Selling a tenanted property
It’s easy to see the benefits of renting out a house or flat. As a landlord, you can expect to receive a useful monthly income and still own an asset which may increase in value, but the reality of the rental market can be challenging at times. Selling a tenanted property is a little more complicated than a normal sale, but it might be the best option for your individual situation.
While the personal or financial reasons for a sale might be stressful, showing consideration for your tenants can help the process go more smoothly. It can help you to achieve a quicker sale, and a higher offer, for your house or flat. Selling a rental property doesn’t have to be difficult.
Why sell a tenanted property?
There are a number of reasons for landlords to consider selling a tenanted property despite the benefits of a rental income and an appreciating asset.
If your personal situation changes suddenly, or your finances become strained, a quick sale might be the best solution. Or you may have just found that owning and managing a rental property is more involved and less profitable, than you expected.
A 3% stamp duty surcharge on second homes and buy to let properties was introduced in April 2016, along with tighter rules on mortgage lending in the same year. This has slowed the number of potential landlords looking to invest, meaning that the prices of rental properties are now more susceptible to a fall in house price than in recent years.
Alongside that, Section 24 of the Finance (No.2) Act 2015 has reduced the amount of mortgage interest costs which can be offset against your total rental receipts to 20%. This is combined with increasing regulations for landlords, including stricter requirements for energy efficiency, compulsory electrical certifications and more.
So you may find your overheads increasing and your post-tax rental income has gone down at the same time, especially if you have a substantial mortgage on your tenanted properties.
It may also just be a good time for you to sell. If you want to release equity for other uses, or your property needs a substantial amount of refurbishment, then it can make sense to sell a tenanted house or flat.
Before deciding to sell and putting the property on the market, it’s worth talking to an Independent Financial Advisor (IFA) or accountant to check whether it will help you achieve your short or long-term goals. You may want to consider working with a letting agent to remove the stress of managing rental issues, or remortgaging for a better deal, alongside selling your property.
You will also want to check your liability for capital gains tax, which can be up to 28% of the increase in value of your investment, but can potentially be offset against improvements.
Should you sell a tenanted or vacant property?
The key choice you face when selling a tenanted property is whether you want to proceed with sitting tenants, or to make the home vacant before selling. Both options can have benefits, depending on your objectives and the details of the rental agreement in place.
The advantage of selling a tenanted property with renters in situ is that you will continue to receive income until the transfer is completed. House sales can take longer than expected, so the loss of rent can become substantial, especially if you also need to refurbish to secure an offer.
Good, reliable tenants may also help you to secure your asking price, as your potential buyers will be existing or prospective landlords who may be happy at receiving immediate income from the property without having to do any work themselves.
The downside is that it limits your market and the options for buyers. Sale prices tend to be lower for properties with sitting tenants as it limits the option for new landlords who may want to introduce new tenancy agreements, increase rents, or redevelop the property, and it rules out offers from anyone wanting to buy a home for themselves.
If you decide it’s better to offer a vacant property, it means either waiting for an existing tenancy agreement to end, or issuing a Section 21 Notice to require tenants to leave (under the most common Assured Shorthold Tenancy agreements which will often only have an initial 6 or 12 month fixed term). Any mistakes with the information or wording of this document can render it invalid and if you’re inconsiderate with your tenants, they can choose to make things more complicated during the sales process.
How to deal with tenants
It’s beneficial to keep existing tenants on your side whether you’re asking them to stay or leave. If you can be respectful and considerate, it will hopefully mean they’ll be more helpful in selling your property.
Informing them of your plans, and offering them first refusal can be a good first step. While they may not be able to buy the property, it shows some appreciation and may end up securing you a quick sale with reduced costs.
You can also assure them of good references for their future landlord and explain the process for their deposit, which means it will be retained in full. You may want to incentivise them by offering discounted rent for a set period, or a contribution to their moving costs if they’re leaving your property.
Most tenants are generally good people, who pay on time and take care of your property. So keeping them on side will be beneficial, especially if you need to arrange visits for home viewings or want access to undertake any repairs and refurbishment before putting the property on the market.
But you also want to avoid dealing with problem tenants, as this can mean resorting to formal eviction notices. While a Section 21 notice to ask tenants to leave may be commonly used to end a rolling term tenancy, a Section 8 Notice is usually a last resort which may involve going to court.
Selling to another landlord
Whenever you’re selling a home, there’s plenty of paperwork required, but you’ll need to have more in order when you’re selling a buy to let property to another landlord. They’ll be concerned with both the legal aspects and the return on investment (ROI) they’re going to get from the purchase.
The more you can provide evidence of the condition of the property, the quality of the tenants and the potential for a good, sustainable source of income, the more likely you’ll be to sell to a landlord.
Some of the information you’ll probably be asked to supply will include:
- The current Assured Shorthold Tenancy (AST) agreement.
- Information about the tenants and any other occupants.
- Credit reference reports and any character references for the tenants.
- Rent payment information and bank statements or approached accounts demonstrating previous receipts
- Any notices served in the past.
- Evidence the deposit is correctly lodged with the appropriate custodial scheme, which will usually be transferred to the new landlord via a solicitor.
- A current Energy Performance Certificate (EPR)
- Evidence of annual mandatory gas checks (CP12)
- An Electrical installation Condition Report (EICR)
- Proof of a working smoke/carbon monoxide alarm
- A Legionnaire’s disease risk assessment.
- The tenant has received a copy of the Department for Communities and Local Government ‘How to rent’ guide.
- A detailed inventory from when the tenant first occupied the property, along with confirmation any furniture provided and left at the property is fire retardant.
If you’re dealing directly with tenants and the new landlord, you’ll need to organise switching payments and the buyer should ensure a Section 48 notice has been served to inform tenants that the property interests have legally passed to a new owner.
You may have used a letting agent to manage the rental process. In that case, they obviously also need to be notified what’s happening and whether the new buyer will want to continue working with them.
In all cases, it’s beneficial to use a conveyancer who has experience in selling tenant properties. That way, you can be sure they know all the areas which need to be covered.
How can you sell a tenanted property?
Whether you’re selling a tenanted or vacant property, you can choose to offer it via estate agents, at auction, or secure a quick sale to a reputable home buying company. It’s also considerate to give first refusal to the current occupants, even if it’s unlikely they’re in a position to buy a house at the moment. If nothing else, it can help to keep them cooperative and understanding during the sale.
Selling any property via an estate agent can take time, particularly if you need to find landlords interested in taking on existing tenants. It can also make organising viewings more complicated, particularly if your renters aren’t happy about the sale, or having people coming into their home. Under Common Law, tenants are entitled to live in quiet enjoyment until their agreement is legally terminated.
Before settling on one or more local or online estate agents, it’s worth checking if they have experience with selling rental properties, especially with a tenant in situ. This means they are likely to know how to reach more potential buyers, and also have knowledge of dealing with tenants for viewings, etc.
Viewings are also required if you decide to sell via auction and it carries the risk of being tied into the sale price on the day. The winning bid could be much lower than you expect, making it harder to plan for your financial future or forcing you to accept an amount much lower than the true market value of your property. Alternatively, if a reserve price is set too high it may mean no-one bids at all.
You’ll also need to account for estate agent or auction fees, the normal legal, conveyancing and solicitor costs when selling a property, and any other payments to market your house or flat.
One way to ensure a quicker sale, and save on both the cost and hassle of selling a tenanted property, is to use a home buying company. We are able to make an offer based on the estimated market value and you can take up to 28 days to think about it, but if you accept, the money could be in your bank account within just seven days.
Home buying companies will also deal with issues such as problem tenants in arrears, or if there are legal or structural issues which may have scared away potential private buyers.
This also means you can avoid paying many of the costs associated with selling your house, and don’t have to risk paying a mortgage on a vacant property before completion. Both you, and your tenants, can benefit from the simplicity of a home buying service. It means you can sell the property more quickly, and that will give your tenants less time spent in uncertainty. Meaning everyone can look forward to the future.
If you are looking to sell your tenanted property contact us today on 08000 443 911 or apply online now and one of our friendly team will be in touch.