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How to Sell Rental Property with Tenants California
If you're a California landlord planning to exit the rental business, you may have already considered putting your property up for sale. While you have every right to do this, the process can be wrinkled with challenges if there's still a tenant in residence. You may see yourself going through legal issues that can delay or even prevent you from selling the property.
To sell a rental property with tenants in it, you have a few options: wait for the tenant's lease to expire, negotiate with the tenant regarding early move-out, terminate the lease, sell to the tenant, work with a real estate agent, or sell to a real estate investor. Among these options, selling to an investor is the most hassle-free because you won't have to ask the tenants to move out.
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 California?
Yes. You can legally sell a rental property even if it is occupied by tenants in California. In fact, many real estate transactions these days involve rental properties that are being sold even with tenants in residence.
The timeframe with which you can sell your rental property to a new buyer depends on the lease agreement with the tenant.
If the lease agreement is month-to-month and you have a good tenant, there would be little to no issues in selling the rental property. Meanwhile, if the tenant's lease is on a fixed term, the sale would be more complicated and 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 California
As established, selling a California investment property with tenants in it can throw you a few curveballs. You would benefit from knowing these challenges so you can plan your sale accordingly.
Here are four common challenges of selling a house with tenants in it.
Smaller Rental Buyers Pool
Perhaps the biggest problem when selling a house with tenants is the smaller buyer pool. You won't be able to attract families that are starting out or senior citizens looking for a place to retire.
You'll be limited to local real estate investors who are looking for profit-generating properties.
These real estate investors are also more calculated when buying an investment property. It's an "investment buy" for them, so it would be hard to appeal to their emotions during negotiation.
Nevertheless, this may turn out well for you if the rental needs a lot of repairs since investors buy as-is.
Difficulties in Open Houses and Showings
There are many reasons why it can be difficult to show your rental property if a tenant still lives in it. For starters, it is hard to set a schedule that suits both the buyer and the tenant.
Most tenants also want to be present during showings since they aren't comfortable opening their dwelling place to strangers. This may prevent the buyer from fully checking out the house.
There's also the possibility that the tenant is messy. You would have to hire a cleaning team just so the rental property looks presentable 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 that may or may not pay them when they become their landlords.
Buyers Fear Dealing with Bad Tenants
Even if your asking price for your tenant occupied property is very low, you may still scare potential buyers away.
From their perspective, the cheap price of your rental would not compensate for being the landlord of potentially bad tenants. They wouldn't want to invest in a rental property that can give them a headache later on.
How to Sell a Rental Property with Tenants In It 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 California 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. In other words, the lease remains active until either the landlord or the month-to-month tenant agrees to terminate the lease agreement.
If you plan to sell your investment property and the tenant is on a month-to-month lease, you likely won't encounter any issues in selling it so long as you provide the tenant with advance notice.
Generally, the notice should be issued at least 30 days before they need to vacate the rental house.
In some states, however, landlords are required to issue a notice 60 to 90 days before the date of the vacancy. This depends on how long the tenant has lived in the rental home.
Be sure to check with your state regarding the required days so you won't face any legal issues.
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 are not in a hurry to put your rental property on the real estate market and still have good cash flow, it is best to wait for the lease to end. There are actually many benefits to doing this.
For starters, you can make repairs and upgrades to the vacant property without disturbing any tenants. A better-looking rental property translates to a higher asking price. Even if you waited months before selling it on the real estate market, you end up with more cash.
Another great thing about waiting for the tenants to move out is that you can increase the rent potential of the vacant property. Doing this would raise the buyer's potential rental income, which also dictates the worth of the property.
The drawback of waiting for the lease to expire is dealing with mortgage payments and property taxes. You would still have to pay the monthly mortgage dues and taxes until the lease ends, which can be problematic if it expires in a few more years.
Negotiate Settlement for Early Move Out
Negotiating with your tenant for the possibility of an early move-out is an excellent option if you have a sure buyer waiting for you to settle the lease. Early move-out means you'll ask the tenant to leave before the lease ends.
Note, however, that the tenant has the right to reject your terms. But there's a high possibility that they'll agree with you if you offer them some incentives.
- 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 might 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 long term tenant loves living in your rental home, it would be difficult for them to move out. In this case, it would be better to have them buy the house from you.
This option is one of the fastest and easiest ways to sell your occupied rental property.
Here's how you can proceed with this option.
- 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
Most lease agreements have an early termination clause. Essentially, the early termination clause states that a lease can be terminated within 30, 60, or 90 days after the closing of the rental sale. This clause can be executed for any reason as long as it is reasonable for both parties.
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 with the Help of a Real Estate Agent
As mentioned, you can legally sell a house on the traditional real estate market even with tenants in it. In doing this, real estate agents would be of great help.
Note, however, that it would be difficult to find potential buyers who are interested in a house with tenants.
Even if you have a great real estate agent, it can take time to land a great offer since most retail buyers want homes that they can move into. In other words, they don't want to be landlords.
Sell the Rental to a Cash Buyer or Real Estate Investor
Selling to a cash buyer or real estate investor is your best option if you want to get rid of a rental property with tenants in it.
These potential buyers are really looking for investment properties they can add to their portfolios.
Moreover, having existing tenants can be beneficial to most real estate investors since it saves them time to find new ones. Remember that these buyers are looking for a high return on investment and a great cash flow in a short period of time.
Aside from buying properties with renters in them, real estate investors also purchase as-is. In other words, they won't force you to make repairs for your rental property.
How to Smoothly Sell a Rental with Tenants California
When selling an occupied property, the last thing you want is an uncooperative tenant. If you are too aggressive with having them leave their primary residence, they may use the lease agreement to sue you in court.
Since, technically, you are asking the tenant for a favor in order to proceed with a California home sale, you should be extra cautious when communicating with them.
That said, here are a few tips that can ensure you'll be able to handle the tenants correctly and proceed to a smoother rental sale.
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 tenant in person can help you communicate your intentions clearly. They may have questions and this gives you a chance to address them immediately when you're face to face.
When meeting with your tenant, explain how the sales process will go, but also be apologetic about your decision because of the inconvenience it might cause them. If they see that you are concerned with them, too, they would be more agreeable.
Send a Written Notice
Prior to meeting with your tenant in person, you should also send them a written notice regarding what is about to transpire. To guide you, here's what a proper notice should include:
- 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 rebate 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
The laws governing tenants' rights vary from state to state. You must research what applies to your location to avoid breaking the law and facing charges.
Typically, tenants aren't required to vacate the rental just because you are selling it. They are paying rent and you signed a lease agreement with them which may span from months to years.
In other words, unless you have a reason to terminate the current lease legally, they could stay in the rental property as the lease terms should be followed.
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 local governments have laws regarding showing times for occupied property. You should set showings based on these laws while considering your tenant's schedule. You don't want to inconvenience them further, especially if they have already agreed to move out.
Ask the Tenant to be Out During Showings
It would be awkward for a buyer to be followed around by a tenant as they explore the property. To avoid this, incentivize the tenant to leave the rental property during showing hours. Give them a gift card to a café or have the tenant stay in a nice hotel if you have multiple showings in a day.
Ensure that the Tenant is Paying Rent on Time
While some landlords are lenient in letting tenants get behind in their rent payments, this should be avoided when planning to sell a rental. To illustrate, when you list your house on the real estate market or sell to an investor, they would look into the payment history of the existing tenant.
If they find out that you have a delinquent tenant that would give them a headache when they collect rent, they might forgo the sale or give you an offer that is below market price.
Schedule Repairs According to Tenant's Convenience
Suppose the property needs a lot of repairs. In that case, you should schedule fixes when the tenants are out so they won't be disturbed.
If they work from home, however, it can be a bit difficult. You would have to ask them to work at a nearby café with a great internet connection and pay for it.
Meanwhile, if the repairs would take days, you would have to shoulder their stay in a hotel just like you would during showings.
However, if you sell a rental property to a real estate investor, no repairs are necessary. Further, with a fast sale you can pay less in 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 lesser problems when selling.
Help the Tenant Find a New Rental House
If the situation calls for it, you may have to help your tenant find a new rental house. You can help them find local online listings or contact someone you know that has an available property. If you have other rental properties in another neighborhood, you may offer them to move there, too.
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 California?
Selling rental property with a tenant in it can be overwhelming when you initially think about it. Hopefully this guide sparked ideas to help you have a smoother California rental property sale.
If in case you're still facing difficulties, it would be best to sell to a real estate investor. They would gladly accept being the new landlord of your old tenants or getting the tenants out of the property. Plus, they won't ask you to make repairs before closing.
Here at Sell My House Fast, we give fair cash offers to rental properties with tenants in it. What's more, we don't charge fees, and we even cover closing costs!
To start selling your occupied property, fill out our form below or call us at (844) 207-0788 to learn more.