Selling Your Rental Property

We sell rental properties for owners on a regular basis. If you are considering that, it is likely some of the common questions we get from landlords are swirling around for you:

• Should I tell the tenant?
  
• Will I have to pay tax?
  
• Can I sell it with the tenancy agreement in place or should I wait until it has ended?
  
• What do I do with a 'difficult' tenant?
  
• What happens when the property is sold?
  

While you own the property it is the tenants home and the tenancy agreement you have signed with them provides them with the right to live in the property without unreasonable and instrusive interruption. A 'difficult' tenant can kill a property sale; a great tenant can really help get your property sold. Getting the tenant on side up front really makes a difference. Communication is the key.

Firstly, you must advise the tenant in writing when you decide to sell the property. In fact the best piece of advice we can give you is to talk with your tenant about what you are doing and your plans. Most issues arise simply from incorrect assumptions on either side due to a lack of communication or confused messages. If you're selling with us we will help you with that.

You need the prior consent of the tenants to enter the property in order to show it. The tenants cannot 'unreasonably' refuse that, but, they can require 'reasonable' conditions. Tenants do not have to agree to open homes and can insist the property be shown by appointment only. Our strategy is to minimise and manage interruptions for the tenant. We tend to try and get agreement to open homes for rental properties – that way we can pre-arrange viewing times with the tenant and they can plan around it. But not in every case if the tenant prefers viewings by appointment. We always tell the buyer it is tenanted (obviously) and insist on at least 24 hours notice to the tenant for a viewing.

How do you get the tenant onside? Communication is key – a difficult tenant could just be the symptom of a poor landlord/tenant relationship. Put yourself in the tenants shoes and make sure the requests you are making are reasonable and respectful of their rights. It has got to work both ways too, so avoid bending so far over backwards it is virtually impossible to show the home to potential purchasers (not every buyer can look at a property between 10am and Noon on a Thursday for example). Incentives can help. Common options include a reduction in rent while the property is on the market (an ongoing incentive), or more “back-end” incentives such as a reduction in rent at the end of the tenancy if the property sells (eg the last 3 weeks free), a lump sum payment at the end, or some combination of both. The specific circumtances of the owner and the tenant normally determines what is best – just remember it is worthwhile having the tenant onside. The advantage to the tenant of cooperating is that a new investor will want to keep a great tenant in the property.

What happens if the tenant is 'difficult'? Bottom line, that is a real problem. You obviously have the normal tenancy processes available to deal with disputes and problems. The reality is that takes time and effort, with sometimes an uncertain outcome. It is much better to not get there in the first place, or resolve the issues directly with the tenant. The problems normally revolve around access and the condition of the property when viewings take place. Good communication, respect for rights, and specific incentives as appropriate are the normal solutions. In the worst case scenario (and we have seen it), end the tenancy then sell the property.

What about taxes? Talk to your accountant about your specific circumstances is our advice. The IRD treats investors and dealers or speculators very differently for tax purposes. So talk to your accountant before you decide to sell so you know what you are dealing with. Depending on your intentions when you purchased or general pattern of sales the IRD may consider you a property speculator or a dealer rather than an investor for tax purposes.

What about existing tenancy agreements? You can sell your property with the tenancy agreement in place. If you have a fixed term tenancy, that is the only way you can sell it. If the tenancy is periodic you can sell it with the current tenancy agreement or you can sell the property vacant possession. If you have a fixed term tenancy the pool of potential buyers is reduced to investors or an owner occupier that is happy to wait for the tenancy to finish. As a result it is generally harder to sell a property with the fixed term tenancy in operation.

What happens upon sale depends upon whether the property has been sold with vacant possession or the tenancy intact. If you have sold with vacant possession you need to end the tenancy. Normally the owner must give 90 days written notice to end a periodic tenancy, but where you have sold with vacant possession there is a reduced notice period of 42 days. The tenant always has the right to terminate a periodic tenancy at any time with 21 days notice.

If the purchaser wants to keep the property tenanted then you must give the tenant written notice of the sale, including the name and contact details of the purchaser. Be aware that until the notice is received by the tenant, the tenant will not be obliged to pay any rent to the purchaser and will not be liable to the purchaser for any rent owing to the previous landlord. Once the tenant receives the notice, or on the date specified in the notice (if in the future), the tenant must start paying rent to the purchaser. The landlord’s interest in any bond paid by the tenants and held by the Ministry of Business, Innovation and Employment (which incorporates the old Department of Building and Housing) will pass to the purchaser on the date of settlement (or possession if earlier). The landlord and purchaser need to complete a change of landlord form and forward it to the Ministry to update the bond information.

Selling rental properties can be really challenging if you have a 'difficult' tenant. Being respectful of the tenants rights, and getting them 'on board' makes a real difference to the sales process and to the result you will achieve. Communication is the key – in our experience most issues arise out of incorrect assumptions derived from poor communication between the landlord and the tenant.

We look to facilitate that for our owners to make the process as easy and smooth as possible for both parties.