The seven key steps to selling a rental property: Leah Calnan

While I am of the belief that owning an investment property should be a long-term commitment, there may be times when a rental property needs to be sold, and those circumstances may include up and coming retirement, reducing debt, marriage separation and death – just to name a few. 

Selling a rental property can be a dramatically different experience to selling your family home. Not only do you need to think about your wants as the owner, but you must also strongly consider the tenants throughout the whole process. Yes, I know the tenants don’t own the property but you must remember it’s their home and when you sell a rental property, with tenants in it, you are selling their home. 

Of course, you may decide to sell the property between tenancies. There are arguments for and against putting an investment property up for sale when it is vacant: 

The pros of marketing a vacant property for sale include:

• The property can be spotlessly clean at all times
• There are no restrictions on showing prospective buyers through the property at any time
• There is no concern for the next owner that they are inheriting bad tenants. 

The pros of marketing a tenanted property (with good tenants) include:

• The prospective owner knows the potential rental return in advance
• The new owner has a rental income from the day he takes ownership
• The property looks more comfortable and “homely”. 

Good tenants can definitely add value to your property. But even the best tenants will be slightly concerned when you put their home up for sale. So I make one simple recommendation to assist everyone, and that is to make sure communication remains at the highest level possible. Over the years I have seen many things go pear-shaped, with a sales campaign of a rental property, and the worst way to start the campaign is to erect a For Sale board at the property before you let the tenants know. 

Can you imagine coming home from work one night and finding a For Sale board up on your home when you know nothing about it? Now I know that a sales agent would never do that to an owner-occupied property, yet it happens time and time again with rental properties. And I really don’t understand why. 

STEPS FOR A SUCCESSFUL SALES CAMPAIGN

We have managed many sales campaigns for our property owners over the years. A result of this experience is that I have come up with a series of steps that, if followed, will help you in your campaign. So let’s run through the steps which I believe are beneficial for all parties. 

1. The owner will normally make contact with the property  manager or the agency and ask for a market valuation. It’s important to ascertain what the purpose of the valuation is for:

• Are the owners looking to sell the property?
• Are they refinancing the property for other reasons, such as to purchase another investment?
• Or is there some other reason – are they weighing up their options? 

An owner will rarely just ask for a market valuation for the sake of it, generally there is an underlying reason, so ask lots of questions and find out their motivation. 

2. If the owners are asking for the market valuation because it is their intention to sell the investment property, then the next step is to make contact with the tenant to inspect the property. 

3. During this inspection take the time to have a chat with the tenants. You never know, perhaps they are interested in purchasing the property. 

4. During this appointment it’s imperative that you work on establishing some rapport with the tenants to gain their confidence that you will work hard to avoid inconveniencing them any more than is absolutely necessary. 

5. The owner/property manager and sales agent must decide what type of sales campaign they will be running. Will it be sold at auction or by private sale? The tenant should be informed of this decision and also given the timeframes for the campaign. 

6. Will there be set open times every weekend? On Saturday and Sunday? How many Open for Inspections will be conducted each week? Again the tenants need to be involved with these decisions. 

7. What happens if the property is slow to sell? How long will you keep the property on the market for?

Keeping a house ‘spick and span’ at the best of times can be hard work, let alone through a sales campaign. So it’s a good idea to provide the tenant with a ‘thank you’ or incentive during the campaign. Maybe some movie tickets so that they can take the family out during an inspection. 

Or even consider a reduction in rent over this period to compensate them or allow them to: 

• Pay for a house cleaner once a week
• Or for a gardener or pool man once a fortnight
• Have fresh flowers around the house during open for inspections.

TROUBLE-SHOOTING

Let’s look at a couple of areas where things can sometimes go wrong… There have been occasions when the selling agent has not realised that a chattel within the property belonged to the tenants and therefore when it came time for the tenant to vacate, they also removed the chattel. If this occurs after settlement it could create an opportunity for a compensation claim to be made against the selling agent and/or vendor. 

The chattels people have been caught out on include window coverings – such as curtains – air conditioning units, portable spas and additions made to the garden, such as trees and plants. So if you are selling your investment property, make sure the selling agent establishes a good working relationship with your property manager and/or tenants and is able to clarify what chattels belong to the tenants. This will prevent such confusions potentially costing you money. 

Another more common area where things can go so wrong with the selling of the property is usually when there is conflict or a lack of a good working relationship between the salesperson and tenant. 

A good property manager may be the saviour here as they can generally work with both parties to come to an agreement that works for both the tenant and salesperson. 

They could get both parties to accept setting open times once or twice a week, instead of expecting the tenant to take telephone calls every day asking for an inspection. Providing the tenant with an outline of the marketing campaign in advance can also greatly assist. 

This avoids the chance of the tenants scheduling their twin sons’ seventh birthday party at that same time as an open for inspection! A little preplanning can save some major “oops” in the future. 

SETTLEMENT OF A RENTAL PROPERTY WHEN TENANTS NEED TO VACATE

Earlier in the chapter we mentioned the two scenarios: selling your investment property with tenants still living in the property and selling the property when it is empty. Of course, not all buyers of a rental property will want to continue to rent the property out. The new owners may choose to live in the property themselves and here is where complexities come into play. 

In the property world you will hear the expressions ‘rent and profits’ and 'vacant posession'. Rent and profits is when there is a tenancy in place and the purchaser of the rental property receives rent from their settlement date. If the new owner retains the same property manager then there is minimum inconvenience for the tenants who just continue paying the manager the rent in the same way as before. Should the management of the property change, tenants will have to be advised of to whom to pay the rent. It is not necessary for a new tenancy agreement to be prepared or signed at this stage unless the lease has expired or is coming up for expiry. It is also not necessary for a new condition report to be prepared – the original report remains in use until the tenancy comes to an end. 

Before settlement takes place, it’s important for the property manager to speak to or even meet the new purchaser in person if this is an option. It’s at this stage that a new management authority is prepared which will be effective as of the date of settlement. An owner’s instruction document should also be completed to ensure you have clear and concise instructions on how the owner wishes the property to be managed. 

Then, upon confirmation of settlement, all of the purchaser’s details must be added to the property manager’s software program. 

It’s a valuable exercise, a few days prior to settlement, to ensure you have checked that there are no outstanding matters relating to the property, such as maintenance. Are there any accounts still requiring payment by the vendor (the previous owner) such as an electricians’ or plumbing invoice? 

With tenanted properties, you may need to ask your owner who is completing the rental adjustment. This calculation ensures the vendor receives all the rent money up until the settlement date and the purchaser receives monies after that date. 

This can often be overlooked as some solicitors and/or conveyancers assume the rental adjustment will be completed by the current property manager. Make sure you find out who is doing it – it will save you potential headaches after settlement takes place. 

Don’t forget to let the tenant(s) know once settlement takes place. A simple letter is enough to confirm the change in ownership. 

A thank you may also be a nice gesture. 

I find it funny that sales agents provide gifts to the vendor and purchaser once the property has settled, yet the tenant, who may have made that property sparkle throughout the sales campaign, is completely forgotten. Why is that?

Pre-settlement inspections

With all property sales, there is the option to complete a pre-settlement inspection prior to the settlement date. It’s ideal to complete this inspection 7 to 10 days prior to settlement. This allows the purchaser to ensure the property is as per the original inspection. 

I would also recommend giving the tenants a good few days’ notice of this pending inspection.

Once settlement takes place, don’t forget to cancel the owner’s landlord insurance policy and activate a new policy. In many cases, the original owner will receive a refund for the unused portion of the policy. 

Vacant possession

Vacant possession is just as it suggests – the property is vacant at settlement. This means that if tenants were still living in the property during the sales campaign they must have left by the date of settlement. 

Over the years I have seen salespeople sign contracts with a purchaser, ticking the vacant possession option and then they have completely overlooked or (perhaps) ignored the fact that there was a fixed tenancy agreement in place. 

Or the one I love the most (note my sarcasm) is when the property is sold with vacant possession on a 60-day settlement, yet legislation requires the tenant be provided with a minimum of 65 days’ notice in order to have them vacate. 

Now I don’t know about you, but no matter how hard I try to make that one work the maths just doesn’t add up. An easy fix is to extend the settlement date. But what if the purchaser has another settlement lined up and needs to settle both properties on the same day? 

This error by the salesperson can ultimately result in:

• The sale falling over
• The purchaser seeking damages from the vendor for compensation for failure to settle on time
• The vendor seeking those said damages and perhaps more from the selling agent.

So stay alert and watch out for this because it happens all the time.

Leah Calnan is the director of Metro Property Management in Victoria and is the chairwoman of the REIV Property Management Chapter.

Leah is the author of Simple and Successful Property Management, published by Major Street. This is an excerpt.