How To Prepare Your Rental Property Before Selling
There are many reasons why you may decide to sell your rental property.
Maybe you’re satisfied with your landlord career and want to liquidate your assets. You’ve benefited from the monthly cashflow and passive income, but now it’s time to invest your time, energy, and assets somewhere else.
Or maybe you’ve decided to invest in real property in a different market. You don’t want to hire a property management company or try to manage your tenants remotely, so selling is the logical next step.
Most likely, you’re simply capitalizing on a property that has appreciated a great deal and you want to move your gain into a new, better opportunity.
Regardless of the reason, you need a solid understanding of the legal, financial, and logistical steps of selling a property, which you’ll use to navigate the sales process with an experienced selling agent representing you. Every property is different, but building a basic timeline for the real estate transaction will help the process run as smoothly and quickly as possible.
Here’s what you should know while preparing to sell your rental property.
When is the Best Time to Sell Real Property?
Like preparing a house to sell, the timing of your rental sale matters. If selling is a long-term plan, it helps to strategize the timing of the sale with current market trends in your area. Any of the following are signs that it may be a good time to sell:
- High demand for housing. If buyers in your area are eagerly awaiting new homes to enter the market, now is an ideal time to sell. High demand can be identified by comparing with historical data and/or comparing the list price of properties, the average number of homes sold in a specified month or given period, or the median days on market for properties.
- High equity level. Whether through appreciation or amortization, it’s best to sell when you have substantial equity in the property. After all, if your gain will be minimal, why give up the cash flow?
- Local trends. The housing market in any local area is influenced by outside factors. Strong job prospects, population increases, or new laws may encourage buyers to flock to your area.
- High interest rates. Are you paying higher than average interest rates on your mortgage? If refinancing isn’t an option, now might be a good time to sell your rental.
Days on Market (DOM)
A common term heard in discourse around selling properties is ‘days on market.’ Days on market, or DOM, is the number of days between when a home is listed on the multiple-listing services (MLS) and the when a contract is signed for the sale (National Association of Realtors). It measures the number of days property listings spend without serious interested buyers. Low DOM indicates a hot market and/or fresh property, while high DOM indicates to buyers that the seller is having trouble selling the home for some reason.
DOM is an important metric to understand when selling a property in any local market. You’ll want to ensure that you strategize and appeal to buyer demand before you list the home, as you don’t want your home on the market longer than necessary. In a market with lower demand, your property will spend more average days on the market—which could lead to price reduction over time if the asking price is too high. High DOM can also indicate an unmotivated seller who is not interested in selling their particular home as quickly as possible. This can be a red flag to buyers who might turn to directly comparable properties in your neighborhood rather than one with high DOM.
However, if your market is hot and there are many active listings and other buyers interested in purchasing your property, this will be reflected in fewer average DOM/days on market.
Communicating with Tenants
Now that you’ve decided you want to sell your rental property, your first order of business is to tell your tenants.
Throughout the sales process, communicating with tenants will be of the utmost importance. Why? Because tenant cooperation is everything during a property sale.
Your tenants will be significantly inconvenienced by the sale, as they’ll have to tolerate frequent entries for repairs and showings, get to know a new owner, and potentially renegotiate their contracts. Be considerate by keeping your tenants in the know. This will provide enough time for those who want to move to do so, and for the rest to prepare for the change.
You might also consider offering incentives for tenants who decide to stay during the sales process. Even a small gesture like a gift card will motivate tenants to cooperate.
What Are Your Tenants’ Options?
Your tenants essentially have three options after learning about the sale. They can:
- Move out immediately
- Wait for the sale to proceed, then move out
- Continue their tenancies under the new owner
The third option is the most ideal for you and your tenants. You can leverage your current tenancies to appeal to potential buyers, while your tenants get to continue living in their homes. However, this option only works if the buyer you choose is also a real estate investor who wants to keep the property as a rental.
*Note – Your local laws may impact tenant rights during the course of a sale. A local apartment association, local lawyer, or your realtor are all good resources to learn more about what you or your tenants can and can’t do.
Repairing, Advertising, and Showing
After informing your tenants of your intention, it’s time to prepare your properties for the market. This means making necessary repairs, listing, advertising, and scheduling showings around your tenants’ schedules.
Evaluating Your Property’s Condition
No buyer wants to deal with major maintenance or repair issues.
For this reason, it’s essential to thoroughly evaluate your property’s condition before listing it.
Start by performing a pre-listing inspection. The inspection will help you identify any problems or repairs that will need to be completed before your property goes on the market.
Repairing and Preparing
Next, repair or service anything on your inspection checklist. For example, you might fix/replace light fixtures or appliances, clean the carpet, replace screens and blinds, or service the HVAC system.
This step is much easier if your units are vacant. If your tenants have already moved out, you can complete much more extensive renovation projects, such as repainting, installing hardwood flooring, or even installing property management tech, like video doorbells.
However, it’s possible to make repairs even if your units are still occupied. The key is coordinating with your tenants and their schedules.
Hiring a Real Estate Agent
The role of real estate professionals like listing agents in the real estate transactions cannot be understated. Now is a good time to hire a real estate agent or listing agent. A listing agent, also known as a seller’s agent, is a licensed real estate professional whose job is to help the seller sell their home by ascertaining the asking price of their home, staging their home, and marketing the property on platforms like the MLS. They also handle paperwork and work with the buyer’s agent to facilitate legal steps like the property lien search and deed transfer.
Before choosing an agent, listen carefully to their listing presentation. A listing presentation is the set of slides or other presentation tactics utilized by listing agents to explain how they will prepare your property for sale, including marketing, showings, and pricing. A listing presentation is a “pitch” to a seller explaining why they should hire that agent to represent them during the sales process. You should choose an agent that provides a thorough and convincing explanation of how they’ll find a great buyer to sell your property to at a great price.
Your agent will assist you in advertising, showing, and completing the necessary legal steps to sell your property. They’ll also have access to the Multiple Listing Service (MLS) to list your property. Their expertise and resources are well worth the commission costs, which are usually established through a listing agreement. A listing agreement is an employment contract between a property owner and a real estate broker. It allows the broker to act as a listing agent and find a buyer for the property on the seller’s terms. Basically, a listing agreement grants your real estate agent permission to find a buyer for your home, along with establishing commission fees and outlining your listing agent’s job, responsibilities, and obligations.
Advertising and Showing
Your selling agent will advise you on how best to advertise your property and may even have access to investor databases to help you locate a buyer.
Real estate agents are also experts on the ins and outs of the local housing marketplace. Listen to the advice and recommendations of your seller’s agent regarding house showing etiquette. Your agent can also advise you what buyers in your area are looking for and how to communicate what your properties offer.
Choosing a Buyer
What makes a good buyer?
Prospective buyers could include a current tenant, another real estate investor, or a house-hunter looking for their own place.
A suitable buyer for your property has a few qualities. First, they must have the means to pay the listed sales price or negotiate an acceptable one. Second, it’s most beneficial for your tenants if you choose an investor willing to take on active leases. The transition is relatively smooth, and your tenants won’t have to move.
If your units are all actively rented, selling your rental to another investor is further advantageous because investors will pay more if the property comes with reliable tenants who pay rent on time. This helps the new investor establish positive cash flow immediately after acquiring the property—no vacancies, tenant turnover, or advertising.
On the other hand, a current tenant or house-hunter has no incentive to pay more than the adjusted cost basis of the home (its comparable market value plus any improvements). An existing tenant is only an inconvenience to these buyers.
Once you or your agent has found a suitable buyer, your agent will work with the buyer’s agents to draft a purchase agreement for the transaction.
Conclusion
Preparing for a smooth selling process is about solidifying your intention, communicating your intention to your tenants, and taking action on it.
Respecting and listening to your tenants’ concerns is a minimum courtesy. Plus, knowing your tenants are up to speed will ease stress off the next steps in the sale: the legal processes of transferring titles, deeds, and leases. No matter your reason for selling your property, adequate preparation will ensure your property passes hands as efficiently as possible.
