Navigating the sale of a rental property

This month I am looking at how best to navigate the challenge of selling a property you own as a landlord.

With the current cost of living crisis, it’s probably no surprise that Landlords have been taking a hit just like everyone else. There’s been a HUGE shift in rental availability over the last few years. Compared with 2019, available rentals in the UK in September 2022 were almost a third lower, while prices were over a fifth higher.* This is part cost of living increase, part supply/demand imposed.

Advertised rentals have fallen in all 20 biggest UK cities. In half of them, the decline was 40% or more, whilst inquiries for single-room lets is up almost 4 times since 2019.

If you do choose to sell your rented property, you can of course take two routes; Sell with your tenant in situ, or remove the tenant and sell an empty property. There are pros and cons to both approaches from logistical and financial perspectives, as well as on a human level. Let’s discuss the options….

If you’re one of the many landlords who are considering selling your rental property, what should you consider first?

1. Any tax implications. You may have to pay Capital Gains Tax if you’ve let out your home to a tenant. Speak to your accountant as it’s very dependent on your personal circumstances such as:
   • Do you hold the property in a company or a personal mortgage?
   • Are you in a fixed rate period, and if so, will there be early release fees?
   • Once you have received the payment, how do you plan on using that money? Will you invest it in a way that will make you a similar return each month that your investment property was providing? If not, have you done a new post-investment-property budget to account for this drop in earnings?

2. How will you manage your tenants? Will you ask them to move, or will you look for a landlord/investor buyer who will take your tenants over?

3. If you have a letting agent that lets your property, what does your contract say about selling the property? Many contracts stipulate that if you’re letting a property through an agent, that the sale should go through them too. Many contracts also stipulate that you are committed to them for the length of the tenancy; in which case, Is there a severance charge to break the contract?

Selling your investment property vacant.

While landlords generally get a bad rep. I’m connected to a large property network, and I don’t know a single one who’s tummy wouldn’t turn at the idea of telling a tenant they need to leave their property. However, if you do find yourself in this position, you’re going to need to follow all legal requirements to the letter and ideally minimise the stress to the tenant as much as possible for a smooth transition and a clear conscience!

Luckily for me, it’s not something I’ve had to do. But I know that if I ever did have to, I know every legal requirement has been followed to the letter and that I have a good relationship with all my tenants so the process would be as straightforward as is possible (which in all honesty, is not very straightforward!!)

Personally, I’d always start with a conversation before serving any paperwork. I’d explain my circumstances and why I need to sell the property and offer any support they need to find somewhere else.

In terms of the paperwork, you’ll need to serve a section 21 notice – a no-fault eviction. This means that no one has done anything wrong, you just want your property back. The notice period is 2 months but often tenants aren’t out in this time; especially considering the current decline in available rental properties. The council, CAB or a solicitor are likely to advise the tenant that they shouldn’t leave until they’ve found a suitable property or been served with a possession order.

Should this occur, sadly the next step is going to court. The courts are still very backed up as a hangover from the pandemic; in fact in Southend court, you’re looking at around 13 months to get a hearing date!

If you’ve always followed all legal requirements set out for you as a landlord, then you’re in a good position to get a possession order at this point. This can take 2 -18 months, and you also have to consider the added cost of court fees.

There is always the risk that a tenant stops paying their rent when you tell them they have to leave, and even if this doesn’t happen – you’ll still lose any rental income between the point at which they move out and your sale completes.

On the upside, if you can remove a tenant first, you have a much wider market to sell your property to, and an empty property is far easier to arrange viewings for and get a higher asking value.

Selling a property with your tenant in situ.

Well of course the first pro of this approach on a personal level is that you don’t have to ask a tenant to leave their home. You’ll also continue to receive rent right up until the sale goes through. So by those measures, it looks like the best approach! But unfortunately, there are many downsides too…

To begin with, this is a very limited market you’re narrowing yourself into. You’ll only be selling to a landlord or investor who is in the market to buy and is willing to take over with a sitting tenant in place. This is likely to result in a lower asking price.

There are fewer and fewer landlords around now as I touched on earlier, and many won’t look favourably upon the tenant in situ if they don’t meet their background criteria in terms of past financial struggles, rent arrears etc.

Fear about losing your home and change, in general, are huge motivators – and not for the best. No doubt the tenant will have concerns that the new landlord won’t honour the commitment to keep them in place, will put the rent up, and generally that things are going to change for the worst.

Whilst there are of course some ‘not nice’ people in the world, I think it’s important to come at it from a place of understanding that tenants may feel in a place of desperation and panic when you tell them you’re selling up. And so, tenant sale sabotage is unfortunately a very real concern in these situations!

‘Oh, the neighbours are really noisy’, ‘Sorry it’s cold in here, the boiler doesn’t work’!

It’s also hard to arrange viewings of a property that someone lives in (and has zero invested interest in you selling – in fact, quite the opposite!). If someone doesn’t want to leave their property, they can make it very difficult for you to facilitate a sale.

The process of selling a property with a tenant in situ

So, if you do want to sell with tenants in situ, you must think very hard about how your landlord/tenant relationship is, and how best to approach the situation.

While I abhor lying, I have sometimes viewed properties as an ‘insurance assessor’ when a landlord was concerned that disclosing their desire to sell would upset the tenant. If the property sale is agreed I will then approach the tenants with a gift and all the information about what me being their new landlord means for them. I sit and chat it through so that when I leave, they are confident that nothing’s going to change and anything around the cost of their rent or any other arrangements is firmly set.

This approach has served me well in a smooth transition between landlords, but of course, it’s the purchaser who must take on this responsibility in order to put any of the tenants’ fears at ease.

I think all of the above serves to prove how crucial it is to have a good relationship without your tenants throughout their tenancy – by always being communicative, professional, helpful, and fair, I think you generally will have a much better experience if you did find yourself in either situation.

*data from property analytics company TwentyCi.

I’m Joanne. I’ve lived and breathed property for longer than I care to remember! This blog is to provide advice and support with problems surrounding property, and life in general.

Previously on the blog…