Selling an Apartment With Existing Tenants in NYC
Selling an apartment in NYC with existing tenants in place can be much more challenging than selling a vacant apartment. This is especially so if you’re selling a co-op or a single-family home which is not catering to an investor buyer base, as the buyer will likely be an owner-occupant who won’t want a tenant to be in place post-closing.
If you’re selling a condo or a multifamily property, having an existing tenant can actually be beneficial. This is because the majority of investor buyers would ideally like to have a tenant in-place as quickly as possible after closing. In some cases, investors specifically look for units with tenants in place in order to minimize the risk of vacancy (and zero cash flow generation) after closing.
Regardless of what property type you are selling, the best case scenario is to have an existing tenant on a month-to-month lease. That way, you can effectively market your home to both investors who’d like certainty of cash flow and owner-occupants who’d like to move in right after closing. Investors will like the idea of carrying over the tenant post-closing, and owner-occupants will appreciate the flexibility of being able to terminate the lease so that they can take occupancy of the property right away.
It’s also equally valuable to have a tenant in place, provided that the lease has an early-termination clause in the event of a sale. Once again, the option value here is highly favorable to the seller’s marketing efforts since having the tenant in place with an early termination clause would still encourage owner-occupant buyers to purchase the property.
The key disadvantage of having a tenant in place, regardless of the lease terms, is the fact that it’s significantly more difficult to accommodate private showing requests and hold open houses. Another disadvantage is the possibility that the tenant keeps the unit in an unsightly condition, perhaps even so bad to the extent that it’s not possible to take professional photos.
Is It Easier to Sell a Vacant Apartment or One with a Tenant in Place?
It’s much easier to sell a vacant apartment. This is because access to the unit is less restrictive and there’s generally more showing availability compared to if a tenant is in place. Coordinating a private showing or an open house with a tenant in place requires the extra step of contacting the tenant and waiting to hear back.
Because tenants don’t have any skin in the game when it comes to a sale, many tenants are incredibly unresponsive and often require multiple reminders when it comes to requesting approval for a private showing. It gets even more complicated if the buyer has a change of schedule after the tenant already approved a showing request, as the listing agent will have to wait for the tenant to respond again before confirming the new appointment time.
If the lease does not clearly lay out the notice period for showings, a tenant could make unreasonable demands such as requiring 3 or even 5 days’ notice for any viewings. This would dissuade the majority of buyers from viewing the unit in the first place. In the case of overseas investors who travel to NYC at short notice to view apartments, an unreasonable notice period would make it practically impossible to accommodate these types of showing requests.
Furthermore, most investors will not make any extra effort to accommodate a showing for a listing with a tenant who is making scheduling difficult. A foreign investor usually flies in, views whatever properties are available to schedule on short notice, and then decides to submit an offer on one or more of the units they viewed. There is rarely any emotional attachment for investors to any particular listing that would make them patient enough to wait around for a tenant to confirm an appointment.
If a tenant is really uncooperative or resentful, they could essentially sabotage the entire sale process by routinely declining requests for the listing agent to hold general open houses on Sunday. Or the tenant could demand that any open house be ‘by appointment only.’ Any listing agent in NYC will tell you that not being able to hold general open houses is a significant obstacle to any sale, as it essentially boxes out walk-in buyers.
Should a Seller Wait Until the Tenant Has Vacated Before Listing?
It depends. If your tenant is highly uncooperative or keeps the apartment in an unsightly condition, it may be advisable to wait for them to vacate before listing. This is because the condition of the apartment would make it impossible to take professional photos, and buyers who do view the property may lose interest in the unit simply because it’s messy or dirty.
If your tenant is uncooperative, they could refuse to provide access altogether. We’ve actually hear of a situation where the tenant simply stopped responding to all showing requests, and this made it impossible to show the unit at all.
If your unit doesn’t show well due to the messy condition of the tenants, it could stunt the momentum of your sale, prolong the ‘days on market’ and force you to reduce your asking price in a way which may not have been necessary if the apartment was in show-ready condition.
Listing your home with a tenant in-place isn’t always a bad thing, especially the tenant is generally cooperative and keeps the apartment relatively organized. Most investors will actually prefer that a tenant is already in place, as it means there’s no risk of vacancy shortly after closing.
The other key drawback to waiting until a tenant has vacated before selling is the fact that you’ll have no rental income to offset your carrying costs during the sale process. It usually takes at least two to three months to close on a sale once you’re in contract, and this excludes the multi-month marketing period of finding a buyer and signing a purchase contract. Even if you don’t have an existing mortgage, you’ll still need to cover the monthly maintenance or common charges for possibly six months or more as the sale process unfolds.
Is It Better for a Seller to List a Property with a Tenant in Place?
It depends. Many sellers are unable or unwilling to carry the cost of an apartment without a tenant in place during the sale process. If you think about the typical closing timeline for an apartment in NYC, it’s not hard to understand why some are hesitant to wait for a tenant’s lease to expire before listing an apartment for sale. A typical sale process in NYC takes up to 4 months to find a buyer and go into contract, and thereafter it takes another 2 to 3 months to close on average.
The prospect of having no rental income for half a year or more is a strong incentive for sellers to list while a tenant is still in place, even if a tenant can be harmful to the overall sale effort. Having an uncooperative and/ messy tenant can wreak havoc on a sale, possibly resulting in fewer offers, a lower sale price or the failure to sell altogether. Therefore, a seller must carefully consider the costs and benefits of going to market with an existing tenant.
The decision on whether or not to list with an existing tenant ultimately comes down to how cooperative and organized the tenant is. Assuming the tenant permits weekend open houses and at least one or two private showings during the week, there won’t be any real accessibility issues when it comes to bringing in buyers and buyer agents to view the property. If the apartment is clean and organized, it will also be possible to take professional photos and show the property in the best possible light to interested parties.
If, on the other hand, the tenant is non-responsive, refuses to allow Sunday open houses or requires an unreasonable notice period for appointments, your sale momentum could be significantly impaired if you list your home while the tenant is still in place.
It’s also important to consider how desirable your apartment may be to prospective buyers. If you’re selling a generic condo in a Midtown high-rise, it will likely take significantly longer to sell compared to an attractively priced, pre-war brownstone in Park Slope with exposed brick and a private roof deck.
Should Buyers Purchase a Property with a Tenant in Place?
It depends! If you’re looking for an investment property, it may actually be a safer investment to purchase a property with a tenant in place. That way, you won’t take any cash flow risk post-closing when it comes to the timing uncertainty associated with finding a new tenant.
However, it only makes sense to purchase a property with an existing tenant if that tenant is paying a ‘market rate’ rent and they have a solid track record of paying rent on time and overall good behavior. It’s also essential as part of buyer due diligence that your real estate attorney review the terms of the tenant’s lease and reconfirm that the tenant has some sort of reasonable security deposit on file with the current owner (seller).
It’s also especially important to understand the labyrinth of NYC rent regulations and to be especially careful if any form of rent-stabilization or rent-control applies to the property you are purchasing.
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Disclosure: Hauseit and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.