When it comes to buying a house with a tenant, this is not an unusual situation, but you will need to be aware of the potential pitfalls.
Sometimes referred to as, ‘buying a house with a tenant in situ’, this can be an effective way to buy a property or invest in one because these properties tend to be cheaper than a property being sold without a tenant.
That means you could:
- Invest in a property with a view to sharing it with the tenant;
- Become an investor with the tenant already paying rent.
There are pros and cons when it comes to buying a house with a tenant, and here we will take a closer look at what they are.
What is a sitting tenant in situ?
Essentially, this means that there’s already a tenant who is renting their home and will continue living there when the ownership switches from the landlord to you.
In simple terms, you will be buying a property that costs less because you’re buying a house with a tenant in it.
Some landlords prefer to sell their property that has a tenant in situ because:
- It’s easier to sell than evicting a tenant;
- Some landlords prefer buying a property that has a tenant in already.
However, while the landlord will need to accept a market valuation that is lower for the property, they may need a cash buyer to actually buy it.
The pros of having a tenant in situ
We have mentioned already that there are some pros to having a tenant living there when buying and they include:
- The property tends to be cheaper;
- You will earn rent from the first day of ownership;
- You don’t have to spend time and money finding a tenant;
- You won’t have to spend money refurbishing the property immediately.
The cons of buying a house with a tenant in situ
While the pros appear to be attractive to investors, there are cons to having a tenant in situ and they include:
- Your tenant might not be the best of tenants;
- You run the risk of an expensive and difficult eviction process with a sitting tenant – you need to check their tenancy status before buying the property;
- Be aware of any unexpected bills the previous landlord may leave;
- You’ll find that most mortgage lenders will not be interested in a property that has a tenant in situ because the lenders consider them to be a bad risk.
The last point is an important one, and unless you are a cash buyer then you need to look for a specialist mortgage lender and the best way to do this is to use a landlord mortgage broker who will have experience of the situation.
What is the difference between buying property with vacant possession and tenants in situ?
Buying property with vacant possession is a straightforward process; you find the home you like, make an offer and the seller may or may not accept it.
The buying process then begins.
However, when there’s a sitting tenant, the situation is not quite as straightforward, and you should utilise the experience of a conveyancing solicitor who has dealt with these types of property transactions previously.
Their experience may prove to be valuable.
If you are investing in the property, you need to understand:
Is the property licensed as an HMO?
Not every landlord will carry out the correct licensing, even though it’s a legal requirement. If they haven’t, then you need to consider what else the previous landlord may have neglected.
What, if any, property restrictions are in place?
While there’s a tenant in situ, and if you are thinking about moving in, some HMOs may be restricted in some areas.
Check for a valid energy performance certificate (EPC)
This will show if the property is energy efficient – and ensure that the tenant has been handed one by the landlord. This is a legal requirement, and it needs to be in place before buying the property.
Check whether a Gas Safety check has taken place
All gas appliances in a rental property have to be checked every year and a Gas Safety certificate handed to the tenant. Again, if there is no Gas Safety certificate, then the previous landlord may not have carried out other measures.
Check the property to ensure there are smoke alarms or CO2 detectors in place.
There are other issues to consider when buying a house with a tenant living in it, including whether the previous landlord has handed them a copy of the ‘How to rent guide’.
You also need to check if there is an Electrical Installation Condition report (EIC) and whether it is satisfactory. Be aware that you may be facing a hefty rewiring bill to avoid fire risk.
Issues to consider with a tenant in situ
Having raised potential problems with the Gas Safety certificate, or a relevant landlord licensing scheme, there are other issues to consider when you have a tenant in situ. For example:
Has a property inventory been carried out?
Before buying a house with a tenant, you need to know what is in the property – and whether one was taken when the tenant moved in. What condition is the home in? If there isn’t an inventory, then you need to carry one out.
Did the previous landlord register the tenant’s deposit in one of the government-approved schemes?
This is a legal requirement, and you need to arrange transferring the deposit with the seller.
How long does the tenant have left on their tenancy agreement?
This is a crucial question if you’re looking to replace a tenant. If there is just a few months left, it may be worth waiting until there is vacant possession and then you can move in, or recruit new tenants.
How much is the rent?
You need to ensure that a market rent is being paid and whether the tenant is making a payment and not a third party.
Rent arrears – has the tenant ever been late paying rent?
With a tenant in situ, it’s crucial that you know whether the tenant has paid their rent late or has been in arrears. Should the tenant have a history of arrears, then you may face future issues.
The major point when it comes to buying a property with a tenant in situ, is that you don’t simply take a landlord’s word for what has and has not happened. You will need to investigate for yourself.
You also need to check if there are any verbal agreements between the tenant and the current landlord in place because an off-contract agreement may scupper your chances of buying the property.
Will buying a house with a tenant make money?
While having a sitting tenant means that the property will usually be offered at a lower price than the market would ask for, you need to understand whether the property will generate a rental yield to make a profit.
Also, when buying the property, you will need to consider how much you need to invest in renovation and repair work.
For example, this could mean replacing the boiler within a year, redecorating, or even investing in new white goods.
Property viewing with a tenant in situ
It’s an important issue that you must view the property that has a tenant in situ with a tenant there.
It is not good enough to use brochures or a video tour because you will need to visit the property and meet with the tenant.
By doing this, you’ll see the general condition and if there are any issues with pest infestations or rising damp, for example.
You also need to ensure that the rental property not only meets legal requirements but is also safe for the tenant to live in.
You also need to meet with the tenant to ensure that you will get along.
This last point is particularly important if you are thinking of buying a cheaper property and living in that home yourself with the tenant.
A conveyancing solicitor for a tenant in situ
One of the checks a conveyancing solicitor will undertake when you are buying a property with a sitting tenant is to look at the tenant.
Essentially, this will be the same process should you recruit a replacement tenant so their employment status is needed, and a credit check will be carried out. Landlord references will also be sought.
Indeed, you may find that a commercial solicitor will be best placed to deal with this since a conveyancing solicitor specialising in residential property may not have the relevant experience.
A tenancy agreement with a tenant in situ
As we mentioned earlier, you’ll need to check the tenancy agreement before buying a house with a tenant, and your conveyancing solicitor will need a copy of it.
Your solicitor will need to know:
- When the tenancy agreement started;
- Where the tenant’s deposit is being held;
- The status of the tenant.
You also need to confirm that no one else is living in the property, other than those who are named on the agreement.
Also, you and your solicitor will need to check the agreement for any break clauses – and if there is one, then you need to consider invoking it for your tenant to leave.
Investing in a property with a tenant in situ
Once you have completed the conveyancing process and you buy the property, then you should speak with the tenant to reassure them that you intend to be a good landlord.
If you are looking at moving into the property, then you’ll need to have had these conversations previously.
The tenant may be wary about living with their new landlord, so you need to build up a good rapport to ensure they feel confident and comfortable sharing the property.
The rights of a tenant in situ
Finally, before beginning the process of buying a house with a tenant in situ, you need to understand that they will have more legal rights than a normal tenant.
This is partly the reason why these properties are offered at a lower amount – this will reflect the risk that comes with having a tenant living in the property.
Normally, a landlord will take over the current Assured Shorthold Tenancy agreement. This AST agreement will offer a landlord the opportunity of using a section 8 or a section 21 notice to evict the tenant.
However, with a sitting tenant, this is harder to do.
That’s because they will be protected by the Rent Act 1977 if they moved in before 27 February 1997. If so, then a section 21 ‘no-fault’ eviction notice cannot be issued.
Essentially, you can only evict a sitting tenant if you provide them with alternative accommodation that is suitable, or they fall into rent arrears.
There are areas of discretion such as subletting the property or breaching the tenancy agreement terms that may lead to eviction.
The tenant will have what is known as security of tenure if the tenancy predates 1989.
This can be a complicated legal area, so should you want to evict your sitting tenant you’ll need to consult with a specialist solicitor with experience of these circumstances for advice.