How to Sell a Tenant-Occupied Rental Property in NYC

Selling a property can be a big undertaking, especially if it’s a rental property with tenants on a lease. This can be a tricky scenario to navigate. Fortunately, you have a few options for dealing with this scenario, and provided you can get one of them to work, the rest of the process should go reasonably smoothly.

Your Options for Selling a Rental Property with Tenants

As the property owner, you have the right to do with it as you please. However, remember that NYC tenants have certain rights that give them a say before you can finalize the sale. As such, your first step should be to review your current lease and NYC’s tenant rights and responsibilities laws. You may have some wiggle room if you prove that your tenant has violated the lease terms; in this case, you can pursue eviction proceedings to get them out.

However, that’s not the approach I would advise. Evictions can become a long-drawn-out process in NYC and should only be pursued as a last resort. Instead, try one of the following options.

1. Wait for the lease to expire

You can hold off on the sale until the tenant’s lease has expired, at this point, you may already have a buyer lined up to take the property. Of course, you must inform the tenant that their lease will not be renewed and notify them each time you bring a prospective buyer around. How well this works will depend on how the tenant takes the news.

Best case scenario: the tenant is fine with it and agrees to vacate the property without fuss after the lease expires. Worst case scenario: they are unhappy with the sale and ask for a payout to vacate the property. There’s also a risk that market prices could change dramatically, and your property becomes worth less than when it was first leased. These are risks that must be considered when taking this option.

2. Sell with the tenant in place

This is the easiest option and the one that most landlords in the situation will take. The seller gets to continue collecting rental payments until the closing day, the buyer gets a rental property that already has a tenant in place, and the tenant can remain where they are with no change apart from who they pay the rent to. Provided that both the buyer and the tenant are fine with this, everyone can benefit from this option.

That said, you will have to find a buyer that is willing to take on a property with a tenant already in place. If the buyer has other plans for the property, such as a significant renovation, or they wish to live in the property themselves, then they will be put off by this deal.

3. Sell to your tenant

The third option is to sell the property to your tenant. This can be a win-win situation for both parties, provided the tenant is interested and has the financial means to close the deal. However, a few pitfalls need to be carefully avoided with these kinds of deals.

For instance, the tenant may wish to avoid paying the full market price, meaning you’ll get less than if you had marketed the property more broadly. You may also be tempted to complete the sale informally without the support of a professional sales agent. This can go badly wrong and result in a deal that damages your best interests.

What to Do Before Listing Your Property

Even if you’re still on the fence about how to sell your tenant-occupied rental property, there are a few things you can do to prepare your property for sale. For instance, you should compile a buyer package that includes all relevant information on the property, its repair history, current rent roll, and your lease agreement. When dealing with property investors, your buyer’s package is one of the first things they’ll want to see when assessing the property.

Next, you’ll want to get a complete home inspection to identify any problems that might come up in the transaction. This can also be an opportunity to raise your property’s market value by making a few repairs and renovations where needed. How far you want to go with this is up to you. Just know that some renovations will affect the market value more than others. For example, kitchen and bathroom upgrades tend to have the most significant impact on value, though they also cost the most to implement.

Another thing to consider is your capital gains tax. This can be a pretty hefty tax on any profits you make from the sale. Fortunately, you can sell your current property and buy a new one without paying any capital gains through what’s called a 1031 exchange. However, you can only file for a 1031 exchange if the new property is considered “like-kind,” meaning it must be another rental property. There’s also a time limit to finding and closing on the new property after the first home is sold.

Lastly, you’ll want to hire a qualified listing agent with experience selling rental properties. Even experienced real estate investors still use an agent when they need to sell a property and for a good reason. The sales price alone can be tens of thousands of dollars more than what you’d save on the agent commission. Moreover, once you factor in the agent’s industry contacts, interpersonal skills, and ability to get you through any bumps in the road, hiring a sales agent is probably one of the best things you do.

Final Thoughts

There’s no doubt that selling a tenant-occupied rental property can be a bit more complicated than a conventional property sale. But like many things in real estate, every challenge has its solution. To ensure your sale goes as smoothly as possible, seek consultation with a professional real estate agent who can walk you through your options and advise you on your best course of action.