How to sell a rental property with tenants

author-avatar By on July 31, 2020
How to sell a rental property with tenants

Photo by Mitchell Luo on Unsplash

As a property owner, you have the right to do what you want with your investment property to a certain degree. But your tenants also have rights, which means there are certain rules you need to abide by when selling it.

Having tenants in your property is usually ideal for the rental income it provides, but it can present complications if you decide to sell the property. That’s why you need to be aware of the do’s and don’ts and the pros and cons of selling a tenanted property.

In this article we’ll go over:

Buying an investment property or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for investors.

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) investment home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

Can you sell a property with tenants in it?

Yes, you’re well within your rights to sell an investment property that has tenants living in it, as having people living in the property doesn’t actually affect who owns the deed to the house. However, the tenants also maintain the right to live in the property until their lease expires, meaning if you decide to sell, you can’t just up and kick them out. They have rights too. We’ll go into greater detail on these rights below, touching on:

  • How much notice you need to give the tenants
  • How the lease factors into it
  • How inspections work
  • The rules around advertising the property

Pros and cons of selling a tenanted property

Arguably the main appeal of selling a property with tenants still living in it is you can continue to receive rental income right up until the house is sold, potentially giving you thousands of extra dollars depending on how long it takes.

On the other hand, tenants actually wield quite a bit of power when you’re selling the property. As we’ll explain below, they can sometimes refuse entry for inspections and can also refuse for internal photos to be taken for advertising purposes, as they live in the home and might want their privacy to be respected. Plus, if they don’t keep the home in a good condition, this can turn away would-be buyers.

Pros of selling a tenanted property

Cons of selling a tenanted property

You can still receive rental income right up until you no longer own the property.

You need to give tenants plenty of notice for both the intent to sell and each inspection

Other investors might be more willing to buy a property with existing tenants to receive rental income straight away

The tenants might not present the property in its best state, potentially harming the sale price

You can potentially sell to the tenants themselves, which could cut down on time and save money on advertising and other costs.

Tenants might be a roadblock for buyers who want a fresh start with an empty property

A property with tenants, as opposed to an empty one, might provide more proof to prospective buyers that it is a desirable property

It could cause friction between the landlord and the tenant

Melbourne-based buyer’s agent and Director of Chamberlain Property Advocates Wendy Chamberlain told Savings.com.au that if it’s a choice between selling a vacant home or a home that is tenanted, you may be better off with a tenanted home, but it will come down to how the home is presented.

“If there is too much furniture, a home will look smaller. In that case, a vacant home offers a blank canvas,” Ms Chamberlain said.

“Furniture placement will also affect the flow of the home. Again, you cannot tell a tenant to move their furniture around to open up space. 

“The presentation of a home will ultimately affect the sale price the home will achieve.”

wendy buyers agent

Buyer’s Agent Wendy Chamberlain. Photo supplied.

Ms Chamberlain gave an example of a house for sale where the tenants' had recently adopted a kitten, filling the house with the “overwhelming” smell of cat urine.

“As soon as you walked in the door it hit you. It would have been really hard to sell that house, with that smell, and achieve the best possible price,” she said.

“So once the tenant left, the home was cleaned, the carpets were replaced and the home was professionally staged. We achieved a very good price as a result.”

What are the general rules when selling a tenanted property?

Although we’ll go into a more detailed state by state breakdown in a little bit, there are general rules you have to abide by when selling an investment property with tenants in it. These rules usually centre around respecting a tenant's right to privacy, keeping them on the lease, and giving them prior notice of your intentions to sell.

1. You have to give notice

Yes, you need to actually tell your tenant of your intent to sell the property before you actually start the sales process, and generally speaking you should keep them informed about updates, such as when you’ve reached an agreement, a contract of sale has been signed etc.

This notice generally needs to be in written form, such as in a letter or email.

2. You can’t just break their lease

Basically, if a tenant is on a fixed lease (the more common type of lease) then you can’t just kick them out if you want to sell the home, nor can the new owner remove them until the lease expires. The fixed lease is set in stone, meaning if you try to sell the property with three months to go on a 12-month lease, then the tenants are allowed to stay there for those remaining three months unless:

  • They directly violate the terms of the lease; or
  • Both parties come to a mutual agreement to end the lease

If the tenant is on a periodic lease, then you can choose to evict them, but you must give them proper notice (usually between 30-60 days depending on the state). If you wish to not renew a fixed-lease, you still need to give the tenants proper notice (usually around a month).

3. You can’t just stroll in for inspections whenever you want

When showing the home to prospective buyers, inspections are often needed for them to get an idea of the home’s true value/liveability. But you can’t just show up for these unannounced - you often need to give at least 24-48 hours worth of notice for each inspection, while some states require up to two weeks notice before the first inspection and before the property is advertised for sale.

Tenants also have the right to be at the home during open homes, and in some states can even refuse an open home request pending the circumstances.

“Communication is key. You must communicate effectively and often with the tenants,” Ms Chamberlain said.

“From the first communication advising that the home is going to be sold, right throughout the entire process, keep the tenant updated.  Explain to them clearly the process, the timelines, the access to the home that will be required, the open inspection times or private inspection times and always provide them with sufficient notice.”

4. Tenants have a right to privacy

While as the owner you’re allowed to take photos of the exterior as much as you like, the interior is a different story. If you want to take internal photos of the property (such as of the bedrooms), then you need to get permission from the tenant(s). The same applies to on-site auctions and signage on the property.

Remember that tenants still live in the house, and as such might have personal possessions and information they don’t want put up on a real estate website.

Tenants' rights vary from state to state

The specific rules of selling a tenanted property vary from state to state - it’s generally advised you check your state’s tenancy laws for a more detailed breakdown of what you and your tenant(s) are entitled to.

[Read: Tenants' rights for landlords]

Below is a brief outline of the tenant’s rights by state when the landlord is selling.

NSW | VICQLDSAWATASACTNT

Tenants’ rights when selling: NSW

  • Written notice: You must give at least 30 days notice if you wish to terminate the lease at the end of the agreement period, or 14 days of notice if they breach the tenancy agreement
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement
  • Notice required for inspections: At least two weeks written notice for the first inspection, 48 hours for following inspections (no more than two per week)
  • NSW Residential Tenancies Act

Tenants’ rights when selling: VIC

  • Written notice: 60 days written notice if you wish to not renew their fixed lease
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement
  • Notice required for inspections: 24 hours of notice (no rules for number of inspections per week)
  • VIC Residential Tenancies Act

Tenants’ rights when selling: QLD

  • Written notice: Must provide written notice of intention to sell to tenants, must give four weeks’ notice if termination of the lease is mutual.
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement.
  • Notice required for inspections: Must provide at least 24 hours notice for both the first and subsequent inspections
  • QLD Residential Tenancies Act

Tenants’ rights when selling: SA

  • Written notice: Must provide written notice of intention to sell to tenants, 60 days of notice to evict on periodic lease if a contract of sale has been signed.
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement.
  • Notice required for inspections: Must provide at least 14 days of notice before advertising the property for sale, and give “reasonable notice” before each inspection.
  • SA Residential Tenancies Act

Tenants’ rights when selling: WA

  • Written notice: Must provide written notice of intention to sell to tenants. You can end a periodic tenancy by giving at least 21 days’ written notice to the lessor, the lessor can end the tenancy by giving you at least 60 days’ written notice.
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement.
  • Notice required for inspections: “Reasonable notice required” - not defined in the state’s tenancy agreement.
  • WA Residential Tenancies Act

Tenants’ rights when selling: TAS

  • Written notice: Must provide written notice of intention to sell to tenants. 42 days notice required for ending a periodic lease.
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement.
  • Notice required for inspections: 48 hours of written notice required for inspections.
  • TAS Residential Tenancies Act

Tenants’ rights when selling: ACT

  • Written notice: You must provide written notice to tenants of your intentions, eight weeks required for mutual termination
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement
  • Notice required for inspections: You must provide 24 hours of notice before inspections, tenants can refuse access if they were not previously informed of the sale
  • ACT Residential Tenancies Act

Tenants’ rights when selling: NT

  • Written notice: You must provide written notice to tenants of your intentions. 14 days notice required for ending a fixed lease at its end, 42 days for a periodic lease.
  • Eviction: No eviction can occur for a fixed lease unless the lease is violated or both parties reach a mutual agreement
  • Notice required for inspections: At least 24 hours
  • NT Residential Tenancies Act

General tips for selling a tenanted property

According to Ms Chamberlain, one of the key ways you can make the process of selling a tenanted property smoother is to be kind to your tenants and to respect their space, while understanding that it is their home too.

“Be mindful of the fact that you are entering their space and also their availability and working hours,” Ms Chamberlain said.

“Most of the tenants that we meet when working with a selling client are great folks that are happy to ensure the entire process runs smoothly.

“We ensure that we ascertain what is important to the tenant.”

For example, if a tenant works night shifts, scheduling inspections for later in the afternoon when they’re less likely to be asleep could be ideal.

She also recommends respecting the tenants' space, and not expecting them to move furniture around or declutter the home they live in.

“The property will be presented as is, unless the tenant decides to work with you regarding taking on your suggestions as to how the home could be better presented for sale,” Ms Chamberlain said.

“A sale can be very stressful for a tenant. You are introducing uncertainty, even for those that are in a fixed lease until a set date.  No one knows whether the home will be purchased by another investor, meaning they can likely stay on, or if the home will be purchased by a home buyer. 

“If it is the latter, the tenant knows that they will be homeless and need to start the hunt again to find a suitable place to live.  Be mindful of this and tread lightly.”

As a landlord you can also offer tenants nice incentives to encourage their cooperation and let them know you appreciate their understanding, such as:

  • Reduced rent, or perhaps even a week or two of no rent during peak inspection times
  • Gifts, such as movie tickets, as a thank you
  • A reference for future rental applications

But above all, keeping a clear line of communication open between you and the tenant is vital if you want to maximise your chances of a good sale.

Should you use a property manager?

The process of selling a home can be stressful for not just you but the tenants as well. If you decide to sell a home with tenants inside, then employing the services of a property manager can help with the landlord-tenant aspect of the sale.

Principal of The Rental Specialists Jo Natoli said landlords should always consider using a property manager.

“Amongst other things, a good property manager will facilitate a good relationship between owner and tenant,” Ms Natoli told Savings.com.au.

“A good property manager will help the owner maintain the value of their capital investment as well as assist in maintaining the value of their rental return. A good property manager will also assist in removing the emotion out of what can sometimes be emotionally charged situations.”

Jo Natoli

Jo Natoli. Picture supplied.

For the actual selling of the property, you can use a selling agent. Ms Chamberlain recommends moving management of the property over to the agent appointed to sell the property once you’ve decided to do so.

“It just makes coordination and access simpler. A good property manager will be able to liaise between the tenant, landlord, the vendor advocate and selling agent,” she said.

Sample letter to tenant(s) when selling the property

For a rough idea on how to start communicating with your tenant about your intentions to sell the property, here’s an example letter you can send them, courtesy of real estate website Upside:


Date

Address

Dear tenant

This letter is to notify you of the intention to sell the residential premises situated at __.

The premises will be placed on the market on __.

In the state of __ it is required that I provide ___ hours of notice before showing the premises to any prospective buyers. I will make all reasonable efforts to give you additional notice before an inspection and agree with you the dates and times of the inspections.

I appreciate your cooperation through this process and upon sale of the rental property I will be transferring the lease and security deposits to the new owner.

Please don’t hesitate to reach out if you have any questions.

Sincerely,

Your name


What about when you’re selling to the tenant(s)?

It’s entirely possible that when selling a property, the tenants themselves might want to buy the property, or they may even just approach you outright if the property isn’t even for sale. This is more likely to happen if a tenant has lived in the property for a while and has come to view it as their home anyway. For example, a young family or a couple planning a family may have grown attached to the property, and decide they want to have their name on the deed.

RateMyAgent's 2020 Agent of the Year and Director/Principal at Ray White Quakers Hill Josh Tesolin said tenants wanting to buy the property from their landlord is incredibly common.

“Oftentimes a tenant already feels as though the home is theirs, and would prefer to own the property themselves,” Mr Tesolin told Savings.com.au.

 If a person has been saving for a home while renting and likes the location and feel of the home, they will typically request to purchase the property they are already living in. For the right price, the landlord or vendor is usually open to discussing the possibility of selling.”

Josh Tesolin

RateMyAgent's 2020 Agent of the Year Josh Tesolin. Picture supplied.

Mr Tesolin said selling to a tenant is advisable under certain circumstances, and all the industry rules, regulations and laws stay the same unless both parties agree to a sale outside the general industry rules.

“The pros of selling to a tenant are that the process is quicker, easier and no marketing budget is required. Selling to a tenant is an attractive option to a seller who wants a quick, stress-free sale,” he said.

“The cons of selling to a tenant are that the vendor isn’t able to explore the market or expose their property to multiple buyers who may pay a more competitive price for the home.

“Selling to a tenant can potentially result in a lower sale price being achieved.”

On the other hand, tenants who have lived in the property for a while might be willing to pay a premium for a property they’ve become attached to, especially if there are many other interested buyers.

“My advice is to request a property appraisal from a real estate agent – this will help determine the potential market value of your property,” Mr Tesolin said.

To find a trustworthy and transparent agent in your area you can check out www.ratemyagent.com.au.

Savings.com.au’s two cents

Selling an investment property isn’t a short process, often taking a couple of months if not longer to find the right buyer and sign a contract of sale. While having a tenant in the property can be beneficial for continuing to receive rental income, it can increase the chances of complications arising the longer it takes to sell the house. That’s why you need to make sure both you and the tenants find a good middle ground, where both parties are aware of their rights and responsibilities when the property is for sale.

Remember that while you own the home, the tenants live in it, and having people streaming in and out while not even knowing if their lease will be extended can be quite concerning for them.

If you aren’t sure of how to go about the selling process, consider consulting the services of a property manager for the tenant-management side of things (if you don’t have one already) and a selling agent to help with the property sale aspect.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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