Selling rental property with tenant

Are there ethical and/or legal guidelines to follow when selling property with tenant(s)?
What kind of notice should I give the tenant?
What happens with the security deposit?
Any advise would be appreciated.
Any do’s or don’ts?

Thanks for any :help!
Chrissy

I’ve never done it before.

That said, I’d discuss it with the tenant and explain to them that the lease remains in force through the sale and they are not being evicted, but that the new owner MAY elect not to renew the lease. If you are selling to another investor, it’s probably not a big deal, but if you are marketing it as a house that potential home owners might buy I’d consider offering the tenant a credit on the rent in exchange for keeping the house clean and ready for potential showings. You want the tenant to be on board and flexible enough to allow the realtor to show the house as needed.

You need to talk to a local real estate lawyer as landlord tenant law varies from area to area. Heaven forbid should a closing take half a year longer than expected because you made a legal mistake and the tenant decided to play the courts and the judge kept adjourning the court date because the tenant kept saying they are not prepared to proceed or the judge thought there wasn’t enough time to hear the whole case today. Most state bars offer a free lawyer referral service with a free half hour initial consultation where you can ask those questions. You normally can get as many referrals as you want. Thus, you can get as many free half hour initial consultations as you want to ask all those questions.

Chrissy,
We’ve bought properties with tenants already in place several times. Some were listed on the MLS like any other house, but the listing mentioned there was a tenant living there. Obviously those tenants knew the house was for sale.

We also bought a bunch of properties earlier this year with tenants in place, but the owner didn’t want to let them know the houses were for sale for fear the tenants would all move and then a sale would fall thru leaving him with a bunch of empty properties. When we looked at those homes, the maintenance man told the tenants we were doing appraisal work. That owner was milking every dime he could without fixing things and we’ve spent this whole year getting those properties improved. The tenants were glad to see us take over.
If another investor buys your property, they may be happy to let your tenant stay or they may try to raise the rent. Having a rental house for sale will stress a lot of tenants because of fear of the unknown. They don’t know what the next person will be like.

Unless there are specific laws in your area regarding tenant notification for property sale, I’d say it’s really up to you how you handle it. Think of how you’d want to be treated in that situation especially if they’ve been there for a long time.

The security deposit should transfer to the new owner at closing. The security deposit amount should be deducted from your proceeds from the sale which means the buyer would pay that much less at closing. Property taxes will also be pro-rated for the portion of the year you owned the house. If you really want to be technical, you should also give the new owner credit for the portion of the month’s rent that they own the house.

When we buy properties with tenants already in place, we evaluate the numbers based off the income it’s currently producing. I don’t like to take over a property and raise the rent on day one. When the property goes vacant, we’ll fix what’s needed and set the rent at a current appropriate amount. How your buyer handles that is completely up to them.

Thank you all for the great advise!
I will keep you all posted on how things go. If I have more questions, I know where to ask!

Thanks again!
Chrissy

You need to look at the lease agreement. In most agreements, there will be a clause on what will happen in the event of a sale. Since this is a signed legal document, the buyer will be required to abide by the agreement until the term of the lease has ended. (Of course, always check with a local attorney.)

A lease agreement gives some rights of use to the tenant. They have the right to live in the property for the term of the lease as long as they do not violate any of the stipulations of the agreement. This cannot be terminated just because the property exchanges hands.

Usually the buyer either has to wait for the lease to end or be able to prove that the tenant has violated the lease agreement and thus has the right to cancel the lease and evict the tenant.

Chrissy,
John brings up a good point about the lease conveying with the property sale. I was looking at things more from your point of view as a seller. The lease conveying with the property is more of a concern for your buyer. I suppose you could make it a small marketing point for you by saying it’s an income producing property with X months left on the lease. None of the occupied properties we’ve bought have had anything other than a month to month lease in place. Some people just have verbal agreements on the rent amount. An existing lease with months left on the terms would be more of a concern to your buyer since they would have to abide by those terms until the lease was up.

For properties that are on the market or about to go on the market, I always inform my rental applicants. I write a month to month lease with a either a 30 or 60 day notice. I also put in a clause that the tenants would agree to allow showing to take place on the property with 24 hour notice. I discounted the rent a little bit for the inconvenience.

In the end it can really work out great. On one property, I found a tenant that was looking to buy a house and did not want a years lease. The buyer was glad to have a property that was generating income until they were ready to move in. Being upfront with all parties can have some positive advantages.

johnevanmiller and justin0419,

Thank you so much for the information, very helpful.
I listed the property with an agent today. I thought about FSBO, but not that confident yet.

Thanks again!
Chrissy

Our current tenant now was somewhat “evicted” when the owner sold the house they’re renting due to financial reasons (owner’s dad had undergone 3 heart operations). My tenant agreed because of the reason behind it. The owner returned their deposit, helped them in finding a new home and also give them a certain percentage for the stress and hassles of moving out after just a couple of months. The owner even contacted me inquiring about my property. I guess, during these scenarios, open communication and transparency (between you, the potential buyers and the current tenants) are major factors in making transactions work. Good luck!