the property. Remind them how much you have appreciated having them and thank them for looking after your property. Offer your tenant the first right of refusal to purchase the property. If your tenant isn’t interested in purchasing the property, then explore what makes the most sense as you prepare to put the property on the open market. Based on your discussion and their feedback, you’ll be in a much better position to decide if and when you need to give them notice, or if it makes sense for all concerned for them to remain in the house while it is on the market for sale. If you’re going to give notice, be sure to put everything in writing.

No matter what you decide, make sure you know your tenants rights and do right by them. And of course, if you have other questions, feel free to give us a call.