Thursday, February 21, 2013

What are your options when a lease is going to end, and you want to sell?

When you are going to sell your property, and you are coming up to the end of a fixed term tenancy, you need to think about how you are going to deal with the lease renewal.  You have what is called 'the effective period' which is 90 - 21 days prior to the fixed term lease ending in which you can renew or end the tenancy with your tenant.  If you miss this window of time to sort it out, the tenancy will become periodic.

Each choice has different benefits and disadvantages.  The options as I see them are:

1. Renew the current tenants for a one year lease.
Advantage: Certainty about cashflow.  A good option if you are not serious about selling, or confident of your chances of getting the price you want.
Disadvantage: Buyers may want to move in, and tenants are protected for duration of their lease, unless you successfully negotiate an earlier end with them.

2. Renew for a shorter fixed term, e.g. 3 months.
Advantage: Cashflow during sales process, buyers don't have to wait long to move in.  Good if you want to hedge your bets during the sales process, and possibly renew your tenants again at the end of the extended fixed term when you take the property off the market.
Disadvantage: Tenants may leave at end, and if you still own the house, and it can be harder to find great tenants at that time of year and rent may drop outside peak letting season.

3. Allow the tenancy to go periodic.
Advantage: If sold, just need to give tenants 6 weeks notice.  Good if you have a sympathetic real estate agent who works well with the tenants, and if your house is likely to sell quickly.
Disadvantage: Tenants can leave at any time with only 3 weeks notice, which means it may be empty while selling, and hard to re-rent while on the market to sell.  Which means your cashflow is detrimentally affected, possibly making you a motivated buyer.

4. Ask the tenants to leave at the end of the fixed term.
Advantage: Will be able to show buyers through without notice, can have short settlement if it suits the buyer.  Again good if you are confident of selling quickly, or have the funds available to wait for the right buyer.
Disadvantage: No cashflow, empty property could be vandalised or broken into (and there are a lot of things in an empty property to steal, smash or stain, don't be fooled into thinking there is not). If it is empty a long time, your insurance can be compromised.

It is best to talk through these options with your property manager, partner, and real estate salesperson so you can fully understand the pro's and con's of each option. I can't say which one will be better for you - it will all depend how keen you are to sell, and how many buyers are out there in the market with the money to spend on your property, and whether you want to have the back-up plan of re-renting it should it not sell (e.g. you don't get offers you are happy with, or you don't get any offers at all). In all, you would need to have a crystal ball to know which option is best. All of them involve some level of risk. I'm sure your real estate agent is good at what she or he does, but no one can promise a sale within a certain amount of time (unless you give it away for free, of course! In which case, we could take it off your hands...).

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