Investors who own and operate income property, whether it’s single family homes or small to mid-market multi-family buildings, tend to fall into two categories when it comes to feeling a sense of obligation to their tenants, they either do or they don’t. There’s usually not too much gray area with this one. Neither is right or wrong. Real estate is a business but it’s a people business and relationships with tenants can get in the way of monetary business decisions.
When you decide to sell an investment property, the potential for tenants to be impacted negatively is high. From allowing access to the property for potential buyers to dealing with uncertainty about their futures, tensions can run high for your tenants. But they don’t have to.
The key is to clearly inform your tenants of what your intentions are and how they might be affected if a sale takes place. Making sure you or your broker relay that information clearly and thoughtfully ahead of time, will make a big difference.
Here are four things you should never tell your tenants:
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1.) It Will Be Up to The New Owner to Decide What Happens to Your Leases.
True, but only with regard to renewing or extending leases. Your tenants have rights and those rights granted by the leases will be transferred with the sale. The new owner will be obligated to honor the terms of the existing leases. It’s important to be very clear when it comes to discussing leases with your tenants. What might be just an income producing asset to you, is their home and people tend to get uneasy with uncertainty when it comes to their homes.
2.) No Repairs Will be Made Prior to Selling
This is something that might be “inferred” as opposed to “said.”
Outstanding maintenance issues that exist while you are trying to sell your property are best repaired ahead of time, or immediately if they pop up during the process of selling. I try to avoid buyers interacting with tenants as much as possible because you never know what a tenant is going to say, good or bad.
If you have outstanding maintenance issues, just imagine how that conversation will go. The price either just went down or you lost a potential buyer. It’s that fast.
3.) You Can Re-up Your Lease Now Before I Sell
Never do this if you are trying to maximize the sale price and you have below market rents. The only reason someone would want to re-up a lease prior to a sale, is to lock in something that is providing a benefit. If they have a kids in the local school system or simply don’t want to move for a while, that is one thing to consider, especially if they are paying market rent.
If you have long-time tenants, on a month to month basis or at the end of a lease and they pay below market rents, raise the rents to a market level or just a tick under. Remember, if someone is paying you below market rent, you are subsidizing their cost of living at your own expense.
4.) We’re Not Going to Return Your Security Deposit
True, you are not going to return the security deposit to your tenants, but you will do so indirectly when you sell the property and the security deposit funds transfer to the new owner. This has the potential to scare a lot of tenants, as it leaves the door open for them to get jammed by the new owner for repair costs associated with wear and tear to the unit upon moving out. In theory, the buyer is purchasing “as is”. Any improvements or repairs needed will be considered in the final sale price. Relay that to the tenants.
If you have issues with tenant uncertainty regarding their security deposit and it’s causing significant problems, you might consider creating an addendum to the lease that photo documents the current condition of the unit and notes that no funds will be retained from the tenant security deposit to upgrade the current condition upon moving out.
Make sure this addendum is agreed to by the buyer before the closing and signed by the buyer at closing. That’s truly going above and beyond, but maybe you fall into the category of having a sense of obligation to your tenants. Not a bad thing.