The Hampton Roads Multiple Listing Service
REINCheck Podcast Episode 12
Selling a Property with a Tenant
Episode 12 Podcast Transcript
Voiceover [00:00:06] You're listening to REINCheck with Andrea Rice, Contracts and Industry Specialist at REIN, where you get the latest member news and information delivered straight from the source, REIN MLS.
Andrea Rice [00:00:20] Hello and welcome to REINCheck. I am your host, Andrea Rice, and today we're checking in with REIN's Sales Manager Advisory Committee member Edwin Rucker and REIN's Property Manager Advisory Committee member Al Patel to discuss the ins and outs of selling your property which has a tenant. Al, Edwin thank you so much for being here today.
Edwin Rucker [00:00:41] Excited.
Al Patel [00:00:43] Great to be here.
Andrea Rice [00:00:44] Yeah, this is exciting because, you know, in the past we've had either SMAC people on or PMAC people on but never SMAC and PMAC together. So, I'm really excited to have you both here today. So, let's talk about what it's like to list and sell the property when there's a tenant residing in the home that is being sold. Al, from a property management perspective, what does this look like?
Al Patel [00:01:10] So, with an existing tenant in the property, there's two things, two situations that's going to happen. One is when a tenant is going to move out at the end of the lease, which will happen before closing, or if the tenant is going to stay with the property after the closing. If the tenant is moving out, then the property manager will basically finish out the lease. They'll do the move at inspection and address any items that the tenant may have been. The tenant gets charged just for damages, not normal wear and tear. The security deposit, minus the damages if there are any, then goes back to the tenant. The property manager will most likely coordinate the repairs and everything associated with the move out. If there are any issues that the buyer finds during inspection or walk through or whatever, the listing agent will handle that as part of the sales transaction. The transaction does tend to go smoother if the lease and the sales issues are kept separate. Now, if the tenants are going to stay in the property after closing, then there's a couple more things we need to think about. While the lease stays with the property, the management agreement does not. So, unless the buyer enters into a new property agreement the property management agreement with the property manager, the buyer really doesn't have anything to do with the existing management agreement. In some cases, the seller may actually end up owing management fee for the remaining term of the lease. So, let's say there's six months still left in this lease, then the seller landlord could be obligated to pay that management fee to the property manager for those six months. The buyer will become the landlord at closing and then we'll take over all the obligations of the landlord. The seller, through their property manager, will have to inform the tenant that a security deposit has been transferred to the buyer. Will become the new landlord. The buyer will have to then inform the tenant where to send future rent payment and who to contact for maintenance. Naturally, this process will go a lot smoother if the buyer hires the same property manager who can continue managing the property. But that doesn't happen often.
Andrea Rice [00:03:48] Interesting. And Edwin, how does this same situation look from the perspective of the listing agent?
Edwin Rucker [00:03:56] OK, as the listing agent, there are a number of things to consider. I don't know if we can cover them all in this podcast, but has Al alluded in most cases, the tenants will complete their lease. And the listing agent, you more likely will be showing the property with the tenant in the property. And as a listing agent, you'll want to coordinate with the tenant acceptable showtimes. Most leases state that the tenant will cooperate with showings and that they will be given reasonable notice. And reasonable notice is anywhere from 24 to 48 hours. You can ask 20 different people and get 20 different answers on that. But 24 hours is the rule of thumb that I use, and I try to negotiate that with the tenants. In most cases, they do. But every now and then you get a stubborn tenant, and I'll default to the 48-hour notice period. And I'll review the lease to make sure that that's not some other exceptions in there, because sometimes there could be. Another concern as a listing agent is getting marketable pictures. Oftentimes tenants are getting ready to move out. They got boxes packed and, you know, the house just doesn't show as well. So, in those scenarios, I typically will default to any pictures that I may have had before that tenant moved in. And now we use those pictures and put something in the agent remarks letting them know that these pictures are staged pictures. Some other things that you might consider is that sometimes tenants are not comfortable with lockboxes being put on the property. Again, you know, communication is key. And I communicate with the tenants that I will put a CBS code on it, which I would recommend because you've got tenants sometimes you got kids and pets and you need to be able to control when other people can get into that property. And let them know that, you know, anybody that's going to show that property, you know, we're going to know who they are and we will get notified as soon as you open that box. So we can keep track of the showings. Sometimes you might run into scenarios where tenants are just adamant that they are not going to allow a lockbox on there and they actually want to be the ones to schedule the showings and actually be present during the showings. And again, you have to make sure that's communicated. And I've seen it where a lot of agents will put in the showing instructions call for showings, and that typically works out. And again, there's a lot of ways of doing it.
Andrea Rice [00:06:39] Yeah, interesting, there's definitely a lot to consider. With the hot real estate market and low inventory, are you seeing more instances of tenant-occupied listings?
Al Patel [00:06:50] Well, from a property management standpoint, we are seeing several of our landlords taking advantage of this market. A significant portion of our landlords in this area seem to be, what we call, accidental landlords. These are the people that didn't really set out to become a landlord. They just couldn't sell the home for whatever reason in the past, upside-down equity or whatever, and decided to put the property with property management. With prices going up now, several of the landlords are beginning to sell. When the lease comes up for renewal, instead of renewing the lease, landlords are saying, hey, you know what notify the tenant. We're going to sell. We're not renewing the lease. In some cases, they're not even waiting for the tenant to move out before putting the property on the market.
Andrea Rice [00:07:44] And Edwin, what are you seeing?
Edwin Rucker [00:07:46] My observations are similar to those of Al again. Most leases require that make the property available for showing up to six days prior to the lease expiration. And I, communications again is important, but I always default to the owner's desires. But if the owner can afford to wait until the property is vacant and any repairs or updates can be completed, I would recommend that before putting the property on the market. But in a market like we got today, just about anything you put on the market will sell and you probably would get more than what the records will tell you that the property is worth. So, I would, you know, kind of follow the owner's desires there. But again, if you can wait, if no one can wait until the property is clear and prepared, you can probably get a little bit more for the property than you would of the tenant still in there.
Andrea Rice [00:08:40] Yeah, interesting. I guess another question I would have would be, are there any special considerations a landlord or seller should consider if the property is being sold as an investment property with an income stream?
Edwin Rucker [00:08:57] Yeah, I'll take that one on. Without making this more complex than it need to be, you know, if you be marking the property to an investor, sellers would need to understand that most investors are not going to pay full price for the property, even if they're going to hold that property for a few years and rent it. And if they're going to do that, they will still be looking for, in most cases, some type of a positive cash flow whether it's a couple hundred dollars might be five or six hundred. You know, it depends on what the goals are. But most investors, you know, if they're going to flip the property, they're going to be looking for a 25% profit margin after they pay all the expenses. That includes [inaudible] the property, paying closing cost. And then after they actually own it, they got to do whatever renovation they're going to do to it. And then they got to relist that property, and they got some carrying cost there. So, after all that is paid, they're going to be looking for an approximate 25% on a return on their investment. So, that means that they're going to have to purchase that property at a really, really low price. And then at today's market, probably not the best market for someone that's going to be trying to flip a property. If an investor's going to buy, they might want to think about holding it for a few years and let the market quiet down a little bit.
Andrea Rice [00:10:17] Yeah, it seems like there's definitely a lot to consider any time there's a tenant in the property and you're looking to sell. What are some tips for making the process run smoothly?
Edwin Rucker [00:10:27] You know, some of the things that you might want to consider to make the process run smoothly, you know, again, communication, communications. Sometimes you might want to do inspections in advance. So, you know, but the overall condition of the property is. You know, if possible, get some of those repairs done before putting it on the market. You know, just so many different things that you can do to make that property marketable, because that's all key. Is making it marketable so you can get the best value for the seller.
Andrea Rice [00:11:02] Al, do you have any tips for making the process run smoothly when you have a tenant in the property that you're selling?
Al Patel [00:11:09] Yes. I would like to echo Edwin's comment here as far as communication goes. The best thing you can do is get the tenant involved in the process right away. If the buyer is going to take over the lease and keep the tenant in there, not make that much of a difference to a tenant. But if the lease is not being renewed just because the owner is selling, the tenant may feel a little differently. If the house goes on the market while the tenant is still living there, then the tenant is the one that will have to be contacted for every showing. They will have to make their home available to a home inspector, termite inspector, appraiser and basically any other inspector that the sales contract may require. They may even have to put up with some repairs being done as a result of some of these inspections.
Andrea Rice [00:12:03] Right, yeah. That's important to keep that.
Al Patel [00:12:07] Keep them informed to the process. If there's an offer that comes in as a result in a showing, you know, let the tenant know there is an offer and then when it turns into a contract that there will be a home inspection happening and then what happens after the inspection and so on. So just keep the tenant involved. That's all.
Andrea Rice [00:12:26] Right. Good point. And Al. Edwin, before we sign off, is there anything else that you would like to add that we haven't covered already?
Al Patel [00:12:35] Well, we've covered communication, which is the biggest thing. That is going to be a key to the successful sale here. If a property manager is not the listing agent, let's say, then this becomes even more critical. They need to be on the same page because at the end of the day, they work for the same client. Recently, I received a call from an agent to let me know that she just listed the property for sale, and if I can get a key that she can get a key from me to put in a lockbox. Obviously, that wasn't the best way to start this transaction. We did eventually close, but it just wasn't as smooth. On the flip side, I'm involved with two transactions at the moment where the listing agent contacted me even before they signed the listing agreement. We're basically in step through the entire process. The listing agent keeps me informed. I coordinate everything with the tenant, keep them informed. So, it's running a lot smoother which that's the biggest takeaway here is the communication piece between the listing agent us and the tenants as well.
Andrea Rice [00:13:50] Yeah, I would say, I mean, especially because in these transactions you have more people involved than when you just have a homeowner selling. You have that extra component. So.
Al Patel [00:14:03] And the market's moving really fast, too, so that adds another level of complexity.
Andrea Rice [00:14:07] Right. Well, Al, Edwin thank you so much for being here today to discuss the ins and outs of selling a property that has a tenant in it. I really appreciate all of your insight and your time. And for all of those out there listening, I hope you enjoyed this episode of REINCheck. If you missed any of the previous episodes, I do invite you to go to REINMLS.com/podcast to take a listen. And we were lucky enough to have someone from SMAC and from PMAC here today. And as always, if you have any suggestions for our Sales Managers Advisory Committee or Property Managers Advisory Committee, you can submit those suggestions to SMAC@reininc.com, and we will make sure that your suggestion gets on an upcoming meeting agenda. Again, thank you Al thank you, Edwin. Thank all of you out there listening. And everyone have a great rest of the day.
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