Every owner of an LA building with a long-term tenant who runs a business in the unit, or a multi-generational family in a unit, or an heir who has been involved in the property, has had this conversation. Have you thought about selling to me? Sometimes it's a serious offer with financing already lined up. More often it's a feeler — the tenant thinks they would like to own the building, and they are wondering if the owner thinks they would like to sell it.
The instinct of most owners is to take the conversation seriously. The owner has known this tenant for years, often decades. The relationship is trusted. The transaction would avoid agents, marketing, and the cost of selling to a stranger. The price is whatever the two parties agree on. The whole thing feels efficient.
The instinct is usually wrong. Not because tenants are bad buyers — sometimes they are exceptional ones. But because the structure of an insider sale is built in a way that almost always undervalues the building by an amount the seller will not feel in the moment and will feel for the rest of his life.
The number that emerges in an insider conversation is almost always anchored to information the seller has shared with the tenant over the years of the relationship. I bought it for X. The taxes are Y. Cap rates in the area are about Z. Each disclosure was reasonable in the context of the moment it was made. Together, they constitute a price ceiling the tenant uses to anchor the offer.
The open-market sale does not have this anchor. A qualified buyer competing for the building anchors to current comparable transactions, current debt structure, current operational upside, and his own conviction about the asset class. The competitive process — multiple buyers, multiple offers, real comparison — produces a number that has no relationship to what the owner once told the tenant about the building.
The gap I see on real transactions is usually 8% to 20% of value. Sometimes more, when the tenant's anchor is significantly out of date or when the building has appreciated in ways the tenant's offer doesn't capture. The owner who sells to the tenant captures the convenience of a relationship sale and pays for it with the lost value of the foregone competitive bid.
A real buyer puts the building through diligence — physical inspection, environmental review, title scrubbing, rent roll verification, financial audit. A tenant-buyer often doesn't, and the seller is asked to extend representations and warranties that the buyer would normally absorb the diligence cost of confirming.
Three months after the close the tenant-buyer finds something he doesn't like — a deferred maintenance item, a code issue, a tenant problem in a neighboring unit. He calls the seller. The relationship that made the transaction feel efficient now puts the seller on the hook for problems the open-market buyer would have priced into his offer and absorbed himself. The seller didn't sell a building. He sold a building and a warranty.
Tenant-buyers are often under-capitalized for commercial multifamily acquisition. They have residential financing experience and commercial multifamily financing expectations. The down payment and DSCR requirements they're going to face on a real commercial loan often surprise them. The transaction stalls in escrow, the seller has invested months in the relationship-priced offer, and either the seller carries financing he didn't intend to carry, or the deal falls apart and the seller restarts the sale process from zero — months later, with the rest of the building's rent roll having gone stale, and often with the tenant-buyer still in the unit holding awkward dynamics.
The tenant offer beats the open market in three specific cases.
Speed and certainty matter more than price. Owner with a hard deadline — medical, divorce, partnership dispute, immigration timing — where a thirty-day close at a discount is worth more than a ninety-day close at a premium. The tenant offer, if the tenant has real financing, is often the cleanest path to a fast certain close.
The tenant operates a business in the unit that gives them a unique willingness to pay. A commercial mixed-use building where the ground-floor restaurant tenant has built twenty years of goodwill into the location. That tenant's willingness to pay for the building is partially driven by the value of not having to relocate. That driver doesn't exist for a generic buyer. In a narrow set of mixed-use situations, the tenant offer is genuinely the highest price the building can produce.
The building is constrained in ways that limit the open-market buyer pool. A building with active litigation, a building under a regulatory cloud, a building with extreme deferred maintenance that limits financeable buyers. When the open market is going to deliver fewer offers and lower prices, the tenant-buyer relationship can be the bridge to a clean exit at a price not far below what a wider market would produce.
Even when selling to the tenant is the wrong final answer, the tenant offer is useful information. It tells the seller what one motivated buyer is willing to do. The right way to use it is as a floor, not a ceiling.
Take the tenant's interest seriously enough to write down the proposed terms. Then bring those terms to a real brokered process and let the open market test them. If the open market produces a higher offer, the seller has captured the lift. If the open market produces nothing better, the seller can return to the tenant offer with conviction. The tenant rarely walks away during a thirty- to sixty-day market test — the relationship doesn't break that fast, and the seller's willingness to test is reasonable on its face.
The mistake is taking the tenant offer first and then declining to test it. The owner closes, takes the price the relationship produced, and never finds out what the building was actually worth. He learns the answer six months later when a comparable building two blocks away closes for more, and he can't unwind anything.
When a tenant proposes to buy, what they sometimes really want is preferential treatment — first right of refusal, advance notice, a chance to match. Those are reasonable to grant in writing if the relationship matters to the seller. They are not the same thing as a sale, and the owner should not confuse the two. Granting a right of first refusal is structurally different from selling to the tenant at a privately negotiated price. The first preserves the open-market test; the second forecloses it.
When an owner tells me a tenant has expressed interest, the first thing I ask is whether the owner has discussed price. If the answer is yes, the owner has often already anchored the transaction below market. The conversation from there is about whether the tenant's number is in the range of the market or below it, and what the seller's options are to test the market without breaking the relationship. Sometimes the tenant offer is a real floor and we use it. More often we run a quiet competitive process and the tenant either lifts his offer to compete or steps aside graciously.
The owners who handle this poorly are the ones who feel obligated to sell to the tenant because of the relationship. Loyalty to a tenant is not a financial decision. If the owner wants to give the tenant a discount, he should be honest with himself about doing it on purpose and at a specific dollar amount. Sliding into a below-market sale because it felt rude not to is not generosity. It is a mistake the seller will pay for.
The tenant who asks to buy is paying the owner a compliment. The compliment does not require a discounted sale to accept. The owners who sell well to their tenants are the ones who test the market first, find out what the building is worth, and then choose whether to give the tenant a price advantage with full information about what the price advantage costs them. The owners who sell poorly to their tenants do it the other way around. The first group sometimes still chooses the tenant. The second group never finds out what they gave up.
Request a free evaluation — including how to handle an unsolicited tenant offer →
Should I sell my apartment building to my tenant?
Sometimes, but rarely as a first step. The tenant offer is almost always anchored below current market because of information the tenant accumulated during the tenancy. The right sequence is usually to test the open market briefly and use the result to decide whether the tenant offer is a fair floor or a meaningful discount.
Does a tenant have right of first refusal to buy my LA apartment building?
No, unless you specifically granted one in their lease or a separate agreement. There is no general statutory right of first refusal for residential tenants on LA apartment buildings. (Some local condo-conversion ordinances create narrow tenant-purchase rights in specific scenarios — confirm with counsel if conversion is on the table.)
What's the typical price gap between a tenant offer and an open-market sale?
The range I see on real transactions is 8% to 20% below market. The number depends heavily on what financial information the seller shared with the tenant during the tenancy and how stale that information is relative to current market conditions.
Can a tenant offer be the highest offer for an apartment building?
Occasionally yes. The narrow scenarios where it happens involve mixed-use buildings where the ground-floor tenant has irreplaceable goodwill in the location, or buildings constrained in ways that meaningfully limit the open-market buyer pool. In most general LA multifamily situations, the open market produces a higher price than a single insider buyer.
How do I test the tenant offer without losing the relationship?
Run a short quiet competitive process — typically thirty to sixty days — and use the result as the comparison point. Most tenants understand a seller wanting to confirm market value before accepting an off-market offer. If the relationship breaks at that ask, the offer probably wasn't fair to begin with.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions.
Thinking about selling? Get a no-obligation evaluation on your building.
Request Free Evaluation →