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While most landlords are in the rental business for the long haul, that doesn’t mean that you won’t be buying or selling properties from time to time. In fact, you may want to let go of some properties that aren’t your ideal investments as your management style changes. It makes sense to make continuous adjustments to how you do business.
One fairly common way that landlords like you might sell a property is when a tenant wants to buy the property that they have been renting for you. What’s the process if your tenant wants to buy your property?
Many landlords worry when this happens: “my tenant wants to buy my property; won’t I lose money?” There are some situations where you can actually make a great profit by selling to a tenant. If you are in that type of situation, it’s time to learn how to move through the sale process efficiently and effectively.
A Table Of Contents For Selling Property To Your Tenant
- Step 1. Decide If You Want To Sell
- Step 2. Hire Your Sales Team
- Step 3. Negotiate The Price
- Step 4. Review Documentation
- Step 5. Close The Sale
The first step of the sale process, of course, is to be sure that you want to sell! Often, a tenant will approach a landlord out-of-the-blue and suggest a sale because they really want to say in the house long-term. In these cases, the landlord might not yet be sure if they even want to sell!
Take some time to think about your long-term goals and the area where the property is located:
- How much equity do you have in the property?
- Are home values rising in the area?
- Is there a large rental market?
- Are there any homes in the area that would make good investments available?
By working through all of these questions, you can get a better idea of where your head is at in terms of selling the property. If you are immediately reluctant to the idea, simply tell the tenant that you are not interested at this time. If, however, you are amenable to the idea, proceed with the next steps.
Next, you will also want to make sure that they are ready to buy and pre-qualified for the right mortgage range. There is no reason to waste your time on a sale process that isn’t going to go anywhere, so it’s best to be upfront about this.
If your tenant isn’t in a financial position to buy just yet or you aren’t sure, you might want to consider adding a first-right-to-refusal clause to your rental agreement. This type of agreement gives the tenant a chance to purchase the property before others, and it can give both parties peace of mind in some situations.
Once you’re sure you want to move forward with a sale process, start building your team for the sale. You’ll want to get into contact with a real estate attorney. A real estate agent is not needed for this type of transaction because the property will not be on the open market; what you need is an attorney to represent your interests.
Typically, the buyer will set up the closing company, but your attorney can help do that as well. The buyer’s bank is also likely to require an appraisal before the sale goes through, so they will be responsible for bringing in an appraiser as well.
Ultimately, a combination of the following can get the job done:
- Real estate attorney
- Realtor (if needed in your state or local jurisdiction)
- Title company
In many cases, you will be able to find an attorney or a real estate agent that will handle the process for a flat fee. Depending on your budget for the transaction, you can make your choice about what type of team to assemble.
One of the biggest parts of the process of selling to a tenant is negotiating the sale price.
Tenant ideas about what is a reasonable and fair sale price can be very different from the ideas of their landlords. Sometimes the landlord is thinking much higher; at other times, tenants offer more than landlords expect them to offer.
Start by doing some market research on recent appraisal values in the market as well as average sale prices. By using an agency listing source, you can get high-quality information that will help you figure out a starting point.
If you aren’t sure and want an expert opinion to make sure the process goes smoothly, you could hire an appraiser for under $400 in most areas to do a property valuation. Be careful about using this, however, as the appraisal might come back lower than you expect it to.
Many landlords will set sales to tenants are the appraisal value minus 6% as realtor fees wouldn’t be needed.
The Landlord-Tenant Discrepancy
It’s important to maintain your composure and keep your patience while doing this step of the sale process.
Tenants that have lived in your properties for many years often begin to think of themselves as the property’s rightful owners, and they may even believe that the changes they have made over the years should earn them a discount. In reality, those changes might need to be reverted before you could make a market sale.
On the flip side, you know that these tenants love the property, and that’s why they want to buy! Despite any wear-and-tear, they know that the property is a good one, and they are interested in owning it. For some properties, finding a buyer on the market would be very different in comparison to selling directly to one of your tenants.
Once you’ve agreed on a price, the buyer’s attorney would usually be the party responsible for writing up the sale agreement according to local and state laws. Then, your attorney would review the documentation before any signing occurs.
The agreement should include any and all agreements that you have made regarding the sale price and extras that either party is including in the sale.
Finally, it’s time to close the sale! Before the closing, the buyer’s bank will order an inspection to ensure that the transaction can be properly financed. Your attorney and the closing company will work you through these steps. Once they’re complete, you’ll be ready to complete the closing and finish the sale.
Now you know all of the basics of what you need to know about selling a property to a tenant. The key points are to:
- Decide if you want to sell
- Hire a real estate attorney
- Decide a price
Once you have a real estate attorney or even an agent working through the sale process with you, you’ll be able to make it through the rest of the process with relative ease! In these cases, it’s always best to rely on an expert to be sure that no mistakes are made along the way.
In some ways, selling a property to a tenant is simpler than selling a property that has a tenant still living there, but both situations simply need to be handled with care and caution to ensure that you make the most profit that you can.