Selling a Tenant-Occupied Property
At some point in your real estate investing career there will come a time when selling a tenant-occupied property is needed. There are several reasons you may have to sell or you may want to buy a bigger property because your current property has reached its maximum potential with little additional upside remaining. If the property has tenants it will complicate the selling process.
The first—and most important—question you need to ask yourself is do you share your selling plans with the tenants. You are not legally obligated to but there are pros and cons to doing so. I’ve handled sales for clients both ways as dictated by the seller. I’ve never advised the tenants when selling one of my properties.
The tenants don’t have a right to know what you do with your property just as your neighbor or the mailer deliverer doesn’t. Most sales of income-producing properties don’t involve the installation of a for sale sign, to help keep your privacy.
Leases “run with the property,” meaning any leases in place will remain in place after the sale. In other words, every tenancy will remain with the same terms after the sale. However, if the buyer is a novice investor, the tenant’s quality of living may suffer due to lack of maintenance, security or from the frustration of dealing with someone who doesn’t know what they are doing or who is hostile to their tenants—something I’ve unfortunately seen. I’ve been contacted by former tenants asking for advise in situations like this.
But that is no fault of the seller. The seller can’t be held hostage to a property in order to avoid disruption in the tenant’s lives, something many governments at all levels have been attempting to do using various forms of rent control, which ultimately takes property owner’s private property rights away.
Why Not to Tell Tenants of the Sale
The reason I recommend not advising tenants of the sale is two fold. First, no matter how many ways you explain it, many tenants get freaked out because they are afraid they will be evicted, their rent will be increased or the buyer won’t take care of the property the way you did. It will take much of your time to deal with this. I’ve experienced a number of quite hostile tenants when they have found out about a sale.
Second, if tenants know the property is being sold, they may not cooperate—again, out of fear—with the needed inspections, tenant estoppels and other items needed to close the sale. There have been situations where tenants will attempt to stop a sale by leaving there unit a mess or even breaking things and then claiming deferred maintenance. They may even get an attorney involved in a futile attempt to stop the sale. This would just be more to deal with in an already stressful time of selling your property.
How and When to Involve the Tenants
Tenants are entitled to quite enjoyment of their home, free from excessive disturbance. Always give your tenants proper notice—usually considered written and served 24 hours in advance—of any needed inspection of their unit. Tenants will inevitably ask what the purpose of the inspection is. Be truthful. Explain that ti is to check the living conditions (for the buyer’s physical inspection or the termite inspection) or for refinancing (for the buyer’s lender’s approval). You do not need to say the inspections are for the sale of the property.
Excessive disturbance of your tenant’s quite enjoyment does not preclude you from selling your property, if done correctly. Most modern day leases contain language requiring the tenant to cooperate in the sale of the property. If your leases don’t have this language then get new leases in place before selling.
When the Sale Closes Escrow
Once the property has sold, it is the buyer’s responsibility to notify the tenants who the new owners are and how they may be reached. But they may only do so after the close of the purchase escrow. They have no legal right to contact them beforehand. You need to discourage them doing so very strenuously. You don’t want something derailing the escrow when it is in the home stretch.
I advise sellers to send a note or email to their tenants shortly before the close, but certainly after all of the purchase contingencies have been removed, informing them when the closing will be and that the buyer will be contacting them in short order. My company—as manager of the property—does this as a curtesy to both the tenants and the seller.