Renting out a property always comes with some trepidation.
Landlords run the risk of signing bad tenants who don’t pay, or who damage the home and generally cause a nuisance.
For every bad egg, however, there are plenty of investors who land a great renter – the kind you would want to stay for a long time.
These tenants you happily trust with your property because you know they will take care of it; these are the ones you want to sign long-term contracts.
Should the day come when you want to sell your investment property, a good tenant could just wind up being your buyer, too.
Selling a home to a tenant is appealing because it offers the promise of being a less complicated process than a standard property sale.
You don’t need to worry about dealing with real estate agents, negotiating over commissions, approving marketing campaigns and liaising with would-be buyers.
Nonetheless, it has its downsides, as you could be missing out on the real profit potential of your property if you give your tenant first dibs.
There could also be an expectation that you’ll give them a discount, especially if you’re not paying a real estate agent a hefty commission.
Why sell to a tenant?
When you sell your property to a tenant, you’re selling to a buyer who has lived in the home already.
They have made it their sanctuary for a reasonable period, and the opportunity to avoid uprooting and finding a new place to stay can have incredible appeal.
This could give you stronger leverage when it comes to negotiating the asking price, because the option to own their existing dwelling could dim all other possibilities for your tenant in light of the time, hassle and costs they save by not having to start over.
Sentiment could also be your best friend in this situation.
What’s more, selling to a tenant is a smart way of saving you the time and money you’d need to spend on dolling up a property for an open-market sale.
“Because your tenants have lived in the property and know it well, they may see past the imperfections of wear and tear that have occurred over the years and accept it in its current state,” Yardney adds.
A potential additional saving you can make is in avoiding the payment of agent commissions, as you can negotiate directly with your prospective buyer.
“Having a prior relationship with the tenant/buyer can work to your advantage and make for a quick and painless sale,” says James Nihill, managing director of Patrick Leo.
“As a vendor, having a good rapport with the tenant is important as it can make the entire process a whole lot easier. I encourage speaking with the tenant personally and trying to come to an agreement. While the benefits of having an agent include the potential for your house to sell at a higher price, the commission you pay counters this and more.”
You will still need other parties to facilitate the transaction and draw up the contract, so a lawyer will have to be part of your team.
You will also need to do a great deal of research on local property values so you know what your property is really worth.
Risks of selling to a tenant
While this type of transaction can be beneficial in many ways, it can also be tricky.
For instance, you could be shutting the door on a better deal.
“Sure, you’ll save on advertising and real estate commissioners. But you’re losing out on any competition from other interested buyers, which could be worth a whole lot more to you,” Yardney says.
“Currently, with fewer investors in the market to buy properties, and the fact that owner-occupiers buy properties with their hearts rather than their calculators, this usually means you’ll get a higher price selling your property vacant on the open market with the maximum number of potential buyers looking at your property – both buyers and investors.”
If your property is located in a hotspot or a tight market, you definitely want to consider listing it on the market for public sale instead, so you have a chance to get the best offers.
Keep in mind that it’s likely your tenant will try to negotiate with you on the basis of your existing relationship, and their knowledge of the property’s ins and outs.
“If they have lived in the property for many years and made personal changes, they start to think that you should reduce your price for what they have done to the property,” Yardney says.
“Some of these ‘improvements’ may have actually devalued your property, but they will still expect a discount.”
In cases where the condition of the property could end up being a sticking point for you, it could be wiser to assess the situation and spend the money on sprucing things up.
As a result, you may even add greater value to your property for outside buyers.
The decision on whether to sell a property to a tenant ultimately depends on your priorities and circumstances.
The important thing is to keep the true value of your property in mind.
You may avoid some of the stress and time invested in a sales campaign by taking this shortcut, but at what financial cost?