We are regularly asked about the process for selling a rental property with tenants on the lease. Most often, this is by investors who worry that the extra obligations for tenanted properties make selling them too hard. But, while having a tenant in place creates additional considerations, it’s still possible to achieve a great result.
Here we take a closer look at the process of selling a rental property with tenants on the lease. As part of this, we will explore the most common motivations for selling a tenanted rental property. We will also outline the key things you should consider when planning to sell with a tenant in place.
Why would you sell a rental property with tenants on the lease?
In most instances, when selling a rental property, it’s better if it’s vacant. This is because having a tenant in place can limit the appeal of the property to specific buyers. It also creates several variables that can impact both your sales timeline and the final price you can achieve.
So, why would you sell a property while it’s still tenanted?
This really depends on the type of property and the kind of buyer it’s most likely to sell to. For example, if the property has strong investment appeal, having tenants in place can be a positive selling point. Such properties tend to be bought by other investors, who will appreciate being able to generate immediate rental income.
Alternatively, a change in your personal or financial situation may require you to offload some assets. If you need to release the capital quickly, selling with tenants on the lease may be the only option.
What do you need to think about when selling a rental property with tenants on the lease?
Having a tenant living in the property poses several unique challenges for a sales campaign. There are also a few important factors that will have a major impact on your sales experience. These include:
Choosing the best time to sell
Setting your timeline is a key part of planning your property sales campaign. If you do not need to sell straight away, consider whether it’s worth waiting until your current lease expires. This will depend on the type of property you’re selling and the state of the local market.
For example, if you’re selling a larger home, it will likely appeal to owner-occupiers as well as other investors. If this is the case, you should do your research and check who has been buying similar properties nearby. If it’s mostly owner-occupiers, selling closer to the current lease expiry date could boost buyer interest – and the sale price!
It’s worth noting here that timing a property sale to coincide with the end of a lease can be difficult. How quickly a property sells will depend on a range of factors and cannot be reliably predicted. Some properties can also sit on the market for weeks, or even months, before they find a buyer.
As such, planning to sell a property close to the end of a lease comes with financial risks. If the sale takes longer than expected, the property could end up sitting vacant for a period of time. During this time, you will need to continue meeting maintenance costs, but the property will not generate any income.
If you are planning to wait to sell your property, you need to be aware of this potential additional cost. If you wouldn’t be able to cover such costs, selling sooner may be the better approach.
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Notifying and looking after your tenants
Clear and open communication is crucial when selling a rental property with tenants on the lease. Keeping your tenants updated and engaged throughout the process should help reduce the risk of issues and complaints. It can also save you significant time and stress, as a successful sale usually requires the support of the tenants.
Importantly, the Residential Tenancies Act 2010 sets out a range of requirements regarding communicating sale plans to tenants. Specifically, you must:
- Notify new tenants of your intentions to sell, prior to them signing a lease: This applies if you are looking for new tenants and are planning to sell within the new lease term. If you don’t provide this notification, your tenants may be able to leave without penalty once they have been advised.
- Advise current tenants of your sales timeline: You need to provide written notice of your sales plans at least 14 days before the first inspection. As a general rule, the earlier you can provide this notice, the better, as it gives tenants time to prepare. You should also share the details of your planned sales approach, as this can help manage anxiety about the process.
- Agree suitable times for inspections: While tenants cannot unreasonably refuse proposed inspection times, it’s best to agree a schedule that works for them. As part of this, you have to provide at least 48 hours’ notice for each inspection. You also cannot require more than 2 inspections per week – though the tenant can agree to more, if they like.
Beyond these basic requirements, it’s worth keeping your tenant updated on the progress of the sales campaign. For a tenant, their “home” being sold creates a lot of uncertainty and could significantly undermine their future plans. As such, they usually want to know the number and type of buyers inspecting the property, etc.
You may also want to offer your tenants some compensation for the disruption caused or incentivise their active involvement. For example, you could engage a cleaning service to help the tenant prepare the property before each inspection. You could also offer a reduction in rent in return for the tenant’s cooperation with sales activities.
Preparing your property for sale
Depending on what’s required, the process of getting your property ready to sell can be expensive and time consuming. It’s even more complex when you are selling a rental property with tenants on the lease. This is particularly true if you decide you need to renovate your property before you sell it.
With this in mind, most investors choose not to make major updates before selling their tenanted properties. This avoids the time, effort, and cost of needing to plan and carry out works around your tenants’ schedule. It also acknowledges that having scope for renovation can increase a property’s growth potential and appeal to other investors.
That said, minor works, like repainting or updating the flooring, can make a big difference to how your property presents. These also tend to be easier to coordinate with your tenants, as they shouldn’t require them to move out. However, some form of compensation (e.g. a reduction in rent) may still be appropriate and help maintain a positive relationship.
Want to discuss this further?
If you would like more information on selling a rental property with tenants on the lease, call Local Agency Co. We can help you understand your obligations and work out ways to make the sales process as stress-free as possible. We can also develop a tailored sales campaign that’s designed to maximise your returns while minimising the time on market.
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