Sell Vacant and Raise The Rent
AM 570 Podcast
Column from The Wave
Always sell your 2-family house vacant and always raise your tenants' rent.
I'm often asked to sell 2-family homes with a tenant occupying one of the units. Usually, the tenant has been there for years. This is especially true when selling estate-owned properties. Long-term tenants typically pay an under-market rent. The seller’s bottom line is then hurt by the inability (and reluctance) of the tenant to find a similarly priced alternative apartment. Even when the tenant pays fair market rent, sellers still need to get them out in order to achieve the highest possible price. Fact is, the market shrinks when selling an occupied house and that produces a sale for less than the highest possible price.
Understanding the market is extremely important: 2-family homes are typically owner-occupied. Owners often fill both units with their immediate and extended families. Others pool their money and partner with a fellow owner-occupier. Even if a tenant is paying a great rent when selling a house, these aforementioned types of buyers will pass on the listing because it simply doesn’t fit their needs. Investors occasionally purchase 2-family houses too, but prefer to select and screen their own tenants rather than inheriting them from sellers. Both occupied and below market units always shrink the pool of buyers; Those remaining buyers offer much less money to purchase occupied houses, especially one with a relatively low income. Accordingly, it's prudent to bring 2-family houses to market promising “full possession” at closing (meaning the house will be delivered fully vacant). The size of the market, and as a result the offers, will then be maximized. In essence, there’s nothing good that comes from selling a tenant-occupied 2-family home yet it remains a common hurdle that brokers need to overcome when first meeting with sellers.
Usually after a lease expires, tenants continue on a month-to-month basis. At the first meeting, I always recommend sellers immediately give their tenant notice to vacate. If the tenant happens to still be under lease, and refuses to leave, my pragmatic advice then is to negotiate a buyout prior to listing. As a fiduciary and advocate of the seller, it's my job to do whatever I can to get their property sold, and for the highest possible price. To that end, I often have to deal with this uncomfortable situation and assist in vacating the apartment by either voluntary surrender, helping the tenant find a new apartment, or even guiding the seller through an eviction process if need be. It behooves the seller, and therefore me, to be gentle but unwavering in doing so. Long-term tenants sometimes develop a sense of entitlement, and even ownership, that sellers don't always immediately recognize. I often encounter this, but more so when selling properties that are (or were) owned by the elderly. Rather than appreciating the deep monthly discounts they’ve been receiving, many tenants conversely feel they’ve earned the right to pay a below-market rent, for one reason or another. Whatever the case, paying one's rent on time and being a good tenant should be expected; Discounts should not. Throughout my career I’ve gone to great lengths negotiating buyouts and resettling tenants. Many are upstanding and cooperative people, but the most troublesome and problematic cases usually begin with a landlord (or heir) who emboldens their tenant by undercharging rent and being overly gentle with them when commencing the selling process. Some tenants have good intentions but others simply do not. Tenants have rights, no doubt, but they don't have the right to cost people the ability to sell their home or get the highest possible price when doing so.
