If you’re selling your investment property, you may be thinking the tenant could be the perfect new owner.
For starters, they already live in the property, which can solve the logistical nightmare that is selling a home with tenants. Hopefully, they’re reliable, they’ve taken care of your home; they might seem like the missing piece to your property-selling puzzle. When you think about it, it’s already their home - they just don’t own it.
But is selling to a tenant a good idea? As the saying goes, there’s plenty of fish in the sea… could you be missing out on another great buyer by selling to your tenant? Aiming to address the question of whether you should ever sell to a tenant, we’ve spoken to people on both sides of the transaction: a landlord that sold to their tenant, and a tenant that purchased from their landlord.
Case study one: Selling to your tenant
First, we spoke to Wendy Chamberlain, Director of Chamberlain Property Advocates, who facilitated a sale for her client (the seller) to their property’s tenant approximately three years ago (pre-COVID).
“We had a client that was looking to sell his one-bedroom apartment that was in Fitzroy, Melbourne. And there was a tenant in place there on a month-to-month lease,” Ms Chamberlain told Your Investment Property Magazine.
“When we're looking to sell a property for a client, we always get in touch with the renter, to just let them know and have a conversation with them about how the process is going to go.
“Through that process, I learned that she was pregnant and she was looking to basically stay where she was. She asked the question of whether or not the owner would consider [selling her] the property. So I flagged that with my client and he said he was open to doing it.”
Ms Chamberlain said it was important to make sure everything stayed at arm's length, and that the tenant wasn’t influenced or provided with any false information. While she was representing the owner, it was also important to ensure the tenant understood how to safeguard herself.
“We had conversations about her needing to do her own due diligence on the sale, so she had to get her own solicitor to go over the contract,” Ms Chamberlain said.
“We already had an appraisal done on the property to give us an idea of the property’s worth. So rather than giving her an indication of what the vendor was looking for in relation to price, I indicated that she needed to do her own research and due diligence around what she saw the value of the property.”
Eventually, the tenant came in with an offer that was a little bit under what the vendor wanted and, after some negotiation, they met on a price in the middle.
Case study two: Buying from your landlord
Next, we spoke to Simon Downes, who recently purchased the rental property he was living in. Having lived in the property for over five years with his wife and kids, they decided to sniff out whether the landlord was interested in selling. They loved the home they were living in, but they were ready to become homeowners.
“We reached out to the real estate agent and said ‘we’d be interested in buying the place if the owner was interested in selling', and they came back and said ‘yeah, we would be interested in selling,” Mr Downes told Your Investment Property Magazine.
“We then started to communicate directly with the owner who said he’d recently had a valuation of the house done, and he told us what that valuation was. We instantly went back and offered the lower end of that valuation.”
He knew that selling privately would benefit the owner in a few ways (which we’ll discuss soon), and they quickly agreed on the price.
“The rest is history really. We went through the sale within a few months,” Mr Downes said.
“Now we're able to make the improvements to the house that we want and actually enjoy the fact that we own the house that we're living in rather than renting it.”
Pros and cons of selling to a tenant
Before you decide that selling to your tenants is the way to go, let’s discuss some of the benefits and drawbacks of doing so.
Pros of selling to your tenants
There are a few key pros that stand out. Firstly, there’s no need to spend money on marketing the property, saving you both time and money.
“They're going to save on the cost of marketing, and depending on the property, [that could be] at least an average of $8,000,” Ms Chamberlain said.
Mr Downes also pointed out avoiding marketing costs as a pro for his landlord to sell.
“It occurred to us that this was a good opportunity for the owner because selling privately to us, he would have avoided all of the costs associated with putting it on the market,” Mr Downes said.
Ms Chamberlain also pointed out that selling to your tenants can minimise the risk of selling with difficult tenants still living in the home.
“Some tenants can be deliberately difficult when you're trying to sell a property,” she said.
“So if your tenant has been difficult, or you think that it's going to be inconvenient for them, then it might work better to sell it to them if they're interested.”
Also worth mentioning, of course, is that selling to tenants can often result in a much quicker sale. It saves you from needing to search for a buyer as they already live in the home. If you’re looking to get the property off your hands quickly and without much hassle involved, selling to your tenants could be the solution.
“In Victoria last week, the clearance rate was about 67%. That means that one in every four properties didn’t sell,” Ms Chamberlain said.
“So, it’s a personal decision of the owner, as to whether or not they want to go down that path, because it does provide less angst and less stress.”
Cons of selling to your tenants
While these pros all sound great (and they are), there are still cons that need to be considered before deciding whether you should sell to your tenants.
The main potential con is that you won’t know what other offers are out there. Particularly in the wake of the housing boom, the fear of settling for a lower price may be on your mind.
“Properties don’t always go for $100k or $200k over the reserve price (or asking price). That’s the kind of stuff you read in the papers because, obviously, it’s noteworthy,” Ms Chamberlain said.
“But then there are all the other folks with properties selling at their values.”
Another potential con is that you may feel too personally invested in the sale; you know the tenants, maybe you even really like them. It’s important to keep the sale at arm's length, as Ms Chamberlain mentioned earlier, to avoid getting into murky water.
So, should you sell your investment property to a tenant?
Ultimately, whether you choose to sell your property to your tenant is completely up to you. But particularly for apartment owners, where values haven’t risen as significantly as houses, you may find that the pros outweigh the cons.
“As a generalisation, the apartment market hasn’t gone gangbusters when compared to what we’ve been seeing over the past couple of years with houses down here in Melbourne. Some houses saw a 20 to 30% increase in value over that time,” Ms Chamberlain said.
“So that's a different conversation, depending on the type of property you're selling. For apartment sellers, there’s not going to be a lot of difference between selling it to your tenants and trying to put it on the open market unless there's something super special or unique about [the property].”
For townhouse and house sellers, Ms Chamberlain said it’s a call the owner needs to make after weighing up all of the pros and cons.
As a tenant who purchased his rental property from his landlord, Mr Downes said the transaction was “mutually beneficial for both parties”.
“I think if a tenant shows interest, there's not much to lose from having a conversation about it,” Mr Downes said.
“And the good thing as well is that there's no rushing on either side because you already live in the property. There's no rush involved, you're not really working to any deadlines, and your tenant can keep going on paying the rent, as long as the negotiations are underway.
“It seems to me to be a pretty good way of doing things for an owner.”