Selling A Tenant-Occupied Home in Silicon Valley
Awhile back, I showed a home for sale along the Los Gatos border with Cambrian Park (area of San Jose) to a buyer couple. It’s tenant occupied, was pretty much a mess (and on top of being in disarray was dark – curtains drawn, no lights on etc.) and the person who lived there walked us through the property, telling us things about the owners and the situation that really didn’t make my buyers want to purchase the home at all. Between the condition of the property and the info-packed narrative, my clients could not wait to leave. No sale!
If you own income property (or rental property) in Silicon Valley and want to sell it, you may be aware that a 1031 tax deferred exchange is something to consider. What you may not remember to do is to strategize about what to do with your tenants. How do you get them to be cooperative, responsive to showing requests, permit an open house and keep the place neat? And preferably, to be absent or at least quiet and out of the way when the home is shown? Or would it be better to wait until the lease is over, and then sell it? There are pros and cons to each approach, but today we’ll talk about selling it with the tenants still in place.
When residential real estate is for sale, the occupants’ lives are turned upside down. It’s no small amount of inconvenience and risk to them with the traffic in and out, the calls at all hours, the loss of privacy and on top of everything else, the risk of personal property being stolen. If you are a homeowner, you are motivated because you will get cash out of the deal at close of escrow. If you are a renter and the home you’re renting or leasing suddenly goes on the market, there’s not really a “silver lining” built into the scenario most of the time. That can set the stage for trouble and even financial loss.
And even if the tenants mean well, many not have been coached as to how to help the home to be sold – or if coached, may not feel terribly motivated to follow through. Most tenants mean well. In the extreme, though, some tenants are somewhat hostile. In worst-case scenarios tenants may do any of these things – all of which I have experienced personally:
- refuse to allow reasonable showings
- make the house unrepresentable or unpleasant (trash on the floor, curtains all closed, lights out, music loud, cigarette smoke, bad odors)
- remove the for sale sign or flyers
- set the appointment to show the home, then not allow buyers and agents in to see it
- follow or accompany agents & buyers through the home for every second, talking about the problems of the house or the owners… or smoking while accompanying the visitors, making the showing extremely unpleasant
- Be in bed or have some of the tenants be in bed during showings (even if it’s 2pm)
- Make sure that the home is over-crowded during showings – actually invite people over so that the home is packed
The law in California says that if you are going to put your property on the market, the tenants must be given 48 hours’ notice prior to showings. Making your home available to be seen with that kind of planning required will kill traffic, and without good traffic, you will not get top dollar for your home. How much will it cost you to have such restricted showing conditions? Possibly as much as 3 – 5% of the home’s value. That is a LOT of money.
There is a better solution: make it a win-win situation. Make sure the tenants buy in to the sale. To glean your tenants’ cooperation (showings with less notice, keeping the house clean etc.), you need to make it a benefit to them to show and help to sell your home. Here are some things to consider doing:
- Pay for a professional house cleaning just before the home goes on the market and is photographed for the MLS & other marketing, and perhaps weekly after that so that it shows well even if it takes a few weeks to go under contract
- Give a reduction in rent while the home is on the market as long as the home sells within 2 – 3 months or so
- Offer a move-out bonus at the end of escrow for the renters to be gone on time (preferably prior to close of escrow)
- Have time available for a reasonable showing schedule such as 10am to 7pm only M – W- F and S/S (or noon to 6pm etc.) but do have it somewhat restricted to protect your tenants
- On the for-sale sign, include a rider that says “Do Not Disturb Occupants: Appointment Only” to prevent looky-loos from knocking on the door, walking into the backyard or peering into the windows
You can negotiate these things and in turn ask your tenants to allow showings with just a couple of hours’ or one day’s notice rather than 2 days’ notice, to keep the home tidy and bright and to be quiet and out of the way during showings. You can and should explain to them to allow people in and then stay out of their way as they look through the home – if it’s nice weather, the occupants could sit on the back patio, or perhaps in one room of the home if they must be there for the showing. Better is if they aren’t home at all. Buyers linger longer when they feel that they are not intruding, so having people home at all will encourage the visit to be short, which will diminish your odds of selling.
It will be a smoother time for you and them, and more profitable for you in the long run, to make it a win for both them and you to get the home sold quickly and to have showings be similar to owner occupied homes.
Alternatively, you could give your clients’ notice to move out and then sell it empty, but often vacant homes don’t sell as well as occupied ones, so if you did that, most Realtors would then suggest that you have the property furnished and staged. That’s the topic for another article. Sometimes the best scenario is often to have the home be occupied, but clean and accessible by cooperative, happy tenants who aren’t trying to undermine your sale. If your tenants are happy with the courtesies you are extending and the financial benefits to them for being cooperative, you are far more likely to experience the win-win situation which leaves everyone better off and will get you, the seller, top dollar, because you won’t have had a vacancy period, staging costs, and other expenses associated with selling a vacant house.
Note – this article originally published in July 2010, updated today, Feb 2013.