How to Sell Rental Property with Tenants in California
If you’re a property owner looking to leave the rental game, you may have thought about putting your place on the market. But if you still have renters, it could get tricky. Legal stuff might come up and slow down or stop the sale.
To sell a rented property with tenants, you can wait for their lease to end, talk to them about leaving early, end the lease, sell to them, work with a real estate agent, or sell to an investor. Selling to an investor is the easiest because you don’t have to make the tenants leave.
To explore all your options when selling an occupied property, check out the rest of this blog! Aside from what was mentioned, we also included some tips to ensure you’ll sell your property smoothly.
Can You Sell a Rental Property with Tenants?
Yes. You can legally sell a rental property even if it’s tenanted. Actually, a lot of real estate deals nowadays involve rental property being sold with tenants still in place.
The timing for selling your rental property to a new owner depends on the lease agreement with the tenant.
If it’s a month-to-month lease and you’ve got a reliable tenant, there shouldn’t be much trouble in selling. However, if the tenant is on a fixed-term lease, the sale process will be more complex and could take longer.
We’ll discuss these two major types of leases in a later section of this blog.
Challenges of Selling a House with Tenants
As established, selling an investment property with tenants in it can throw you a few curveballs. You would benefit from knowing these challenges so you can plan your sales accordingly.
Here are four common challenges of selling a house with tenants in it.
Smaller Rental Buyers Pool
One of the main challenges when selling a property with tenants is the reduced number of potential buyers. You’ll struggle to draw in young families or retirees.
Your options are mainly limited to local investors seeking income-generating assets.
These investors approach property purchases with a strategic mindset. They prioritize financial returns over emotional attachments during negotiations.
However, this could work in your favor if the property requires extensive repairs, as investors often purchase properties in their current condition.
Difficulties in Open Houses and Showings
There are a lot of reasons why it may be tricky to showcase your rental place if someone’s still living there. First off, scheduling can be a pain since you gotta find a time that works for both the potential buyer and the tenant.
Plus, tenants often wanna stick around during the showings ’cause they’re not keen on letting strangers roam around their home. That could make it tough for the buyer to get a good look at the place.
And then there’s the chance that the tenant’s not the tidiest. You may need to shell out for a cleaning crew just to make sure the rental property looks decent during the showing.
Lower Selling Price
Setting a very high asking price can further limit your already small buyer pool. You won’t have any choice but to sell the rental property at a low price when tenants are in place.
Potential buyers may also put in conservative offers because your rental property is quite risky, what with existing tenants who may or may not pay them when they become their landlords.
Buyers Fear Dealing with Bad Tenants
Even if you list your property at a bargain price, having tenants already in place could deter buyers.
Potential investors may see the discounted price but worry about dealing with troublesome tenants. They may hesitate to buy a rental property that could cause problems down the road.
How to Sell a Rental Property with Tenants In California
Earlier, we mentioned that the process and timeline of selling your rental home depends on the type of rental agreement you signed with your tenant. In this section, we have detailed how to get started with the sale of a rental depending on these agreements.
When the Tenants are on a Month-to-Month Lease
A month-to-month lease or rental runs for an indefinite time. That means the lease is still active until either the owner or the rolling tenant decides to end the lease agreement.
If you’re looking to sell your investment property and the tenant is on a rolling lease, you probably won’t have any problems selling it as long as you let the tenant know in advance.
Typically, you should give notice at least 30 days before they have to leave the rental property.
In certain states, though, owners must give notice 60 to 90 days before the vacancy date. This depends on how long the tenant has been in the rental property.
Make sure to check with your state about the necessary days so you don’t run into any legal problems.
When the Tenants are on a Fixed Term Lease
A fixed term lease is a rental agreement with a start and end date. Usually, a term lease can last anywhere from 6 months to 3 years.
Since there is a contract that binds the landlord to the tenant, the sale process is much more complicated and time-consuming.
Detailed below are six ways to sell an investment property with a tenant on a fixed-term lease.
Wait Until the Active Lease Expires
If you’re not hurry to list your rental property in the housing market and it’s still bringing in good money, it’s smart to wait until the lease is up. There are lots of advantages to this.
Firstly, you can fix up and improve the empty property without bothering any renters. A nicer-looking rental means you can ask for a higher price. Even if you hold off for months before putting it up for sale, you’ll end up with more money.
Another plus of waiting for tenants to leave is that you can boost the rental potential of the empty property. This would increase the potential rental income for the buyer, which also determines the property’s value.
The downside of waiting for the lease to end is dealing with mortgage payments and property taxes. You still have to cover the monthly mortgage and taxes until the lease is up, which could be tricky if it’s not ending for a few more years.
Negotiate Settlement for Early Move Out
Discussing with your renter about the potential for a premature departure is a great choice if you’ve got a confirmed purchaser ready for the lease closure. An early departure entails requesting the renter to vacate before the lease term concludes.
Keep in mind, though, that the renter retains the option to decline your conditions. Yet, there’s a strong chance they’ll consent if you provide them with certain perks.
Pay for rent difference. If your tenant is indecisive about moving because the rental they plan to move into has a higher rent, pay for the rent difference. This agreement will cover the months left on their fixed-term lease.
- Cover their moving costs. Leaving your investment property can bring inconvenience to your tenant. Covering their moving fees is a small price to pay.
- Pay for their security deposit. Remember that when moving to a new rental, your tenant has to pay a security deposit. You may want to pay for this deposit to entice them to move out.
- Offer payout. Offering a payout is the most expensive way to convince a tenant to move out. However, it can be effective. The payout you’ll offer should be computed based on your rental income and how much you’ll earn from the potential sale. Beware of tenants who will take the money and require you to evict them (which can take months).
Sell the Rental Property to the Tenant
If your tenant plans to stay in your rental property for a while, it may be hard for them to leave. In such a situation, it could be wise to offer them the opportunity to purchase the property.
This approach represents a swift and straightforward method to sell your currently leased property.
Here’s the process to follow for this approach.
Lease-to-own: In a lease-to-own agreement, the tenant would buy the rental property eventually. The monthly rental payment will serve as the down payment.
- Seller Finance Agreement or Seller Financing: With seller financing, you would act as the lender of your current tenant. In other words, you collect a down payment from the tenant as well as a monthly mortgage. If they fail to pay, you can take the rental property back.
- Lease-to-own with a Non-Refundable Option Fee: In this agreement, the tenant will pay an additional fee on top of the rent so they can buy the rental at some point in the future. This is only a one-time fee that gives the tenant more incentive to keep paying.
Terminate the Lease
Many leases include a provision for ending the agreement early. This provision allows the lease to be ended within 30, 60, or 90 days after the rental property is sold. It can be used for any valid reason that benefits both the landlord and the tenant.
Here are the most common reasons for an early termination clause to be executed:
- Delinquent tenants who fail to pay rent and cause negative cash flow
- A violation of a clause in the lease agreement
- A violation of a responsibility set by local laws
When terminating a lease agreement, the landlord must issue proper notice to the tenant months before the rental property needs to be vacated.
Sell the Rental Property with the Help of a Real Estate Agent
As mentioned, it’s permissible to sell a property on the conventional real estate market even if it’s occupied by tenants. Engaging real estate professionals can be great in this process.
However, it’s important to recognize that locating prospective buyers willing to invest in a property with tenants can be challenging.
Even with a skilled real estate agent, securing a favorable offer may take time, as most end-users prefer properties they can inhabit immediately. Essentially, they’re not keen on assuming the role of landlords.
Sell the Rental Property to a Cash Buyer or Real Estate Investor
Selling to a cash buyer or real estate investor is the top choice to sell a rental property with tenants.
These buyers seek investment properties to add to their portfolios.
Moreover, having tenants is beneficial to most investors as it saves time finding new ones. These buyers aim for high ROI and quick cash flow.
Besides buying properties with renters, investors also purchase as-is. They won’t demand repairs for your rental.
How to Smoothly Sell a Rental Property with Tenants
When selling a property with tenants, it’s crucial to avoid any resistance from them. Being overly forceful in getting them to vacate could lead to legal action based on the lease terms.
Considering that you’re essentially requesting a favor from the tenant to facilitate the sale, it’s important to communicate carefully.
Here are some tips to help you manage the tenants effectively and facilitate a seamless sale of the property.
Inform the Tenant Regarding the Sale
The first thing you have to do if you’re a landlord selling a rental property is to inform the tenant of your decision. You can do this by meeting them in person and sending proper notice.
Meet in Person
Meeting the lessee face-to-face is vital for transparent communication. They may have inquiries, so seizing this opportunity to answer them in person is key.
During your rendezvous with the lessee, outline the property transaction procedure while expressing regret for any inconvenience caused by your decision. Demonstrating empathy towards their situation can foster cooperation.
Send a Written Notice
Before you meet your renter, make sure to send them a written notice outlining what’s going to happen. Here’s what you should include in the notice:
- Basic Identification: This includes the date, tenant’s name, and the address of the rental property.
- What Will Transpire: This covers when the rental property will go on sale, what the tenant’s role will be during the sale, if you will have showings, etc.
- Property Showing Notice: If you would schedule showings for the rental, attach a rental property showing notice so the tenant is aware of when it would happen. Also, this should detail if they should leave the property while there is an ongoing showing. The same goes for open houses.
- Bonus Incentives: In case you plan to give your tenant some incentives like rent rebates or paying for moving expenses.
Aside from these required details, you should also assure the tenants in the notice that you won’t allow a lot of unknown strangers or prospective buyers to parade inside the rental simultaneously.
Know the Legal Rights of the Tenants
Laws about renters’ rights differ depending on the state. It’s important to check what rules apply in your area to avoid breaking them and getting in trouble.
Usually, renters don’t have to leave the property just because you’re selling it. They’re paying rent, and you’ve agreed to a lease with them, which could last for months or years.
Basically, unless you have a valid reason to end the lease early, they can continue living there as long as they follow the lease terms.
Ask a Real Estate Attorney for Guidance
If you are confused regarding the state laws and the whole process of selling a rental property with a tenant in it, you should ask a real estate attorney for guidance and real estate advice.
A real estate attorney can also help you settle an issue with your tenant, so you can avoid going to court while selling rental property.
Take Care of the Upkeep of the Rental Property
Remember that your tenant doesn’t really have a stake in the sale of the rental. Therefore, you should take responsibility for keeping the rental property clean and in great condition. Hire a cleaning service to help you with this if there’s a lot to take care of.
Don’t Put “For Sale” Signages Outside the Rental Property
As respect to the tenant’s privacy, do not put a for sale sign outside the rental property. If there’s a for sale sign, there’s a chance potential buyers would knock on their door and disturb them.
The real estate transaction should be controlled by you, including showings and this shouldn’t burden your tenants.
Adjust Showing Times According to Tenant’s Schedule
States and localities have regulations about when you can show a property that someone is already living in. You should schedule showings according to these rules while also thinking about your tenant’s schedule. You don’t want to cause them extra trouble, especially if they’ve already said they’re moving out.
Ask the Tenant to be Out During Showings
It may feel odd for a prospective buyer to have a tenant trailing them as they check out the property. To prevent this, offer the tenant an incentive to vacate during viewing times. Provide them with a café gift card or arrange for them to stay at a quality hotel if there are several showings scheduled in a day.
Ensure that the Tenant is Paying Rent on Time
Some landlords are flexible about tenants falling behind on rent, but it’s best to avoid this when preparing to sell a rental property. For instance, when listing your property for sale or pitching to investors, they’ll check the tenant’s payment track record.
If they discover you have a tenant with overdue rent, causing potential hassle in rent collection, they may pass on buying or make a lower offer.
Schedule Repairs According to Tenant’s Convenience
Let’s say the property needs lots of fixing up. Then, plan those fixes for when the renters aren’t around so they’re not bothered.
But if they’re working from home, that gets a bit tricky. You may need to suggest they work at a nearby coffee shop with good Wi-Fi and cover the cost.
Now, if the fixes are going to take a few days, you’ll have to cover their stay in a hotel just like you would for property showings.
But if you sell the rental to a real estate investor, no fixing is needed. Plus, with a quick sale, you can save on property taxes and other fees.
Keep Up with Your Landlord Duties as the Property Owner
While selling your property, you should not forget your duties and responsibilities as a landlord.
You should still attend to your tenant’s needs and address the issues they’re experiencing with the house. This would help maintain your good relationship with them, which can translate to fewer problems when selling.
Help the Tenant Find a New Rental House
If needed, you may need to assist your renter in locating a new rental property. You can aid them in locating listings online or reach out to your network for available properties. If you own other rental units in a different area, you could also suggest they move there.
Communicate to the Tenant After the Sale
After closing the sale of the property, you should send a letter to the tenant regarding the sale and where they should direct the payments moving forward.
A more personal approach would be introducing the tenant to the new owner of the property. If the tenant only deals with the property manager and not the new owner, there’s no need for this.
Final Thoughts: How to Sell a Rental Property with Tenants In It in California?
Selling an investment property with occupants can feel daunting at first. This guide aims to inspire strategies for a seamless sale.
Should challenges persist, consider selling to a property investor. They’re keen to assume landlord responsibilities or vacate the premises, without repair requests prior to sale.
At JiT Home Buyers, we provide equitable cash offers for tenanted properties. No fees, and we handle closing expenses too!
To start selling your occupied property, fill out our form below or call us at (510) 473-5885 to learn more.
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Author: Saini
My name is Saini, and I founded the JiT Home Buyers team with years of experience in the real estate industry. I have assisted numerous sellers in selling their homes quickly, “AS-IS”, and for a fair price.
He’s been featured in multiple publications including Yahoo Finance, GoBankingRates, LegalZoom, The Mortgage Report, Apartment Therapy, US News and World Report, and SuperMoney among others.