Selling a Tenanted Property?

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Most people are familiar with the traditional route of selling a vacant property through an estate agent as it’s the method of sale most people choose when they move house. There is no reason why a tenanted property cannot be sold through an estate agent, it just requires the estate agent to find a property investor who’s prepared to pay a fair price.

However, the issue some sellers encounter when they sell a tenanted property though an estate agent (or direct) is that the sale is at risk of falling through (or the price being reduced) because the contract of sale has only been sent to one buyer. A sale fall through or price reduction could be for any reason, including the possibility of the investor having found a better purchase elsewhere!

When selling a tenanted property, public auction offers a very good alternative to a (private treaty) sale through an estate agent, not least because the fate of the sale is not at the mercy of the one, individual buyer. Auction offers the ideal way for property owners to sell at a fair price, in the quickest possible time.

– Rental income is obviously very important to an investor. The investor will take into account the cost of finance (buy-to-let mortgage) and other outgoings when calculating their return on investment. If you’re selling a property with a yield in excess of 5% in London or in excess of 9% anywhere else in the UK then that will be considered a good return.
– Covenant strength of tenant – if you’re selling a property where the tenant has always paid their rent on time and there has been no history of problems, then that will look good to any prospective investor buyers.
– Property type – some investors stay clear of certain types property, regardless of the rental yield. For example, some high-rise ex-local authority properties can be difficult to re-finance so won’t be as attractive from an investment standpoint.
– Capital appreciation – for some investors this is the most important factor. Many overseas buyers invest in vacant London property (without any rental income) because they know it represents a secure investment.

We’re often approached by property landlords who have run into problems with their tenants and have the option of taking legal action against the tenant, or selling the property at auction with the problem tenant still in place. Typical tenant issues include rent arrears, anti-social behaviour, damage to property or subletting the property without permission.

Although there are property investors that specialise in dealing with problem tenants, the price they offer will be below market value. Selling a tenanted property at auction can be a quick and straightforward way to off-load a problem, but it’s always worth looking at your options before selling at a discount; negotiating with the tenant or threatening/taking legal action against the tenant are always worth exploring first.

It’s worth noting that selling by auction is by no means restricted to problem situations. There are many perfectly good tenanted properties sold at auction, for the reasons stated in the first paragraph.

Whilst it is possible to sell a tenanted property at auction, the sale price will typically be higher if you are able to sell a property with vacant possession.  The audience of buyers for a vacant property will include owner-occupier buyers, who will usually pay more for a property, compared to a buy-to let investor.

A landlord can take back their property without giving any reason by serving Section 21 notice on the tenant, if they have either:

• A periodic tenancy, sometimes called a “rolling tenancy”.
• A fixed-term tenancy that has ended.

For a landlord to do this, all of the following must apply:

• The landlord has protected the tenants deposit in a deposit protection scheme, if the tenancy began or was renewed on or after the 6th April 2007.
• The landlord has given the tenant at least 2 months written notice that they want the property back. This is called a “notice to quit”.
• The date the tenant must leave is at least 6 months after your original tenancy began (the date the tenant moved in).

Visit the UK Government website for up-to-date information about serving notice to your tenant.

If you have been using a letting agent to manage the rental of your property, the obvious choice might be to appoint the same agent (assuming they deal with sales) to help sell your property. It would make sense to keep the letting agent onboard as they can liaise with the tenant regarding viewings, and they will probably know the property better than a newly appointed agent might.

However, it’s worth considering there may be a conflict of interest in appointing your letting agent to help sell your property. After all, once your property is sold, the letting agent will no longer receive their letting management fee. In the longer term, a letting agent will make a greater profit by continuing to rent your property, than they would from a one-off commission payment for the sale.

And on that note, if the property your looking to sell is currently vacant, but an estate agent has suggested they find you a tenant, instead of selling the property, we suggest taking moment to consider if the estate/letting agent is acting in your best interests. As described above, the income an agent will receive from managing a rental property will be far greater in the longer term, compared to a one-off commission payment from a sale. And once your property is tenanted, it might be some time again before you get the opportunity to sell.

When selling a property that is not your own home, you may be liable to payment of Capital Gains Tax, regardless of whether the property is sold tenanted or vacant.

Capital Gains Tax (CGT) is based on the difference between the amount you paid for your property and the amount you got when you sold it. There may be an exemption, or partial exemption if you previously lived in the property as your own home.

It’s advisable to take specialist tax advice, but to get an initial idea of whether you will be liable to paying Capital Gains Tax on the sale of a residential property, you might find it useful to try an online Capital Gains Tax calculator.

If you’re selling a property in the UK while living abroad, there are special rules for calculating Capital Gains Tax.