Rentals are a huge pain in the ass. I can tell you bad tenant stories that will curl your toes. Not everybody is cut out to be a landlord. Even diehards like my husband and I question our choice from time to time. We’re still not finished the complete renovation that was required for the Crazy Cat Hoarder’s apartment, and she moved out in September! Read that post here: http://thisgingerjustsnapped.weebly.com/blog/tenant-horror-stories-the-cat-hoarder
(An update on that one – we’ve just about finished up and everything is brand new. Our property manager called me on Friday to say she rented it to a girl who works at the salon I go to, someone who I feel is the ideal tenant profile. So yay us!)
My husband obtained his real estate license in December and is working under the umbrella of Berkshire Hathaway. One thing he has noticed – the Wilkes-Barre/Scranton market is heating up. Prices are rising.
How not to sell your rental property
If you decide to sell, please, do NOT take a parade of would-be new landlords through your tenants’ apartments every weekend. That would be a huge waste of everyone’s time, and it would only spook the tenants.
What if your landlord is selling?
A word to tenants: your life probably isn’t going to change all that much if your landlord sells the building. If you have a lease, the new owner is obligated to honor that lease. If you don’t have a lease, they are still required to give you 30 days written notice before raising your rent or asking you to move. All of our tenants have leases. Also, you likely pay your rent to a rental property manager, rather than to the owner. Most investors who buy rentals don’t want to be landlords, so they will likely continue to use the same property manager. In that case your life won’t change at all.
Foreclosures are a different story. A lot of tenants I’ve spoken with have a fear of ownership change due to going through a foreclosure, which is not the same thing as a sale. A foreclosure is a legal action which effectively ends your lease. In that case, you will be given at least 30 days to move – there was a Federal law passed in 2009 after the financial crisis that extended that to 90 days notice in most cases.
Bottom line: your landlord selling the building you live in to another investor is not the same thing as a foreclosure, so there’s no need to freak out.
Avoiding foreclosure is one reason why your landlord may sell the building. Here are some others:
Reasons why it may be a good idea to sell your rental property
*You’re over -leveraged and your debt and other expenses exceed your income, or is coming close to it
*You’re really sick of being a landlord and just want out – there are other things you’d rather be doing with your time and other ways to make money
*You’re getting divorced and joint ownership of this property would keep you a little too chained to your ex than you’d like to be
*You want to move out of town and you’re not thrilled with the selection of property managers in the area
*Prices are on the rise and you could turn a nice profit from selling the property
Keep in mind rentals are still a great investment as far as getting a return on your money. If the only reason you’d sell your property is for the capital gain, be sure you have something with an even better return to put that money into. If you’re staying in the rental game, you may want to take advantage of a heating-up real estate market by doing a 1031 exchange – sell your existing rental for a good price, then roll the gains into an even bigger investment before the market heats up too much. You can defer your capital gains taxes this way. Ask your accountant for more details.
How to sell your property without scaring your tenants
Unless you’re desperate to sell, do NOT put out a “for sale” sign.
List your property with a good realtor who deals with investors. Those are a rare bird – 90% of the realtors out there sell houses to newlyweds. They’re in the retail game, the end-consumer – Joe & Suzie Homeowner - is their customer. Your customer is the investor. Call around. Do research online. Go to real estate investment group meetings – find one near you on meetup.com. Or call my husband Steve Franco at (570) 237-0124.
You could also work with wholesalers. You’ll get out of your rental a lot faster, but you probably won’t get the top price for it. Investors who buy through wholesalers are looking for cheap properties they can flip for immediate cashflow. But if you want out fast wholesalers are a great option. Steve can help you out there, too. Just don’t sign a contract with a realtor if you’re going to go the wholesale route. You’ll end up paying the realtor’s commission, even if your wholesaler sells it for you.
Show me the LOI and the POF
Once you have stealth-listed your rental property, only accept inquiries from serious buyers. This is where a good realtor who deals with investors or a wholesaler can help you out the most. You only want to show this property to people who will likely want to buy it and who have the money to buy it. You don’t want to interrupt your tenants’ lives by parading a bunch of tire kickers through their homes on a regular basis!
You are going to need a lot of pictures. Interiors and exteriors of every unit and every building. Photographs and descriptions of all the major systems: heating, plumbing, electrical boxes, anything you would want to see before you would lay down money for a property. You want to be able to show these investors as much as you can without physically showing them the building. That way when you do get a prospect who wants to see the building, they’re already about 75% sure they want to buy it. And they don’t get to see it until you have seen their LOI and their POF.
All the big commercial deals require this. And guess what – your cash flowing, occupied rental property is a big commercial deal!
LOI = Letter Of Intent. Usually non-binding, a Letter of Intent is written assurance that a buyer is serious about purchasing the property at an agreed-to price, subject to all inspections. It is less time-consuming than doing an agreement of sale, and people are usually not comfortable signing an agreement of sale before physically laying eyes on a property. If an agreement of sale is an official engagement with a diamond ring and a date, a Letter of Intent is the class ring you wear to tell your friends you’re “going steady.”
POF = Proof of Funds (or Financing) You want to make sure your buyer has the cash on hand to buy the property outright, or at least cover the down payment and closing costs along with a commitment letter from the bank that will be financing the mortgage. Realtors require this all the time, so you shouldn’t be shy about asking. It’s just good business practice!
Showing your rental property to a prospective buyer
So now you’ve found a good pontential buyer for your property. This buyer has read your property’s financial statements, seen the pictures, driven by the property to inspect it from the outside, and done all the due diligence possibly without actually walking through the property. And she still wants to buy it at a price you’re okay with getting, pending inspection. You have her Letter of Intent and Proof of Funds. Now you can notify your tenants that you (or your realtor) will be bringing someone through the property on (pick a day, at least 24 hours in advance, 72 is better.)
Make sure the buyer is available on the date and time you selected. You don’t want to have to reschedule this appointment. Even though the tenants don’t have to be present, many of them will make a point to be home. This is their home you’re walking somebody through, and many people feel funny about that.
Do you tell the tenant the building is for sale?
That I will leave up to you. I, personally, would not. I would not lie to my tenant, though, if she asked.
The reason I wouldn’t tell my tenants (unless asked point blank) would be that I wouldn’t want to cause them unnecessary anxiety. It is very likely that even if I did sell the building, their lives wouldn’t change at all. Why give them something to worry about?
If you stealth-list your property with no sign in the yard, and only show it to exclusive clientele with LOI and POF, chances are you’re only going to need to bring someone through your tenants’ units once or twice.
If you’re interested in stealth-listing your rental property with a realtor who deals exclusively with investors, or if you’re looking to buy a rental property, please get in touch with my husband, Steve Franco. Call or text him at (570) 237-0124 or e-mail him at firstname.lastname@example.org
Steve also heads up the real estate investors group Investors Network NEPA, which meets the second Wednesday of the month, 7pm at the Iron Skillet inside the Petro Truck Stop in Dupont. The next meeting is April 13th, and it’s listed on meetup.com