Selling a 2–4 Unit Multifamily Property in Illinois: What Owners Should Know
Selling a two-flat, three-flat or four-unit building can be very different from selling a traditional single-family home.
You're not only selling the real estate. Depending on the property, you may also be dealing with tenants, leases, security deposits, operating expenses, rental income, local landlord-tenant laws and buyers who evaluate the property as an investment.
Whether you own an investment property or live in one unit and rent the others, preparing for these issues before listing can make the transaction much smoother.
Start With the Property's Current Occupancy
One of the first questions to answer is simple:
Who currently occupies each unit?
A 2–4 unit property might be:
Completely owner-occupied
Owner-occupied with one or more rented units
Fully tenant-occupied
Partially vacant
Completely vacant
That matters because occupancy can affect everything from marketing and showings to financing and the type of buyer most likely to purchase the property.
It can also affect what you can—and cannot—do with existing tenants before a sale.
Gather Your Leases and Tenant Information
If any units are rented, start organizing the property's records before listing.
That may include current leases, rent amounts, lease expiration dates, security-deposit records, information about utilities, parking or storage agreements, and documentation of other arrangements with tenants.
Don't rely on memory.
A prospective buyer—particularly an investor—is likely to want to understand exactly what rental arrangements they will inherit if the property is sold with tenants in place.
Your attorney should review existing leases and advise you regarding your obligations to tenants and the transfer of leases, deposits and other items at closing.
Understand the Property's Income and Expenses
A multifamily buyer may evaluate your building very differently from someone buying a single-family home.
An investor is likely to ask:
How much income does the property generate?
And just as importantly:
What does it cost to operate?
Be prepared to provide accurate information about current rents and relevant property expenses.
Depending on the building, buyers may want to understand expenses such as property taxes, insurance, utilities paid by the owner, maintenance and other recurring costs.
Good records can make it easier for a buyer to evaluate the property and can help support the value you're asking the market to place on it.
Current Rent Isn't Necessarily Market Rent
This distinction can be particularly important with long-term tenants.
A unit might currently rent for $1,300 per month even though similar units in the area are renting for considerably more—or less.
That doesn't mean a new owner can simply change the rent immediately.
Existing leases, local ordinances, required notices and other legal requirements may affect what can happen and when.
But understanding both current rent and potential market rent can help buyers evaluate the property's present performance and future potential.
When marketing the property, be careful to distinguish documented current income from projections or estimates of potential income.
Your Buyer Pool May Include Both Homeowners and Investors
One of the interesting things about 2–4 unit properties is that they can appeal to very different buyers.
An investor may primarily evaluate the property based on income, expenses, condition and potential return.
An owner-occupant may look at the same building and think:
"Could I live in one unit and rent the others?"
That can make smaller multifamily properties attractive to buyers who want some of the benefits of real-estate investing while still purchasing a primary residence.
Your marketing strategy should account for the different ways prospective buyers may evaluate the property.
Know the Local Laws Before Making Decisions About Tenants
This is one of the most important differences between selling an owner-occupied single-family home and selling a tenant-occupied multifamily property.
Do not assume that selling the building automatically gives you the right to terminate a tenancy, decline a renewal, increase rent or require a tenant to leave on whatever timeline works best for the sale.
State law, local ordinances and the terms of the lease may all apply.
And those rules can change from one municipality to another.
Chicago Is a Good Example
The City of Chicago has landlord-tenant requirements that property owners should understand before making decisions about existing tenants.
One example is Chicago's Fair Notice Ordinance, which establishes notice requirements involving certain rent increases and decisions not to renew or terminate residential tenancies. The amount of notice required can depend on how long the tenant has occupied the property.
That can become extremely important if you're considering selling a tenant-occupied two-flat, three-flat or four-flat.
For example, a seller might assume:
"I'll list the property now, give the tenants notice when I get an offer and deliver the building vacant at closing."
The applicable lease and local law may make that timeline more complicated.
Before promising vacant possession—or sending a tenant a notice because you're preparing to sell—talk with your real estate attorney about the lease and the laws that apply to the property.
You can learn more from the City of Chicago's Fair Notice Ordinance information.
Decide Whether to Sell Occupied or Vacant
There isn't one correct answer.
A tenant-occupied property may be attractive to an investor because rental income is already in place.
A vacant unit may appeal to an owner-occupant who wants to move in after closing.
A vacant building may provide greater flexibility for renovations, showings or repositioning—but creating that vacancy may not be simple or legally appropriate when tenants are already in place.
The best strategy depends on the leases, tenants, local laws, condition of the property and likely buyer.
This is a decision to make before listing, not after you've accepted an offer that requires something you may not be able to deliver.
Think About Showings Differently
Showing a tenant-occupied multifamily building requires more coordination than showing a vacant home.
There may be multiple households involved, and tenants are entitled to whatever notice and other protections are provided by applicable leases and law.
Rather than creating unnecessary disruption, establish a showing process before the property hits the market.
Depending on the circumstances, your broker may recommend consolidating showings into specific windows or limiting access until a buyer has demonstrated serious interest.
The goal is to balance effective marketing with the rights and reasonable expectations of the people currently living in the building.
Prepare for Buyer Due Diligence
A serious multifamily buyer may want more information than a typical single-family buyer.
Depending on the transaction, due diligence may involve reviewing leases, income and expense information, utility arrangements, property condition, zoning and legal use, building records and other documentation.
Buyers may also want to confirm that the number and configuration of units are legally recognized.
Just because a property physically contains three apartments doesn't necessarily mean the municipality recognizes it as a legal three-unit property.
Identifying potential questions before listing gives you an opportunity to address them before a buyer discovers them during the transaction.
Condition Still Matters
Investment property doesn't get a pass on condition.
Roofs, masonry, electrical systems, plumbing, HVAC equipment, porches, foundations and other building components can become significant issues in a multifamily transaction.
Deferred maintenance can also affect a buyer's analysis because an investor may immediately subtract anticipated capital expenditures from what they're willing to pay.
Before listing, decide which repairs make financial sense and which items are better reflected in the property's price and positioning.
Financing Can Affect Your Buyer Pool
Financing a 2–4 unit property can depend significantly on how the buyer intends to use it.
An owner-occupant purchasing a small multifamily property may have financing options that differ from those available to an investor purchasing a non-owner-occupied property.
That means a building's layout, occupancy and existing leases can potentially affect more than its investment performance—they may also affect the pool of buyers able to finance the purchase.
When evaluating an offer, look at the buyer's financing and intended occupancy along with the price.
Evaluate Offers Beyond the Purchase Price
Just as with a single-family home, the highest offer isn't automatically the strongest offer.
With a multifamily property, pay particular attention to:
Financing and intended occupancy
Earnest money
Inspection provisions
Attorney review
Appraisal-related terms
Requested seller credits
Due-diligence requests
Existing tenant and lease requirements
Requested vacant possession
Closing date and other contingencies
A buyer offering slightly more money but requiring the seller to deliver multiple units vacant on an unrealistic timeline could create a very different transaction from an offer that accepts the existing tenancies.
Plan the Sale Before You Put the Building on the Market
A successful multifamily sale starts with understanding exactly what you're selling.
Before listing a 2–4 unit building, determine its occupancy, collect the leases, organize income and expense information, understand the property's legal use and discuss tenant-related requirements with your attorney.
Then develop the pricing and marketing strategy around the property that actually exists—not the transaction you hope to figure out later.
At AED Realty, we help owners evaluate and market residential and investment real estate throughout Illinois, including 2–4 unit multifamily properties.
Explore our Investment Real Estate resources, learn How Your Home's List Price Is Determined, or contact AED Realty to discuss your property and develop a plan for the sale.
Clarity. Strategy. Execution.
This article provides general real estate information and is not legal advice. Landlord-tenant requirements vary by jurisdiction and circumstances. Property owners should consult a qualified attorney regarding their specific property, leases and obligations.