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Selling an investment property is not as straightforward as selling a residential property. Unless the property is empty, you have a tenant to consider. Although you ‘own’ the property, the tenant has rights. This means you can’t call your local estate agent and stick the property on the market without giving the tenant a second thought. Chances are, they’ll be a bit upset when a For Sale sign appears in the front garden with no word from you!
Despite this, you can sell a tenanted property if you want out of the landlord sector because it’s not generating enough money. There are two main ways to go about this.
It’s quite common for landlords to sell a property with a sitting tenant. There are pros and cons to doing this, as we’ll explore below. You also have the option of evicting the tenant prior to selling the property. Again, this has pros and cons.
Selling a Property With a Sitting Tenant
Selling an investment property with a sitting tenant is not a problem, but the only interested parties will be other landlords.
The main advantage of selling a tenanted property is that other landlords will view it as an attractive proposition. Instead of buying the property and going to the hassle of finding a suitable tenant, it’s a seamless transition. They can earn rental income as soon as the property becomes theirs.
It’s also less costly to sell with a tenant in situ, as you have a guaranteed income for as long as it takes to sell the property. Bear in mind that it can take several months if not longer to sell a property in some areas. Even after you find a buyer, it’s common for the conveyancing process to last for 8-12 weeks. This also depends on how long searches take to come back and how competent your solicitor is.
The downside of selling a tenanted property is that you have to jump through more hoops. You can’t afford to upset your tenant, so it’s vital that you do things by the book.
Keeping Tenants in the Loop
Talk to your tenants before you do anything. It’s vital that you keep them informed if you decide to sell the property. You’ll need their cooperation if you want the sales process to run smoothly. Letting them know your plans early on will help promote trust.
Give your tenants the option to buy your property. If they’ve lived there for a long time and are happy, it could be something they would like the chance to consider. Make them an offer even if you don’t think they’re in a position to buy – it shows them you are acting in good faith.
Be clear about your reasons for selling the property. Let the tenant know their tenancy can continue and you are planning to sell the property with them as sitting tenants. Reassure them you’ll keep them in the loop at all stages of the process. Be polite and respectful at all times.
Selling to Another Landlord
Selling to another landlord allows the tenant to remain in the property. Any potential buyer will want to reassure themselves that the sitting tenant is reliable.
Be prepared for any prospective landlord buyer to look closely at your tenants. They will probably want to carry out their own tenant referencing checks and examine the terms of the tenancy agreement.
If the tenant is long-term and reliable, there should be no problems. If further checks reveal any issues, you may need to think twice about trying to sell the property with a sitting tenant.
A new landlord will want to see copies of your paperwork, such as gas safety certificates, Right to Rent records, property inventories, etc.
Transferring Tenancy Agreements and Deposits
On completion day, the tenancy agreement with your tenant transfers to the new owner, you are no longer responsible for your tenant’s actions. The existing tenancy agreement remains valid, even though you are no longer the landlord named on it. It is good practice to formally amend the tenancy agreement to reflect the change of landlord.
Reassure the tenant that nothing changes in this regard.
As a responsible landlord, you will have placed your tenant’s deposit in a government-approved deposit protection scheme – you will be asked to prove this during the conveyancing process. When you sell a buy to let property with a sitting tenant, the deposit should be transferred to the new owner.
There are different ways of transferring a deposit, so check with the scheme you use to find out what the protocol is.
The TDS, for example, offers two types of deposit protection: custodial and insured. A change of ownership is handled differently in each one.
An experienced conveyancing solicitor accustomed to dealing with tenanted property transactions should be able to handle this part of the process for you.
Apportioning Rent
Arranging for completion to take place on the day when a tenant’s rent is due is the best way to keep it simple in terms of rent apportionment. If that’s not possible for any reason, you’ll need to come to a mutually agreeable solution as to what portion of the rent is credited to the buyer if a tenant has paid in advance.
Use an Experienced Estate Agent
Not all estate agents are familiar with tenanted buy to let property transactions. If you decide to sell an investment property with a tenant in situ, look for an experienced estate agent, preferably one that’s also a letting agent. Estate agents will be comfortable selling a property with a sitting tenant. They will also have access to a large database of landlords, some of whom might be looking to expand their portfolio.
Everyone’s a winner if you can find a buyer quickly.
Selling a Vacant Buy to Let Property
The advantages of selling a vacant property are:
- Selling a vacant buy to let property is easier because it will appeal to a greater number of buyers.
- It may even attract a higher price if it’s empty, as a chain-free empty property is appealing to buyers hoping to move quickly.
- Because the property is empty, there should be fewer delays in the conveyancing process.
- Organising viewings is easy when a property is empty, and you won’t have to book viewings in accordance to your tenant’s schedule.
The main downside to selling a vacant property is that once the property is empty, you’ll have no rental income. If you find a buyer quickly, this may not be too much of a problem. If it takes a while to find a buyer, you’ll be out of pocket, especially if you are still paying a mortgage.
The other point worth mentioning is that a lived-in property tends to look better. This won’t apply if your tenant lives in squalor and potential buyers have to wade through pizza boxes and cat litter trays to view each room, but a well-kept property that’s clean and tidy looks more attractive than empty, soulless rooms. One way around this is to ‘stage’ it for viewers. However, it’s not worth the effort unless you are trying to sell a more upmarket property.
Evicting a Tenant
Evicting a tenant is necessary if you plan to sell your property with vacant possession.
Unless the tenant has broken the terms of their tenancy agreement, serve them with a Section 21 notice. You can only do this once a fixed term tenancy has ended. If the tenant doesn’t leave by the date specified in the notice, you will have to go to court to seek a possession order. Unless you are claiming for unpaid rent, you can apply for an accelerated possession order. This is faster and usually eliminates the need for a court hearing. Learn more about the eviction process from this government web page.
In order to stay on good terms with your tenant, give them ample warning of your plans before issuing a Section 21 notice, as discussed above.
Be aware that it could take months to evict the tenant if they choose to fight the eviction.
Dealing With Property Damage
Not all tenants are happy about being evicted. Some do everything in their power to avoid being removed from a property, and when they are finally thrown out, they damage the property out of anger and frustration.
It will be nigh on impossible to sell a property with significant damage. If you have any suspicions that the tenant has or is likely to cause damage, factor in the cost of repairs when budgeting to sell the property. At the very least, you may need to decorate and replace floor coverings.
It’s much easier to sell a property in good condition, and you are more likely to achieve the asking price. Buyers tend to shy away from properties that need new kitchens, bathrooms, and other expensive renovations. This is especially important if your property is at the lower end of the market and likely to appeal to first-time buyers.
Landlord buyers might not be as bothered if a property is in a poor state, but many will prefer to buy a property that needs no work. They can then install a new tenant as quickly as possible.
The Tenancy Agreement
Tenancy agreements usually contain a clause that states the tenant must allow viewings if a landlord chooses to sell the property. Do check this before you put the property on the market. If your tenancy agreement doesn’t have an appropriate clause, you are reliant on the goodwill and cooperation of your tenants.
Even if there is a clause that says the tenant must agree to viewings, you must still give them advanced notice. It’s customary to provide at least 24-hours’ notice of a proposed viewing, but your tenants might need longer if they work shifts.
Break Clauses
A break clause is useful. This is a clause in the tenancy agreement that allows the landlord or tenant to terminate the tenancy agreement early, i.e. before the end of the fixed term. If you think you may wish to sell the property before the end of your tenant’s fixed term, include such a clause in the tenancy agreement. An alternative is to give the tenant a six-month contract, so you have the option to sell at the end of the term.
Here’s what you need to know about break clauses:
- Landlords can’t activate a break clause in the first six months of a tenancy.
- You must give the tenant two months’ notice if you want to activate the break clause.
- The break clause must be fair to both parties and clearly drafted, otherwise, it is not legally enforceable.
The Right to Quiet Enjoyment
The right to quiet enjoyment is a legal requirement in landlord-tenant law. In simple terms, the landlord must not interfere with the tenant’s enjoyment of their rental property – or allow anyone else to.
Conducting property viewings is arguably a breach of a tenant’s contract, but tenancy agreements usually include a clause to give a landlord right of access. The purpose of this is to allow them to carry out property viewings and maintenance. Requesting access does not fall foul of the quiet enjoyment clause, but you must be reasonable when arranging property viewings.
Never set up property viewings without giving the tenant notice. Always discuss your plans with them first, so they are comfortable with the arrangement.
Covid-19
The Covid-19 pandemic has made selling properties challenging. Some estate agents are only conducting virtual viewings to protect sellers and buyers. Be prepared to accommodate vulnerable tenants and anyone self-isolating when organising viewings.
The government has been very clear by issuing this report. Tenant safety must be a first priority for landlords and letting agents. Carry out a risk assessment to see if you can find a safe way of handling in-person viewings.
Do bear in mind, that tenants may insist on virtual viewings rather than in-person viewings, even if they are not classed as vulnerable and your area isn’t in lockdown. If so, that’s their prerogative, and you should be as accommodating as you can be.
Preparing the Property for Sale
Throwing a property on the market, warts and all, is not the best way to achieve a decent price or quick sale. Even if you’re targeting other landlords, the more effort you put into making the property attractive, the easier it will be to find a buyer willing to pay anything close to the asking price.
Schedule a property inspection, so you can assess what needs doing. A fresh coat of paint might be all that’s needed, but if there are any problems, try and fix them before you put the property on the market.
Factor in how tidy your tenants are. If they don’t have much enthusiasm for housework, consider hiring a contract cleaner to go in and give the place a deep clean. As long as you are respectful of the tenant’s time and are willing to work around their work/life commitments, there should be no problems. Try and give the tenants as much notice as possible if you need access to the property for any kind of maintenance work.
Remember, the better the relationship you have with your tenants, the easier life will be.
Handling Viewings
Viewings can be stressful for a tenant. It’s never enjoyable having random strangers wandering through your home. To keep the peace and to avoid any problems, it is best to come to a mutually agreeable solution regarding viewings.
Where possible, organise block viewings, so you have lots of people booked to view the property over a few days. One solution is to have an open day or weekend, preferably when the tenant isn’t there. This can be handled by the estate agent.
If this isn’t possible or it’s a slow market, be as flexible as possible to avoid causing upset.
Always check with the tenant before booking a viewing. Don’t expect them to show a buyer around – that’s not their job.
Make sure your estate agent is on board with this, so they don’t anger the tenant with unreasonable requests and last-minute viewings. An experienced agent should know better, but it’s worth making it crystal clear at the start of the process.
Choosing the Right Conveyancing Solicitor
Property conveyancing is a specialist area of the law. Don’t engage the solicitor who handled your divorce and expect them to do a good job with a property transaction.
Selling a property can be a hugely stressful experience. There is a lot that can go wrong before completion day and if your solicitor isn’t on the ball, it could potentially cost you a lot of money.
The best way to minimise stress is to hire a competent and experienced conveyancing solicitor. Check the person you use has experience of buy to let property transactions, in particular, tenanted properties (if applicable).
Be wary of using a solicitor from an online-only firm, as they are often overworked and difficult to get hold of. Working with a solicitor you can speak to in person makes life easier.
Estate agents often recommend using their in-house solicitors. This can be advantageous, as it speeds things up, but only if the solicitor has the right experience.
Mortgages and Capital Gains
Finally, before you put the property on the market, check you are not still locked into a buy to let mortgage deal. Exiting such a deal early can have huge financial implications, as early repayment charges can be brutal. Unless you need to sell to release capital, it’s usually better to wait until the fixed term ends.
Speak to your lender or a financial advisor, as if you are selling with a view to buying a different property, you may be able to port your existing product to a new property without incurring a penalty.
Another consideration to be aware of is capital gains tax (CGT). Buy to let properties are subject to capital gains tax. Any gains made on the property sale above your tax-free CGT allowance are liable. The good news is that some costs can be used to offset the bill, such as estate agent fees and capital improvements made to the property. Your accountant can advise you further on this topic.
We hope this guide has offered a few useful tips if you are planning to offload a property in the next few months, but always seek professional advice appliable to your individual circumstances.
Have you bought and sold investment properties with and without sitting tenants? Has it all been smooth sailing, or have you experienced a lot of headaches along the way?
