Extend the Lease AND Sell? That’s Not “The Way”

 

 

 “You can have it all.”

(1980’s Michelob Light Advertising Slogan)

 

I was (attentively) listening to a teacher’s presentation at my children’s school and she referenced the movie, Twister.  I nudged my wife and whispered, “That movie is probably 20 years old now.”  “Yeah, at least…”, she quietly agreed while discreetly double-pointing to the stage to redirect my attention back to (arguably) more important points of the on-going monologue.

 

But it got me thinking about older movies and Road Trip came to mind.  In short, it is about a group of Ithaca College (NY) students racing against time trying to get across the country to the main character’s girlfriend’s dorm in Texas before her mail arrived.  It was going to be close so they needed the quickest route to get there. 

 

There was the route that took all interstates and would definitely be the safest way.  But would it be fast enough?  Preliminary math on the mileage didn’t look promising.  However, there was another path that was more closely aligned with “how the crow flies” that would cut considerable time off of the trip.  It would take them on unproven, side roads.  It was the classic “risk versus reward”. 

 

One of the quotes from the movie that I still remember is from the character, Rubin, when he was defending taking the unproven route:

 

“It’s supposed to be a challenge, it’s a shortcut!  If it were easy, it would just be the way.”

 

The point that I take from this is that if something is straight-forward with the least amount of risk, it is “the way”.  It’s a “best practice”; there is no short-cut needed.  If they could have made it to Texas in plenty of time on the interstates, they would have been cruising in the fast lane there (though it would have made the movie less interesting…).

 

The way may be boring, but it is effective.  And it requires good planning in advance.

 

As a property manager in Charlotte, we ask our owners approximately 75 days prior to lease expiration whether they want us to extend a tenant’s lease and for ideally how long of a time period (one year or multi-year).  If the rental home is being kept as a long term investment, then “the way” is to offer to sign a lease extension for a long period of time.  If the owner wants to sell it in the near future, “the way” would be to sign a shorter-term lease and/or let the current lease expire and go month-to-month until a notice to vacate is needed.

 

In a perfect landlord world, tenants would be in leases all the time (no vacancies!), but landlords could still sell the home and have the tenants vacate when the buyer wanted.  But, alas, the world doesn’t work like that.  We live in a world of tradeoffs.

A lease is legally binding regardless of who owns it.  The main trade-off made with long term leases is that both the tenants and owner are sacrificing flexibility for security.  The tenants now cannot move out (without incurring financial penalty) if Uncle Joe calls in a few months and offers a free house to stay in.  They are stuck in a lease.  And, on the same token, if the owner loses his job and wants to move back into the house, he cannot kick the tenants out and take the house back.  On the plus side, the tenants can feel confident that their kids will be able to go to the same school for the life of the lease.  And the owner can count on monthly rental payments. 

 

There is security for both parties, but not flexibility.

 

You usually can’t have it all, no matter what Michelob Light says.

 

But what if the owner did extend the lease and then decided he wanted to sell the home right away?  We still live in the United States of America and no one can tell someone they can’t sell an asset that they own.  However, when selling, the prospective buyer would be purchasing the home SUBJECT TO the existing lease.  In short, the buyer would be stuck with the tenants at the terms of the lease for its duration.  For investors, that may be acceptable (or preferable!).  For someone who intends to live there, not so much.

 

That’s when Rubin’s “shortcut” would be needed.  And that is when it can be a challenge.  Solutions include trying to find investors to buy the home subject to the lease, letting the tenants out of their lease and encouraging them to find a new house, and/or negotiating a financial settlement to entice the tenants to move.  It can be tricky (and not always successful).

 

However, shortcuts sometime work out.  The Ithaca students were able to get to the incriminating piece of mail before the girlfriend could get to her mailbox.  But it was a stressful “road trip” and success didn’t seem likely during most of it.

 

I don’t know about you, but I generally prefer the calmness of the way; “boring” property management works well for me!  It’s good to make lease extension decisions thoughtfully now to avoid having to take uncertain shortcuts later.

 

Happy Landlording!