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Portfolio Growth, Tenant Management

What Landlords Need To Know About Buying A Property With Tenant In Situ

Selling a property with a tenant in situ is not that unusual. These properties tend to appeal to more experienced landlords. There are several distinct advantages to the arrangement when it comes to buying a property with tenants in situ.

This guide explores the advantages and disadvantages, so read on if you like the idea of buying an investment property that offers you an income from day one.

What is a Sitting Tenant/ Tenant in Situ?

A tenant in situ, also known as a sitting tenant is a tenant that is already renting a property when you purchase it and the tenant will be staying on for a period.

In some cases, a landlord will sell their property with a tenant in situ because they have a good relationship with their tenant. However, more common is they wish to sell the property and there is still a period left on the current tenancy agreement meaning the tenant cannot be removed.

Financing when purchasing a tenant in situ can be harder, and so landlords selling with a sitting tenant may have to take a below-market valuation.

The Pros and Cons of Buying with a Tenant in Situ

Some of the pros and cons to buying property while the tenant is still in situ include:

Pros of sitting tenants

  • Many lenders consider sitting tenants higher risk as you yourself cannot vet them. As such, it’s harder to get finance. Because of this the property generally sells for a lower price.
  • Immediate income. If there is already a tenant in place then the rent is paid from the first day you take ownership which can be an attractive proposition for any landlord.
  • No need to look for a tenant. Which saves time and the cost of finding a new one.
  • It is unlikely the property will need any immediate refurbishment. Properties are usually refreshed between tenancies. If you already have a tenant in situ then there is a greater chance that the property is in fair condition.

Cons

  • Lenders considered it a higher risk if you’re looking to purchase with a tenant in situ. As such, you may need to find a specialist lender or put down a higher deposit.
  • Landlords who sell with a tenant in situ do so usually because they don’t want to wait till the end of the current tenancy agreement. Often this is because there is something wrong, either with the property or the tenant.
  • You don’t get to choose the tenant. As such, they may not be a good fit for you and your operating model.
  • If the tenant isn’t a good fit it can be difficult and expensive to remove them.

Things to be Aware of When Buying a Property With Tenants in Situ

When purchasing a property with a tenant in situ there are a few more things to consider than purchasing a vacant property. You’ll likely want to use an experienced conveyancing solicitor for this type of transaction.

A few key things to check and verify before you purchase the property include:

  • Is the property licenced? Some rental properties must be licenced, specifically HMOs. Not all landlords licence their property. Some do not know it is necessary. Do check whether the property needs to be licenced. And if it does, ask for the details of the licence. If the landlord hasn’t applied for a licence you might ask yourself what else they have neglected to do?
  • Are there any restrictions on who you can let the property to? For example, in some areas, new HMOs might be banned in an area of high-density HMOs. This prevents you from converting a single-family dwelling into a shared house.
  • Does the property have a valid EPC? An EPC tells you how energy efficient the property is. The seller should have given one to the tenant; one is also needed before the property is sold.
  • Has a gas safety check been carried out in the last 12 months? Gas appliances must be tested annually. If the seller can’t produce a recent gas safety certificate for the property, they may have neglected other safety measures.
  • Are fire safety measures in place and when were they last checked? There should be a working smoke alarm/CO detector, among other things.
  • Does the property have a current Electrical Installation Condition Report (EICR) and is it satisfactory? Dodgy wiring is a major fire risk.
  • Has a Legionnaires’ Disease risk assessment been carried out?
  • Was the tenant given a copy of the ‘How to Rent’ guide from the Department for Communities and Local Government?
  • Was there a property inventory carried out at the start of the tenancy? Property inventories are often forgotten about, but you need to know what’s included in the property before you take over the tenancy and what state the property was in prior to it being let. Ask for a property inventory to be carried out if there isn’t one before buying a property with existing tenants. Insist that all contents are insured before contracts are exchanged.
  • Was the tenant’s deposit registered and placed in a government-approved scheme? When you buy a property with a tenant in situ, you’ll need to come to an arrangement with the seller about the transfer of the deposit.
  • How long is left on the current tenancy agreement? Check how long is left on the tenancy agreement. If the tenancy is due to expire in the next few months, it might be worth hanging fire and waiting for vacant possession.
  • How much rent does the tenant pay and who actually makes the payment? In some tenancies, the rent is paid by a third-party rather than the actual tenant, for example, a family member. You need to know exactly how much the tenant pays in rent. Make sure the figure the landlord gives you matches what the tenant in situ tells you. If there is a discrepancy between the two, find out why.
  • Has the tenant in situ ever been late with their rent? This is important when buying a house with tenants in situ. The seller’s bank statements will need to be checked for evidence of rental receipts. Taking on a tenant with a history of rent arrears could cause problems.

As always ensure you do your due diligence when investigating a potential property purchase and verify there are no verbal agreements in place between the current landlord and the tenant that may complicate matters.

how to rent boxes

Are Properties With a Tenant in Situ Profitable?

The right property can be profitable. With a tenant in situ, the property is likely to be marketed at a slightly lower price reflecting the increased assumed risk. This could mean a better yield for the investor (though not if there are issues with the property or tenant that must be sorted out first). You will want to do the mths first to ensure an acceptable rental yield for your long-term financial plan.

It’s a good idea to review potential large upcoming expenses such as old boilers or serious maintenance work and to include these costs in your calculations.

Essentially, while yes, it can be profitable to purchase with a tenant in situ you will want to make sure your return on investment is sufficient to outweigh the extra risk of buying a tenanted property.

Viewing a Property with a Tenant in Situ

Always view a property in person before purchasing it – this includes the scenarios where there is a sitting tenant.

A first viewing gives you a good idea of the size of the property and its general condition. A second viewing lets you look beyond the superficial to see whether there are any problems you need to know about, such as rising damp, dodgy electrics, or pests.

Make sure the property is safe and meets all legislative requirements from a health & safety perspective. Pay attention to any maintenance issues, as these will become your problem once the purchase has been completed. These are all important things to consider when buying a property with existing tenants

Organising Viewings With a Tenant in Situ

As usual, tenants must be given proper and adequate notice before any viewing of the property can take place.  This means at least a 24 hour notice delivered in writing. Some tenancies may also not allow viewings to take place without the tenant’s permission. To ensure this is handled effectively and legally you will need to liaise with the seller.

If the tenant refuses access you will want to determine exactly why as this could be an indicator of issues in the future.

When asking to view the property be open and honest with the tenant – if you need to organise a survey then they will likely understand. You have to do your due diligence, but the tenants still have their right to privacy. Ultimately, you don’t want to upset a tenant in situ before you even take over the tenancy as it will make life harder if you do decide to complete the purchase and take over the management of the rental.

Talking with the Tenant in Situ

Before closing on the rental property it’s a good idea to talk with the current tenant. An informal chat is a good opportunity to introduce yourself, find out more about them, make an initial assessment of the kind of tenant you think they’ll be, and find out their future plans.

A few things to discuss include:

  • What do they like about the property, and whether they have any issues such as with noisy neighbours or the boiler etc?
  • Review when the rent was last increased.
  • Ask whether they are happy doing minor repairs themselves.

Referencing a Tenant in Situ

When buying a property with a tenant in situ it is normal for either the conveyance solicitor or yourself to conduct reference checks on the existing tenant. This will include the usual checks such as credit checks, employment checks, landlord references, etc.

Additionally, check with the current owner of the property if they have served any notices or made any of their rent payments late. This should highlight any disagreements or unresolved maintenance issues.

Tenancy Agreements

The existing tenancy agreement is still valid after the property handover. As such, the seller’s letting agent should provide a copy of the lease document as well as share important details including, when the document was created and the status and location of the deposit.

Verify that everyone living on the property is on the lease document and double-check for any break clauses in the lease agreement as you may need to invoke one should the tenancy not work out.

Start off on the Right Foot With the Tenant in Situ

Once you have completed the handover, make sure to reach out to the tenants and reassure them and make sure they have all the necessary details such as how to pay rent, how to report maintenance issues etc.

Reassure them that the deposit is safe and that it will be returned as usual (assuming no damage) at the end of the tenancy.

If you have any renovation plans or plan to make changes to the property in some way let them know now.

Final Word

It is important to understand the tenant’s rights and ensure you understand all of the risks and steps associated with buying a property with a tenant in situ.

For example, tenants in situ are protected under the Rent Act 1977. If it can be proved they moved into the property before 27 February 1997, ‘no-fault’ Section 21 notices cannot be used to evict the tenant.

Additionally, you don’t get to choose your tenant, and you have no say over the tenancy agreement that was signed at the beginning of the tenancy and so there is inherent risk there too.

However, as already mentioned you may be able to get a property at a significant discount, and if you can secure the financing required this could help you achieve top returns for your investment.

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