How to Sell A Property When A Tenant Isn't Paying Rent
By Mercedes Shaffer / Published in AOA Magazine
Can you sell a property when you have one or more tenants who aren’t paying rent due to COVID 19? The short answer is YES, it is just a matter of taking the right steps to ensure that you and your real estate agent understand and follow current laws regarding notices, disclosures, the eviction moratorium and nonpayment of rent.
Should I tell my tenant that I’m selling?
The first thing you’ll have to decide is if you want to tell your tenant that you’re selling. Many landlords prefer not to tell their tenants that the property is going on the market because landlords fear that the tenants will decide to move. This fear isn’t unfounded. It’s not uncommon for tenants to give notice to move once a property is listed for sale because they are worried they will be forced to move out and or they just fear change. By placing a rental property on the market, change is inevitable. For tenants this means that they will have a new landlord whom they know nothing about. Will the landlord raise the rent? Will they maintain the building and take care of repairs in a timely manner? Will they want to move into the unit or do an extensive renovation that will require moving out? If so, then once the eviction moratorium is lifted, with proper notification and compensation, under AB1482 the tenant will be forced to move.
The Benefits to Letting Tenants Know That You Are Selling
If a tenant is paying below market rent or not paying at all, and they decide to move, this could actually be an advantage when selling a property and would be a great reason in favor of telling tenants ahead of time that you plan to sell. In most areas a landlord can immediately advertise the unit for fair market rent and find a qualified tenant to fill the vacancy. This will make the property more desirable to a buyer and it will increase the value of the property.
Also, the seller could just leave the unit vacant which makes it easier to photograph, to show to prospective buyers and it enables the seller to assure that it looks clean and presentable. For the buyer, purchasing a property with a vacant unit can be an advantage for them as well because it enables them to use their own financial criteria for selecting a qualified tenant and allows them to ensure the rent is at market value. Also, if they want to move in or do any remodeling it enables them to do so right away.
From my experience, there’s no downside to letting a tenant know that you are selling the property and in fact it can make the selling process go a lot smoother. An agent who is experienced working with tenants and selling multifamily properties can notify the tenants that the property is going on the market and can be available to answer their questions and explain the process to them.
Will the sale price be affected if a tenant is not paying rent due to COVID 19?
The market value of an income property is based primarily on four factors:
1. The first one being local comps – the price that similar properties in the area have recently sold for.
2. Related to local comps, the second factor is current supply and demand. The market is highly dynamic and if there is extraordinarily low inventory and there is a great deal of demand, as is the case right now, that will push prices up.
3. The third factor in determining the sale price is taking into consideration the proforma income. This is the projected income the unit will bring in when rents are at fair market value. If the tenants are paying below market rent or not paying at all, there may be a significant gap between the proforma rent and actual rent. Proforma rent indicates the full potential of the property to derive revenue.
4. The fourth main factor in determining price is the financial performance of the property itself. This includes calculating a multiple of the current income, oftentimes referred to as the Gross Rent Multiplier (GRM), relative to the projected property value. A property is more valuable to a buyer when the rents are at market value. If a unit is vacant, a buyer can presume that the vacancy will be filled quickly and that the rent will be at market value. If a tenant isn’t paying rent due to COVID 19, this is something that would be factored in when determining the price of a property. Currently SB 91 extends the statewide eviction moratorium law until June 30, 2021 which would be a benchmark for calculating the potential loss of income for a buyer.
By looking at comps, supply vs demand, pro-forma rent and the current rental income – a seller and agent are able to make an informed decision about the list price of the property and buyers are able to assess the investment opportunity.
Does the tenant have to cooperate with the agent and the landlord?
With proper legal notice, the tenant does need to cooperate and allow showings, inspections, an appraisal, a final walk through and allow for any necessary repairs. If they don’t cooperate then they could be putting themselves at risk for a just cause eviction. It’s important that you and your agent understand your local regulations related to notices and access to occupied residential units (Civil Code 1954).
How do I sell if a tenant is not paying rent due to COVID 19?
If you have a tenant who isn’t paying rent due to COVID 19 you simply need to disclose this to any potential buyer and recognize how this could affect the offer price. Once the property changes ownership, if the tenant stays, it will be up to the new owner to manage the non-payment of rent and any possible future eviction. With the proper documentation, the seller is still entitled to collect on past due rent up until the time that the property was sold. For collecting past rent, it’s best to consult with a collection attorney.
Because the regulations are rapidly changing and can vary from county to county, it’s important to have an agent who understands the state and local laws and follows them to the letter to protect you and your investment. You want to be sure that you have an agent who is able to communicate effectively with tenants, resolve any issues that may arise, and ensures that tenants are given proper notice each step of the way during the selling process. This will maximize the value of your investment to potential buyers, minimize inconvenience and worry from the transaction, and assure that the buyer feels like they have everything they need to feel comfortable moving forward with the sale.
Mercedes Shaffer is an agent with Pacific Sotheby's International Realty and specializes in investment real estate and 1031 Exchanges. For help with buying or selling investment property, Mercedes can be reached by phone at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit her website at www.InvestingInTheOC.com. DRE 02114448.