How to sell a tenanted property
Selling an investment property while your tenants are still living in there often makes financial sense for investors. Timing your market move to ensure you are selling at the right time is important, but also having the consistency of the rental income right up until you sell the property, can make a big difference to your financial stability, especially if you need to make home loan repayments.
Additionally, other investors often prefer to purchase a property that has reliable tenants in situ and in some cases can help push the sale over the line.
However, having tenants in your property adds a level of complication. In many cases tenants facing the sale of their ‘home’ are likely to not be very happy. They have to find and move into a new place which is both time consuming and costly. They need to search for a new property – and this can take ages, pay for removalists, cleaners, utility connections and find the bond for their new place. Tenants can expect to pay $2000 - $3000 which is a lot of money! And a lot of reason not to be very happy.
How can you keep your tenants happy and sell your property at the same time?
1. Open Communication with your tenants
Open and early communication is key. It’s important that you let you tenants know you are going to sell the property BEFORE you put the property on the market. Many tenants love their 'home' and in many cases if they are in a financial position to do so, may like to buy your property. So ring the tenants first and offer them the opportunity to purchase it. Keep in mind if the first time they hear about the sale is when the signboard is going up, you’ll find they may not be that willing to work with you to help you sell your property – and you need them on side.
Additionally, in many states and territories you need to abide by legislative requirements and notice periods and be reasonable about the number of inspections that are held each week. In some states such as NSW, if you don’t let your tenants know that you are planning on selling your property when they sign the lease, if you go to sell they have right to give notice to vacate the property whether they are on a lease or not. Make sure you talk to your property manager about your specific state and territory legislation.
2. Open homes and inspections
If the property has tenants, you have less control over how well the property will be presented to potential buyers. Most tenants will do the right thing and ensure the property is tidy and in a reasonable state for inspections, however overflowing garbage, a smelly bedroom or an unmade bed can have a negative impression on buyers. If the property is presented very poorly this can directly affect the sales price.
Again open communication is key here. In most states and territories, written notice must be provided to the tenants at least 24 hours before the property will be shown to a potential buyer. To help ease tension over last minute requests, it is a good idea to organise 2 set times per week for open home viewings as this gives your tenants enough time to tidy up the property and make plans if possible to be out of the premises. There is no official requirement for tenants to be out of the property but by giving them notice they are often happy to go out for the duration of the inspections.
3. Offer incentives to your tenants
Having income coming in from your tenants during the sale period is important to many investors and they find offering an incentive to their tenants can make all the difference to how willing they are keep the property clean and tidy and vacant for inspections. Here are some incentives you could offer your tenants during the sales period:
- Taking $50-$100 off the weekly rent in return for the tenants presenting the property as nicely as possible for viewings and staying away during open homes
- Consider offering a week’s free when the property sells to help them pay for the relocation costs
- A small fee for open for inspections if they tidy and prepare the property for sale
- A reference for their future rental property applications
4. Offer the chance to break the lease
If your tenants are really unhappy it may be better to offer them an early release from the tenancy. While you will miss out on the rental income during the sales process, having them out of the property offers benefits too. You can get into the property easily and fix anything that needs to be repaired, things that you couldn’t do while the tenants were living there. Do the walls need a repaint, how is the carpet looking, does the bathroom or kitchen need a refresh? These changes can often bring in more money when you sell than if you had the tenant in place collecting rent. Plus, you don’t have to worry about access and considering them at open inspections.
A few points to consider though – if they are on a fixed term lease you cannot ask them to leave unless they choose to break the lease themselves. If you can’t wait until the end of the lease to sell, then your property manager can try to negotiate with them and perhaps offer an incentive for them to break the lease.
If your tenant is still living in your property past the end date of your fixed term lease they are protected under what is called a Continuing Agreement Tenancy. You can terminate this lease if you give them 90 day’s notice, or advise them that you plan on selling the property and give them 30 day’s notice when the sales contract is signed. Of course you need to make sure the tenants are out of the property before settlement date.
5. Pay for a clean up
A well-presented property has a direct impact on how many people are interested in your property, how quickly it sells and how much it sells for. Relying on your tenants to prepare your property for sale is a bad idea. Hire a cleaner (and gardener if you have and outside space) to do a thorough clean and garden tidy up before you take any photos or open the property for inspections. First impressions matter so spending some money on making your property look its best can really pay off, plus the cost of this is tax deductable and your tenants will be happier living in a fresh, clean and tidy home.