Should You Sell Tenant-Occupied Properties? Pros, Cons, and Alternatives

There are no federal, state, or local regulations that prevent the owner of a rental property from selling it while renters live on the premises.

However, it can present some challenges. Sellers should plan carefully before listing tenant-occupied properties on the market.

Here’s what you need to know about selling rented properties.

The Lease Agreement Survives the Sale

When you sell a renter-occupied property, the lease agreement transfers to the new owner. All terms carry over, no exceptions.

The security deposit also transfers, so make sure you deliver it to the buyer at closing, along with the last month’s rent if you collected it.

When you sell the property, provide your tenants notification of the new owner’s name and contact information for rent payments, maintenance issues or anything else.

Challenges with Long-Term Leases

Month-to-month rental agreements or leases with nearing expiration dates don’t present a problem in most cases. Sellers can simply non-renew the lease contract to clean and sell the property vacant.

But lease agreements that contain a fixed term — with a specific lease ending date — can cause issues for sellers.

I recently encountered this situation. Because the market is so hot right now, a long-term property management client of mine wanted to sell his rental property. All well and good, except in August of last year, we negotiated a two-year lease contract. Justin Bieber’s song “Stuck With U” comes to mind.

Tactics for Selling Occupied Properties

What if you are stuck with tenants in a long-term lease? There are a few tactics one can take.

First, you can approach your renters about leaving early. You never know what a situation may be and there is a chance they may agree.

If they aren’t keen to move, you could make an offer for your renter to leave early, AKA cash for keys. Provide them an amount to have them leave early. Make sure you get a signed agreement of this arrangement. Additionally, do not pay the agreed upon amount until they have completely vacated, and the premises is in satisfactory condition.

Finally, you could offer the property to your current tenants to purchase. In fact, in many states renters get the right of first refusal: you have to offer to let them buy it before listing it for sale. You can optionally offer them a discounted sale’s price, since you don’t have to pay a real estate agent’s commission.

Not all renters will agree to leave. It’s not ideal; to begin with it inhibits showings. If the condition is less than favorable, it may not present well for showings. And the income versus expenses may not work well for an investor purchasing within a hot real estate market or an increase in interest rates.

You may end up deciding to hold off on a sale until the lease expiration is closer. But what if you decide to sell anyway?