Selling a property with tenants

Written by view.com.au in Selling

A furnished apartment

It is very common for investors to sell their properties with tenants still living in the home, simply because neither party wants the headache associated with waiting for a lease period to end or, for the tenant, finding a new home. But there are both advantages and disadvantages to selling a property with tenants and your financial situation, the nature of property and the state of the market will affect whether you do choose to go down this road. As an investor, you should be well aware of this process and what either party’s legal rights are (which change from state to state but generally work to give tenants enough time to find a new home and owners the right to sell a property if a lease is periodical rather than fixed).

The advantages of selling a property with existing tenants

  1. The biggest advantage of selling a home with an existing tenant is that you maintain cash flow during a time when you have considerable outgoings (check out the hidden costs of buying a home here).
  2. Selling with tenants in the hoe can give you the opportunity to present your property well as long as the tenants are incentivised to present the well home (to attract other investors rather than owner/occupiers) and if they have styled the home in an appealing way as they have lived in the property.
  3. There is the potential to get a sale over the line when you sell with tenants as investor buyers will be attracted by the fact that they will not need to find tenants for their property. The nature of the market and of your property will dictate whether or not you are in a good position to attract investors rather than occupiers (if you have a two bedroom inner-city apartment, you are less likely to attract owner-occupier buyers but if investor lending in the market is down, then this will affect the potential buyers you see walking through your door. 
  4. Tenants can be a reflection of how the property has been treated, so having had longterm tenants who have looked after the property very well will drive interest from potential investor buyers.

The disadvantages of selling a property with tenants

  1. You need to notify tenants before any inspections, usually by 24 hours in advance, which can make the process of last-minute inspections a headache.
  2. You may be restricted as to when you sell. Property is not a liquid asset (it can take weeks to months to turn it into cash), which is made even harder by having existing tenants. If your property is on a fixed lease, you in most cases have to give a considerable amount of notice to your tenants or even wait until that lease has ended.  
  3. You cannot present the property exactly as you like, or stage it. Staging your home before selling can potentially bring in 5-10 per cent more on the sale price, which is made impossible when selling a property with tenants inside. 
  4. You risk eliminating half of your potential audience if you do down this road. Owner-occupier buyers may be put off by existing tenants. Again, the market and your property will dictate how relevant this is: if your home is appealing to families and investor lending is sliding, then having tenants will stop you from attracting these buyers and finding a higher price (offsetting the advantages of a maintained cash flow).

How to sell a property with tenants

  1. States have different laws regarding notice periods, so make sure you are aware of those relevant to you before you consider selling. These include both the notice you need to give to a tenant if you want to sell and the notice you need to give during inspections.
  2. It’s easy enough to advise that you maintain good relationships with your tenants to aid the process, but this does not relate to many investors today. Property managers often have the direct relationship with a tenant. The best way to offset this is by simply being a good landlord and making sure the needs of your tenants are met and that you provide a good service as a landlord. This is important because in Victoria, for example, you have no legal right to taking photos of the home for advertising purposes, which means you need to have a good relationship with your tenants if you want to be able to negotiate times and what you can photograph for the purpose of marketing the property.
  3. Provide incentives to your tenants, such as a reduced rent during the period of the sale, so that they are both compliant and helpful. A tenant may be legally obliged to allow inspections to occur if you provide 24 hours notice, but this does not mean they have to make the property immaculate nor even be absent during the inspection. See whether they are open to you paying to have the property cleaned prior to the inspection so that they can then enjoy a clean home when they return.
  4. Be personable and contact your tenant directly. Having a face to associate with their landlord will dramatically improve your relationship with the tenant.
  5. Market the property with all of this in mind. You may potentially reduce the number of potential owner-occupier buyers walking through your doors, but if the market is on your side then marketing specifically to investors could work in your favour.