Selling Your Condo While Tenanted = Leaving Money On The Table

Condos

6 minute read

October 17, 2014

I don’t care if you’re a mathematician by trade, I refuse to look at any numbers you show me that says, “It makes sense to sell your condo when it’s tenanted.”

Time and time again, I see properties sitting on the market, and eventually under-selling, because the seller, listing agent, or both, decided it was a good idea to sell the property while tenants were living there.

I will tell you unequivocally, that there’s money left on the table if you take the easy way out.  And yes – selling with the tenant present is easy, but why not put a little work into this process for a big pay out?

MoneyOnTable

“The property is tenanted and it shows very, very poorly.  That’s PERFECT!”

That’s what I often tell my buyer clients when we go to see a downtown condo listed for sale.

A tenanted property, quite often, is a disgusting mess, and disgusting messes, even in the red-hot Toronto market, don’t exactly fly off the shelves.

When these properties do sell, they certainly sell for less than they would if they were in pristine condition, and it’s for this reason that I can’t figure out for the life of me, why condo owners don’t wait until the tenant has vacated to sell the property.

Now I know some of you will raise the issue that “you can’t make the tenant leave.”  That’s true, but that’s not what I’m talking about here.

We already know it’s a terrible idea to sell a property, with a tenant attached, in a lease that expires in August of 2015.

On the one hand, an end-user doesn’t want to wait until August of 2015 to move in, so those buyers are out.

On the other hand, an investor wants to set his or her own rent, and pick his or her own tenant, so many of those buyers are out.

We know it’s not a good idea to sell a property with a tenant attached, but today I want to talk about simply selling a property before the tenant is gone.

Simply put, it comes down to money.

And when people think they can save money, they’ll try to do so, even if it’s to their detriment.

Case in point: my theory on sellers listing with discount brokerages, or “listing services.”  You’ll save $5,000 on commission, but your property might sell for $25,000 less.  Way to think it through!

The same logic (or lack thereof…) applies when selling a property that is about to become vacant.

The seller looks at the cost, or rather the opportunity cost of lost rent.

If you take a 2-bedroom condo, where two young girls are renting for $2,400 per month, then the seller figures, “If I sell when it’s tenanted, and get a 60 day closing, then I don’t lose those two month’s rent.”

But seriously?

Can’t you do better than $4,800 with some work and just a tiny bit of thought thrown into the mix?

There are five major reasons why tenanted properties don’t sell as well, and while we’ve covered this topic many times before, let’s just do a quick refresher:

1) Access.  You need 24 hours’ notice to view a property when it’s tenanted, and some tenants don’t allow certain showings, or remain home during showings.  Fewer showings means fewer potential buyers, and that means more days on market!

2) Condition.  Most tenanted properties need some minor repairs once the tenants leave.  Not to say every young 20-something is lighting firecrackers in the living room, but a “lived in” condo doesn’t show as well as a model suite.

3) Maximization of Space.  There’s a reason why stagers use small furniture, and in small quantities: you want to show the space.  Picture two young girls, with their closets stuffed to the brim, and with two of every single kitchen gadget there is, stacked in the living room.  The space doesn’t show nearly as well as it would if it were vacant, or staged.

4) Psychology.  You can’t help but feel a bit dirty when you walk into a dirty place, in the same way that you feel a bit low-brow when you walk into a place where two 22-year-olds are renting and living in squalor.  You associate that condo – even if it were new and beautiful a week ago, as being something “lesser,” whether you do so subconsciously, or not.

5) Leverage.  Buyers know that tenanted properties don’t sell as well, and they assess a lower value.  They also know that as we outlined above – many buyers aren’t dying to submit offers, and thus the buyer has more leverage than he or she would if the condo were staged as a model suite.

So having said that, what can we do to remedy this situation?

What do I do when I get a call from a potential seller who has a tenanted property?

The first thing I say is, “I have to be honest with you: I don’t want to list your condo for sale if it’s tenanted, and an absolute mess.  I wouldn’t be doing you any favours if I told you otherwise.”

Call it cheesy, but I like a challenge, a task, and the allure of getting more than another agent could or would is something that appeals to me. I could easily just sign the listing and put up the lockbox, but then why not hire a discount agent?

The goal is simple: to do everything we can in advance of the end of the tenancy period, so that we can hit the ground running when they’re gone.  Then we list the property in A+ shape, look for a very quick sale, a quick closing, and perhaps only 30-45 days are “lost.”

The process goes as follows:

1) Preparation

I’d go and see the property about 2-3 weeks before the tenants leave in order to get a feel for what needs to be done.

Some properties need more work than others, but at the risk of generalizing, I think that most tenanted properties show very poorly.

You have to put together a battle plan, and execute it accordingly.

2) Painting

A tenanted property has to be painted most of the time.  Not every tenant bangs holes in the walls, but many do, and with all the holes from photos (picture the girls who have every square inch covered in 8 x 10’s of their days in university…), art, and wall-mounted TV’s, you’re going to need a patch-job anyways.  Now consider the funky colours the girls painted when they moved in, and you know you need a complete do-over.

A painted condo smells new, fresh, and adds value in the minds of buyers.

3) Lights!

Most properties are tenanted because people bought them in pre-construction, and thus the finishes are, how we say, “Builder-Simple.”

The light fixtures are awful.  Not only are the existing lights cheap, but many rooms have no lights at all!

You want a property to shine bright when it’s listed, so grab a few stainless steel fixtures from Home Depot, and pay an electrician $50 an hour to hang them up.

4) Cleaning

I can’t even tell you how awful some tenanted properties are.

I really do believe that not all tenants are messy people, but rather they decide they won’t keep somebody else’s property all that clean.

When two 25-year-old guys leave the rental they’ve been living in for two years, you can’t just hire Lucy the cleaning lady; you need a team.  Picture hazmat suites, and massive garbage bags being hauled out.

Nothing turns a buyer off more than a dirty bathroom, the smell of rotting food in the kitchen, and a tray overflowing with cigarettes on the balcony.  Again, I don’t want to generalize here, but most tenanted condos in the downtown core are exactly what I’m describing.

5) Staging

Not every seller elects to stage their properties, but I think it’s worthwhile.

You’ve got a great start with:
-empty condo
-freshly painted
-meticulously cleaned
-bright as the sun

Now as Stan The Caddy would say, “You’re close.  You’re on the green.  Now you just have to go for the cup.”

Why not stage the condo?

You know you’re going to sell the place in less than 30 days, so the committment is as basic as they come.

You can elect to show it vacant, and if it’s empty, fresh, clean, and bright, then you’re already way ahead of the game.

But a professionally staged condo (and I do mean “professionally staged”) will elevate the relative value in the minds of buyers, especially if they’re out on a Saturday, looking at awful condos, and then suddenly they come across yours.

With painting, cleaning, new lighting, and staging, you’re looking at $5,000, perhaps more depending on the size of the unit.

If you hit the ground running and list the condo 3-4 days after the tenants leave (assuming you’ve done the preparation and got the painter, cleaner, electrician, and stagers lined up), you can sell your condo in 7-10 days, and with a 30-day closing, you’re only out 1 1/2 month’s rent.  That’s $3,600 in the above example.

Add in the $5,000 for the work, and you’re looking at $8,600.

Geez, round it up and call it an even $10K, just to hammer this point home.

I have seen, time and time again, condos that “could” sell for $489,900, end up selling for $465,000, or less, because they’re in awful, miserable condition.

That’s $25K.  Maybe more.

And you won’t put $8-10K into the place?

Where else can you make 300% on your money?  Probably not the DJIA or TSX in October 2014, anyways…

Honestly, folks, I have no idea why people don’t put more effort into their largest investments.

If you could shine up your paper-certificate-share of General Motors (I know they don’t actually issue physical shares anymore, but the analogy is there….), and substantially more than it’s worth, wouldn’t you have to do that?

Most house sellers stage.

Many condo sellers stage.

So why not condo sellers, whose properties are tenanted?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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7 Comments

  1. Tony

    at 7:45 am

    I hear what you say. However, the situation here in the UK places property owning landlords in a dilemma. The choice may involve getting the tenants out first and then sitting on a property for months – or longer – whilst a buyer is found, losing much-needed income or, trying to sell with the tenant in situ, with all the disadvantages that your post describes.

    We are finding it an increasingly difficult call!

    McCarthy Estates</a.

  2. myeo

    at 8:28 am

    Selling a tenanted property is effectively “reverse staging.”

  3. Pervy_Investor

    at 10:34 am

    I’d buy a condo tenanted by two 22-year old girls… “Hey ladies, I need to inspect your walk-in shower. Does it feel steamy in here?”

    1. Boris

      at 3:51 pm

      How many skin masks do you own?

  4. Vlad

    at 10:42 am

    Mmmm..that oily, musky smell of unwashed bedsheets comes to mind.

  5. steve

    at 12:58 pm

    I agree with David here …. people have a very hard time seeing past the current state and at the potential of any space.

  6. IanC

    at 7:40 pm

    And if the lease is not up for 6 months or more – buy your tenants out…

    Give them a couple of months free and ask them to leave… They’d me moving in six months anyway ….

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