There are many reasons why you might sell a rental property.
Some of the most common reasons are:
- Cash: You want to cash-in on your property’s equity.
- Cut your losses: The property isn’t performing as well you like, and you just want out.
- Accidental landlord: You inherited the rental property and have no interest in being a landlord.
- You’re moving: You’re relocating, don’t wish to be a long-distance landlord, and/or plan to buy something closer to you.
- 1031 exchange: You want to trade it in for something else.
- The end is near: You’re retiring or just want to get out of the landlord business altogether.
Whatever the reason, it is your property, so you can sell it any time you wish. However, when you have tenants, the process involves some extra steps depending on the type of lease or agreement they possess.
The two most common types of rental situations are:
- Month-to-month agreements
- Fixed-term leases
Handling Month-to-Month Agreements
If your tenant is renting on a month-to-month basis, all you need to do is give your tenant proper notice. This involves mailing or delivering a letter to your tenant 30 days before you’d like them out, usually in respective to the rent due date.
The required notice period varies from state to state, so be sure to look up your state’s policy here.
You don’t need a reason to terminate a month-to-month agreement, hence why it is called a “no cause” termination. It’s one of the main benefits of having a month-to-month agreement. You don’t have to tell the tenant why they need to vacate unless you want to.
Here’s a sample of what to do:
- Send a letter with the date on it letting your tenant know that their tenancy will terminate in XX days from the date of the notice or next rent due date (depending on your state).
- Inform your tenant to remove all possessions and return your keys to you on or before the last day mentioned in the notice.
- If they don’t move out, start the eviction process immediately.
Handling Fixed-Term Leases
Fixed-term leases require a more delicate touch and don’t normally terminate just because a property changes ownership.
Here are five options for handling a tenant with a fixed-term lease:
1. Wait Until the Lease Has Expired
If you have a tenant in good standing who is renting the property under a lease situation, the easiest method for you is to wait to sell the property until the lease is up and your tenant has moved out.
However, if your tenant has violated any lease terms, you can terminate the lease more quickly with proper notice. Valid reasons for a lease termination include, but are not limited to:
- Failing to pay rent
- Violating the lease, including:
- Engaging in illegal activities on the property
- Violating a no-pet clause
- Subleasing if prohibited
- Causing serious property damage
- Being a nuisance to others
- Falsifying information on the rental application
2. Sell the Property with an Active Lease
This option limits your prospects because you would need to sell to someone who understands that a tenant is living in the property and is OK with that. You are basically limiting yourself to investors.
It’s important that the new owner honors the tenant’s lease and lets the tenant live in the property until the lease is up.
In almost every state, the lease and security deposit must be transferred with the property, and the new owner becomes the new landlord. A fixed-term lease does not automatically terminate when a property is sold.
Here’s a podcast episode where Lucas addresses the question:
3. Pay your Tenant to Vacate
If you want to sell right away and your tenant still has several months left on the lease, you can try to negotiate a settlement to get your tenant out early.
This tactic is called “cash-for-keys,” but how do you know how much to offer?
Here are some ways to arrive at a figure:
- Make up the difference: Look to see what comparable properties to yours are renting for in the area. If rent elsewhere is more than what you’ve been charging, offer to pay the difference between what your tenant will likely have to pay and what they have been paying you, times the amount of months left on the lease.
- Moving costs: You might want to offer some money to help your tenant move for the inconvenience of moving earlier than expected.
- Pay their security deposit: You might want to offer half of what your tenant would need to move into a new place, which is usually first month’s rent and a security deposit.
- Whatever you can afford: The bottom line on how much to offer depends on how much you want your tenant out early — and how much you can afford.
Keep in mind, however, that the tenant is under no obligation to agree to your terms. In that case, you’ll need to wait until the end of the lease to sell the property.
4. Sell the Property to your Tenant
Offer to sell the property to your tenant. You could allow them to get financing on their own, or offer a seller financing arrangement, which is a type of transaction where you are the lender and allow your tenant to make payments to you (on a short-term basis) to buy the property.
Seller financing is especially attractive to offer to long-term tenants in good standing.
Keep in mind that you typically need to own the property free and clear or get approval from your mortgage lender to conduct a seller-financing deal.
5. Execute an Early Termination Clause in the Lease
There is a case where tenants, even those in good standing, don’t get to live out the entire lease. Some leases have an early termination clause to handle a variety of situations.
These clauses usually say that the lease terminates in 30/60/90 days, for example, after closing on the sale of the property. The “trigger” can be anything you want, as long as it is reasonable, and both parties agree to it in the lease.