Should I Sell Investment Property With Tenants?

I had a call from a potential seller today.  HIs first words were, “Should I sell investment property with tenants?”. The homeowner was afraid that the process might result in a vacant unit and no rent.

Are you like this caller? Do you own a Glendale CA investment property?  Your first condo, perhaps, or a small home?  Perhaps you’ve been watching the market and thinking of selling the unit. The cash would be very handy right now, right?

Ideally, this homeowner wanted to see if he could get a great offer (high price) without letting the tenants know the unit was even for sale.  In this wish-based plan, we would only show the interior after someone had submitted  a reasonable offer.

Unfortunately, that is not how it usually works.

Here are you options when you sell investment property with tenants.

Sell “subject to inspection”
This is common with commercial grade investment units- think 10 unit buildings.  In this situation, the buyer is a professional investor and property owner.  They don’t need to see storage or floor plan or the quality of the light…. they just need to know if the numbers make sense.

The buyer who will pay the highest price for a condo or a small house is going to live in that unit.  Quality of life is an important part of the total value for this buyer.  And, they will only know their future quality of life if they get to see the inside prior to making any offer.  This method will generally yield a steeply discounted sales price compared to the next idea…

Vacate the unit and sell it cleaned and staged
This is the other extreme and leads to hives for many investment unit owners. It means one or more months of lost rent as well as the possibility of re-renting the unit if the sale is unsuccessful.  Added to this is the stress of disrupting people’s lives by asking them to move.  It feels icky.

However, from the buyer point of view, it is the most attractive.  Buyers pay more for pretty and convenient.  Vacant and cleaned are a minimum, staging (which can include painting, maintenance, and touching up) is often a money making investment.

Get the tenants to cooperate with showings
If you simply can’t stomach the idea of a vacant unit there is a middle road.  Inform the tenants of your intention to sell.  Offer them a bonus at close of escrow or move out if they cooperate with the sale.

Cooperation means allowing showings with day before notice, keeping the unit clean and presentable, and having a positive attitude whenever they are present during showings.

How much money you give as a bonus depends on how cooperative the tenants are and how much effort the tenants will need to exercise.  Tenants who habitually keep a show ready home might get less than a chaotic home with more stuff than storage space.  In general, though, it needs to be enough to be really attractive, a month’s rent, or more.

Also, do not give the tenant a reduced rent in order to get cooperation.  They will take the reduction and live as they always have.  You can also structure the bonus so they get more the longer they stay.

Since this is the middle road you can expect middle results.  You won’t break any sales records, but you won’t sell at the “investors price” either.  Your prospective buyer will want a lower price to offset the risk that the tenant will not vacate in time to close escrow.  This is a real risk, no matter how wonderful your tenants might be.

So, what is your priority?  Highest price?  Least risk?  I encourage you to take a look at what you will do with the money once you sell.  Or, what will you do with your peace of mind?  If you focus on the gains, the risks might feel more reasonable.

 

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