In August 2023, there were over 12,500 properties listed for sale with tenants in-situ. In part, the recent spike has been attributed to rising mortgage rates that are making it more difficult for landlords to earn a profit from rental income.
But, as we all know, what comes up must come down, and when they do it might be the perfect time for aspiring landlords to make their move, or current landlords to expand their portfolio.
If you are thinking of buying a house with tenants already in it, in this article we’ll break down the pros and cons and share some no-nonsense tips to help guide you through the process of doing so.
What is a tenant in situ?
A tenant in situ, or sitting tenant, is a person (or people) already renting a property who sticks around when the ownership shifts from the previous landlord to the buyer.
Basically, when the current landlord sells up, the tenant stays where they are and the buyer becomes their new landlord.
Why do landlords sell houses with tenants in situ?
There are lots of reasons why a landlord might choose to sell a house with tenants in situ. For example, they may want to sell the property but have a good relationship with the tenants and therefore do not want them to have to leave. Alternatively, they may not be able to evict the tenant legally for a number of reasons, which leaves them little choice but to sell with tenants in situ if they want to get rid of the property.
Check out our guide for landlords on selling a property with sitting tenants for more information on this.
Advantages of buying a house with tenants in situ
So, why would anyone choose to buy a house with a tenant in situ? Well, there are a few reasons, including:
Homes with a tenant in situ often come with a friendlier price tag. Why? We’ll, they’re a bit tricker to sell for a few reasons, which can lead to them being sold for a lower price.
Immediate return on investment
Picture this - you buy a house and straight away the rent starts flowing into your pocket from day one. Sweet deal, right? Buying a house with a tenant in situ often means immediate income for any landlord.
No searching for tenants
Finding suitable tenants can be a real time sink. And every day your new property sits empty is losing you money. But with a tenant already in the picture, you skip the whole process. No need to spend time and money on sourcing tenants - they’re already there and paying rent.
Less urgent renovations
Usually, you’ll find properties with tenants in situ are already in a decent shape, so there’s no need to worry about having to make any immediate changes or drastic refurbishments.
Disadvantages of buying a house with tenants in situ
Now, let’s talk about the flip side - the not-so-great bits of buying a property with tenants in situ:
Many lenders are a bit wary of financing a property with a sitting tenant because they see it as a higher risk. If you are committed to buying a house with tenants in situ, you might need to shop around for a specialist lender, work with a broker, or be prepared to shell out a heftier deposit to seal the deal.
Speedy sales could spell trouble
When landlords want a quick exit, they might sell with a tenant in tow. But why the hurry? It could be due to hidden issues with the property or the tenant. Now, this isn’t always the case, but it’s important to be aware of the risks and ask lots of questions before making things official to avoid potential future headaches or surprise bills once you take ownership.
Tenant compatibility roulette
Since you didn’t choose the tenant, they might not be a good match for you. For example, their style of living might not align with yours. For that reason, taking on a sitting tenant can be a bit of a gamble, so it’s important to walk in with your eyes wide open.
If you've never been a landlord before, taking on a property with a tenant in situ could also be a steep learning curve as you get your head around your obligations as a landlord and the expectations of your tenant.
If you plan to buy a property with a tenant in situ and then evict them, brace yourself. This can be a tough and pricey process, it’s also one you want to make sure you understand fully to ensure you stay on the right side of the law.
It’s wise, before you commit to a property, to check the fine print of the tenancy agreement to avoid unexpected eviction hassles down the road. It's super important that you understand how to evict a tenant legally before doing starting proceedings, including the type of eviction notices you need to serve and how you might go about getting court orders, such as a possession order, in the event that they don't leave on the set date.
Checklist for buying a property with tenants in situ
When it comes to buying a property with a tenant already in the mix, it’s a bit trickier than going for one with no tenant. For a smooth ride, it’s smart to have a seasoned conveyancer by your side who can help you steer clear of any unexpected bumps in the road.
Here’s a list of questions you should ask before sealing the deal:
Does the property need a license? If so, does it have one?
Are there any restrictions on who I can rent the property to?
Does the property have a valid EPC?
Can I see the most recent gas safety check certificate?
Do all the smoke alarms and carbon monoxide detectors work? When were they last inspected?
Is there a current EICR for the property?
If appliances are included in the sale, have they been safety tested?
Has a legionnaire’s disease assessment been done?
Was the tenant provided the ‘How to Rent’ guide when they moved in?
If furnishings are included, are they fire rated?
What’s included in the property? Is it insured?
Was the tenant’s deposit registered in a government approved deposit scheme?
How long is left on the current tenancy agreement?
How much is the rent amount and who pays?
Does the tenant have a history of late payments or outstanding rent arrears? Can you provide statements as proof?
Before you dive into buying a house with existing tenants, it’s up to you to do your due diligence and collect all the evidence you need to feel confident in your decision.
First, assess the pros and cons of the current tenants. Are they reliable and responsible with their rent payments, or have there been any issues in the past?
Second, evaluate the property's condition and whether any renovations or improvements are needed, keeping in mind the tenants' living arrangements.
Lastly, check for any hush-hush agreements between the current landlord and tenant. Verbal agreements, like reduced rent for a monthly cash payment, could be lurking amongst other things. Remember, you’re perfectly within your right to have a chat with the tenant to make sure there’s nothing lurking around the corner to catch you out once you’ve signed on the dotted line.
Tips for landlords buying a property with tenants in situ
When considering properties with tenants in situ, it would be advisable for landlords first to evaluate the property's profitability. It is essential to carefully analyse the current rental income and ensure that it aligns with your investment goals.
Make sure to take some time to check if the rents being charged are competitive in the local market. Also, assess the potential for rent increases if the existing rates are below market standards.
Additionally, it is crucial to review the expenses associated with the property, such as maintenance costs and management fees, in order to determine the overall profitability.
Evaluating the quality of the existing tenants is also vital. It is recommended to request tenant records from the seller, including payment history, lease agreements, and references. Conducting thorough background checks will provide valuable insights into the tenants' rental history and creditworthiness.
In some cases, it is beneficial to consider interviewing the current tenants to understand better their needs and expectations, which can foster a positive landlord-tenant relationship.
Before finalising the purchase, review the existing tenancy agreements to fully comprehend the terms and responsibilities for both landlords and tenants. It is crucial to ensure that any changes made comply with local regulations.
Transparent communication plays a vital role in maintaining a healthy landlord-tenant relationship, so it is recommended to seek legal advice from a landlord solicitor to ensure that your decisions align with local laws and protect the interests of both parties. Whether you choose to renew existing agreements or draft new ones, it is essential to carefully consider the lease duration, rental terms, and any necessary adjustments.
Ultimately, whether or not purchasing a property with a tenant in situ is the right decision for someone’s next property purchase depends on your risk appetite and ability to manage tenant situations such as referencing and tenancy agreements.
Any such decisions should always be conducted in consultation with an experienced property lawyer, investor adviser or estate agent.
At Lawhive, we help landlords with any legal matters they may have relating to their properties. Contact us today for a free case assessment and quote.