No, we’re not giving up and selling out. This is a strategic move.
Steve just got his real estate license in December. Now that he’s a full-fledged PA realtor he has his pulse on the local housing market daily. And he noticed that prices are rising. People are paying more for properties. We’ve been trying to find good investment houses to flip and have been running into the problem of higher acquisition costs. So we thought, let’s list the rentals then. Why not get on the right side of the market?
We don’t have to sell our rentals. Yes, they’re a pain in the ass, but that’s the nature of the business. We’re working with a rental manager now, and that’s freeing up most of the time we used to spend dealing with tenants and maintenance issues. And they do make money – there were times this past year when the rentals were the only facet of our business that did! So why sell them?
It took some convincing on my part to get Steve to list them. He said it felt like cutting off our toes. But not really!
We’ve listed our properties at very reasonable prices, based on real-life rents and expenses. Everything is priced to bring the investor-buyer a 10 to 15% capitalization rate. Closer to 15 than 10. That’s a really good deal – and a heck of a lot more than we originally paid for most of them! We are definitely not selling at a loss.
Investors note: if you are thinking of listing your rentals for sale, contact Steve and he’ll plug your numbers into his formula to arrive at the 10-15% cap rate that will attract investors. He’ll even list the property for you under Berkshire Hathaway if you’d like – Steve is an investment property specialist for them! Call or text (570) 237-0124.
Thinking of selling your rental? Don’t spook the tenants!
We’re being very picky about the type of buyer we would even show the property to. There are no “For Sale” signs in front of the buildings. They’re on the Multiple Listing Service (MLS) where realtors working with investor-clients can access them. We will give our financials and extensive pictures to any realtor with an interested buyer, but if that buyer wants to see the property we need to be fairly sure he or she is serious. So we require a letter of intent and proof of funds/financing before we set up any showing of an occupied unit.
This is certainly not designed for a quick sale, but like I said we don’t need to sell! This way we can offer our properties at the right price for us, to serious investor-buyers, with minimal disruption to the lives of our tenants.
What if your tenant finds out you’re selling the building?
Be prepared for this. Consumer internet sites like Zillow and Trulia pull listings right off the MLS immediately and without permission. It’s up to the listing agent to ask those sites to take down the listings after the fact. This is a bone of contention with the Board of Realtors, believe me.
Almost immediately after Steve had listed the property, the tenant found out on Zillow and went ballistic. Tenants tend to take this sort of thing very personally (yet somehow we're not supposed to be offended that they're looking on Zillow to move out of our rentals!) They don’t think about the fact that the property owner actually has the right to buy and sell his own property without the tenants’ consent. They see it as a betrayal of trust. That is 100% wrong – but at the same time I can see it from their side. This is their home, where all their stuff is and where they sleep at night. Finding out it’s for sale may put a tenant in a state of panic. They irrationally believe the property is going to sell tomorrow and they’ll be out on the street. It just doesn’t happen that way!
Let me explain and try to soothe some fears:
Most buyers of investment properties think a tenant living in the unit is a GOOD thing. If an investor is buying a property based on its ability to provide income, they’re not going to evict the source of that income! If you’re paying your rent in full and on time, you likely have nothing to worry about. If you’re not… well, you’ll have something to worry about whether or not I sell the property!
Read your lease – unless there’s a termination clause regarding the sale of the property, the new owners have to abide by the terms of your lease, whether or not they want you there! Here’s what our lease says:
34. SALE OF THE PROPERTY
(A) If Property is sold, Landlord will give Tenant in writing:
1. Notice that the rent, fees, lease and application details and Security Deposit and any advanced rent has been given to the new landlord, who will be responsible for it.
2. The name, address and phone number of the new landlord and where rent is to be paid, if known.
(B) Tenant agrees that Landlord may transfer all tenant information, deposits, and advanced rent to the new landlord.
1. New owner has the right to end the lease according to the terms of the lease.
Our tenants have nothing to worry about. Even if we sold the property, and the new owner wanted to move in to one of the occupied units, he would have to wait until that tenants’ lease was up. And he’d have to give the tenant 15 or 30 days minimum written notice to vacate. Most people are more considerate than that – if I were taking over a property I would give the tenant as much notice as possible that they’d have to move. It’s just common courtesy to your fellow man – and besides that, most landlords HATE eviction court and want to avoid it at all costs.
Tenants beware: if your lease has a termination clause in the case of a sale, and you signed it, that means the new owner can exercise his right to give you minimal notice to vacate. Also, if you’ve been living there past the expiration date of your lease, and you never signed a new one – unless there’s an automatic term renewal clause in your lease you are considered a month-to-month tenant. That means the new owner can have you out with just 30 days’ notice.
Foreclosure and Condemnation
Tenants should also note: everything I’m writing about here only refers to the sale of the property – a voluntary transfer of ownership. Foreclosures are a different animal. If the bank forecloses on a rental property, they can kick you out, lease or no lease. I believe they still have to give you a 15 or 30 day notice to quit, however, and they have to go through the proper channels in court if you can’t or don’t move by the deadline.
If the property is shut down by government agency – if the landlord didn’t pay the water bill and code enforcement shuts the building down because there’s no water, for instance – you will have to leave immediately.
Unfortunately, your beef is with the deadbeat landlord. If he didn’t pay the water bill or the mortgage, it’s not going to be easy getting your money back. But you should try anyway. And there are agencies that can help you get replacement housing such as the American Red Cross and CEO- People Helping People.
Foreclosure and condemnation are the main reasons tenants are spooked by the prospect of the landlord selling the property. They’ve heard horror stories from friends and relatives run out of their homes by foreclosure or condemnation – there’s been a lot of that going around in NEPA since the market crash of 2008. It’s how we were able to pick up so many properties so cheaply in the past few years! But I want to drive home the point to tenants that a private, voluntary sale is not the same. Chances are your life won’t change one bit. Since our properties are managed, the new owner will most likely keep the manager - most investors don’t want to be landlords!
Make your landlord an offer!
Our tenant did, after he got over being angry about the fact that we listed the property without his permission.
He’d offered to buy this property from us before, but his previous offers were too low. We’re not looking to off-load our investment properties unless the price makes sense. That may be why he was so offended when we listed it. But he’s since calmed down, and is talking to my husband about seller financing.
I told Steve to write him up a standard rent-to-own offer. We’d take a $5,000 non-refundable deposit, and a reasonable monthly payment that would include the cost of taxes, sewer and insurance. The term would be for three years, after which time the tenant-buyer would refinance with a bank, pay off the balance and take possession of the deed. If he can’t refinance at that time, we could extend the term.
I’m interested to see if this deal works out. Will a tenant be able to make the transition to property owner – with all maintenance now being on him? And how will he handle the role reversal of being a landlord himself, if he chooses to rent out the other side of the double block for income?
Well, I could give him some pointers…