Should You Sell Your Chicago Multi-Unit Occupied or Vacant?

One of the first decisions when selling a Chicago two-flat, three-flat or four-unit is whether to sell it with tenants in place or deliver some or all of it vacant. There's no universal right answer. The best choice depends on who is most likely to buy your building, how your rents compare to the market and how much time you have.

Start With Your Likely Buyer

Small multi-units in Chicago attract two very different buyers:

• Investors want income from day one. Reliable tenants on current leases are a selling point, not a problem.
• Owner-occupants plan to live in one unit and rent the others. They need a unit they can move into, usually within a month or two of closing. Many are using low-down-payment loans that require them to occupy the building.

In many Chicago neighborhoods, owner-occupants can pay more than investors, because they're buying a home as well as an income stream. That's often the strongest argument for delivering at least one unit vacant.

When Selling Occupied Makes Sense

• Your likely buyer is an investor
• Current rents are at or close to market
• Tenants pay on time and their leases run past your expected closing date
• You want to avoid months of carrying costs with no rental income
• The units are in good shape and show well with tenants living there

When Delivering Vacant Makes Sense

• Your likely buyer is an owner-occupant
• Rents are well below market and pulling down the building's value to investors
• Units need updating that's easier with no one living there
• Showing an occupied unit is difficult, or the unit doesn't present well
• You can absorb the lost rent while you wait out the notice period and market the building

The Middle Path: One Unit Vacant

For many sellers, the best answer is both. Keep the rental units leased and deliver one unit vacant, usually the owner's unit or the largest one. An owner-occupant gets a place to move into and rental income from the rest. An investor still sees most of the income in place. You widen your pool of buyers without giving up all your rent.

Chicago's Notice Rules Set Your Timeline

If you plan to deliver a unit vacant, the timing is set by Chicago's Fair Notice rules. To end a tenancy or not renew a lease, landlords must give written notice based on how long the tenant has lived there:

If proper notice isn't given, the tenant can generally stay for that notice period after notice is finally delivered. For a long-term tenant, that means deciding on vacancy about four months before you want the unit empty. A tenant on a lease running into next year adds more time.

Some owner-occupied buildings are treated differently under Chicago's landlord rules, and every situation is specific, so confirm your notice obligations with a real estate attorney before sending anything.

Some sellers negotiate an early move-out with a tenant instead, often with a payment toward moving costs. If you go that route, put the agreement in writing.

Weigh the Cost of Vacancy

Vacancy isn't free. Suppose a unit rents for $2,400 a month and takes four months of notice plus two months on the market. That's roughly $14,400 in lost rent, plus utilities and taxes you're still paying. Delivering it vacant makes sense when the price you expect from an owner-occupant, or the value of updating the unit, is clearly larger than that.

Showing an Occupied Building

• Give tenants proper advance notice before every showing, in writing. Chicago's landlord ordinance requires advance notice to enter a unit.
• Group showings into set windows so tenants aren't disrupted daily.
• Let tenants know what's happening early. Cooperative tenants make a better impression on buyers.
• Consider showing the vacant or owner's unit first, then occupied units only to serious buyers.

What Happens at Closing

When an occupied building sells, existing leases stay in force and the buyer becomes the landlord. Security deposits, along with any interest owed, transfer to the buyer, usually as a credit on the closing statement. The new owner must notify tenants in writing within 14 days that it now holds their deposits. Clear deposit records make this step simple; see How to Build a Rent Roll Before You Sell Your Chicago Two-Flat.

Making the Call

Before deciding, look at three things: recent sales of similar buildings in your neighborhood, whether they sold to investors or owner-occupants, and how your rents compare to the market. Those answers usually make the decision clear. For more on buying, selling and financing these buildings, visit our page for Chicago multi-unit specialists, or download our free Chicago 2-4 Unit Checklist.

Talk to Joe and Katherine Tighe. Email [email protected], call Joe at (312) 345-5353, or call Katherine at (708) 847-9913.

This post is general information, not legal advice. Talk to a real estate attorney about notices and tenant matters for your building.