Congratulations! You’ve decided to sell your rental property!
After all those months spent collecting rent and repairing leaky faucets, maybe now you’re going to use the profit to buy a larger home for yourself. Or maybe you want to put your money to work in other ways. Whatever the reason, you want to make sure you do it right. Your time and money are both going to be on the line.
With that in mind, here are 8 mistakes that you should avoid when selling a rental property with tenants.
1. Not discussing your plans with the tenant first.
You’d be surprised how helpful a 20 – 30 minute conversation with your tenant about selling the property can be. Some of the logistical aspects, such as showing the property to buyers, are much easier to discuss over the phone than in an email thread. Here in our state, the Arizona Residential Landlord & Tenant Act has specific terms in it related to landlords showing the property to prospective buyers, which you should review with your tenant if the property is going to be marketed while the tenant is still living there.
2. Refusing to complete any disclosure statements about the property.
Many investment property sellers think they can refuse to provide property disclosure statements because they have never lived in the property themselves. However, Arizona law requires sellers to disclose material (important) facts about their properties, whether or not anyone specifically asks for the information.
3. Not researching how much your closing costs and capital gains tax are going to cost.
Selling an investment property carries with it a number of costs, which are different – possibly higher – than the costs you paid when you bought the property. For example, unless you plan on purchasing another property through a Section 1031 exchange, your profits may be subject to a federal and state capital gains tax. Also, if you are a foreign person or non-resident alien, your escrow/settlement agent may be required to withhold 10% of the sales price until you file your next income tax return, per the Foreign Investment in Real Property Tax Act.
4. Marketing the property while a difficult tenant still lives there.
We often recommend that home sellers let their tenants move out before listing their homes for sale, because in our experience, most tenants either make showings more difficult and/or don’t leave their homes as show-ready as buyers expect. Secretly, some tenants haven’t found their next home yet, so they figure the longer the sale takes, the longer they’ll get to stay. Just a few months ago for example, we had a gorgeous and well-priced, but tenant-occupied, listing. Despite all of its wonderful features, it sat on the market for three weeks, during which time the tenants allowed very few showings and we received several negative comments about the home feeling cluttered. At this point, we suggested that our clients take the home off the market temporarily, wait for the lease to end, and the tenants to move out, which they agreed to do. One month later, we re-listed the home as vacant, and after just four days, it was pending sale at 99% of list price!
5. Not considering the time of year before choosing your list date.
Here’s a tricky one. Many rental property owners decide when to sell based on when their tenants’ leases are due to expire. For example: listing on January 1st because the lease ends on December 31st. However, you may want to consider whether the month when your lease ends is the best selling season for your type of property (a single family home in a well-known school district vs. a small condo overlooking a golf course). If the demand is expected to be greater in the next 3 – 6 months, you can ask your tenant if he/she would like to extend the lease by a few additional months.
6. Allowing the home to be photographed without seeing it first.
In a perfect world, you should walk through your investment property with your Realtor so you can discuss its condition and how to market it together. When that’s not possible, ask your Realtor if you can video-call (FaceTime anyone?) in while he/she walks through. And if that won’t work either, your agent should at least send you a few preliminary pictures or a short video to review. The point is, you want to see the property before the public does so you can put yourself in a buyer’s shoes and then make any adjustments that will help the property sell faster, for more money, or both.
7. Not making any repairs or addressing the curb appeal.
Putting your rental property on the market as quickly as possible can be tempting. After all, the sooner it’s listed, the sooner it’ll sell, right? Not necessarily. The “normal wear and tear” your tenants lived with for years may be deal-breakers for buyers in today’s market. Should the interior walls be repainted? Does the front door need to be replaced? How do the bushes in the front yard look? If you can, take a look (either in person or online) at three to five comparable properties that are either active on the market or pending sale. This will give you a better idea of what home buyers in your desired price range are attracted to.
8. Hiring a Realtor who isn’t experienced in selling investment properties.
This tip is pretty straightforward. A professional Realtor who is familiar with selling investment properties should be able to give you the advice and referrals you need in order to avoid making these 8 mistakes. On the other hand, an inexperienced agent who, perhaps, has only represented a few buyers might not be comfortable giving advice such as whether the demand for your property is usually greater in the spring or winter.
Are you thinking about selling a rental property this year? If so, we’d be very happy to help you, too!