At M A S O N S, we have a good understanding of the key risks and benefits associated with buying a property with a tenant in situ. For investors considering a property with a tenant in situ, it’s really important to weigh up all the factors involved, to reach an informed and sensible decision.
What is a tenant in situ?
A tenant in situ simply refers to a tenant who remains in a property after it has been sold. Unlike a vacant possession, where a property is empty and ready for new occupants, a property with a tenant in situ comes with an existing rental agreement that the new owner must honour.
On the surface, this seems like a straightforward arrangement, but the reality is far more nuanced.
Let’s explore the potential benefits first…
- Immediate rental income. One of the most attractive aspects of purchasing a property with a tenant in situ is the opportunity to earn rental income from day one. There’s no need to spend time and money finding a new tenant; the cash flow begins as soon as the purchase is complete.
- Lower purchase price. Often, properties with tenants in situ come with a lower asking price. Sellers are typically motivated to offload these properties quickly, making them more affordable.
- Reduced letting costs. With a tenant already in place, you can avoid the time and expense associated with advertising, referencing, and securing a new tenant.
- Established rental history. Access to the tenant’s rental history can provide valuable insights into their reliability. Knowing that the tenant has consistently paid rent on time and taken care of the property potentially offers peace of mind.
- Minimal refurbishment needed. A property occupied by a tenant is less likely to have been neglected, as regular habitation typically means it has been maintained. This reduces the likelihood of needing to invest in significant refurbishment projects.
Sounds good so far, doesn’t it?
But… at M A S O N S we urge buy-to-let landlords to dig a little deeper and to ask sensible questions about these benefits.
Key points to consider:
- Immediate rental income. This does sound great, but it’s also very straightforward to begin advertising your new rental property before your completion date, therefore reducing any potential void periods.
- Lower purchase price. This prompts the question; why is the seller reducing the price? Is it because this type of property is more difficult to sell and finance?
- Reduced letting costs. Inheriting a tenant can be more troublesome than finding a new one, and the cost of re-letting might be worth the peace of mind that comes with selecting your own tenant.
- Established rental history. Even with access to a tenant’s rental history, you’ll need to conduct your own thorough referencing process to ensure they’re a good fit.
- Minimal refurbishment needed. Again, this sounds like a bonus. But it’s quite difficult to fully assess a property’s condition while it’s occupied, which means potential problems may surface after purchase. Buying with vacant possession ensures you know exactly what you’re dealing with.
Understanding the risks
If you’ve questioned the benefits, and still feel the potential benefits remain strong. It’s time to weigh these against the risks associated with a tenant in situ.
- Limited tenant choice. With a tenant in situ, you’re inheriting a tenant you didn’t select. If the tenant isn’t a good fit for your management style or if their circumstances change, you may find yourself facing issues that could have been avoided with a fresh tenancy agreement.
- Eviction challenges. Evicting a tenant in situ can be more complex and time-consuming than starting with a vacant property. If the tenant is on a fixed-term tenancy agreement, you may have to wait until the term ends to regain possession of the property, even if you encounter issues along the way.
- Restrictions on rent increases. Depending on the terms of the existing tenancy agreement, raising the rent might not be as straightforward as it would be with a new tenant. You could be locked into a rate that doesn’t reflect the current market value.
- Deposit deductions at the end of the tenancy. Thinking ahead, it can be complicated to untangle where the tenant’s original deposit is held and it may be difficult to establish if the tenant is liable for any damages.
- Financing difficulties. Lenders often view properties with tenants in situ as higher risk, which can make securing a mortgage more challenging. You may need to seek out specialist lenders or be prepared to pay a higher deposit to offset the perceived risk.
- Legal complexities. Taking on a property with a tenant in situ involves navigating a more complex legal landscape. Ensuring all prescribed legal documents have been correctly served and that the tenant’s deposit is properly protected are just a few of the legal considerations. Failure to comply with these regulations can result in costly fines or legal disputes. Using an experienced (and more costly) conveyancing solicitor is essential.
Proceeding with caution
If you’ve weighed up the pros and cons and want to explore the opportunity further, there is a plethora of due diligence needed to ensure your property investment runs smoothly.
As mentioned, you will need a conveyancing solicitor experienced in this specific type of transaction to advise you. Here are a few questions that should be in the mix:
- Why is the landlord selling? It’s important to understand why the landlord is selling as this may mean the property isn’t a viable investment.
- Does the property have all the required certificates in place? If it doesn’t, you may struggle to evict the tenants (if necessary) in the future.
- Are all current health and safety standards up to date? From day one, you could be liable for any failure on this front – think fire safety, gas safety, Legionella… and more!
- Have the correct legal documents been served to the tenant? If the original tenancy agreement has not been established correctly, you may struggle to evict the tenants in the future.
- Was a thorough inventory and schedule of condition carried out before the tenants moved in? Has this been signed by all parties? Without this you may struggle to make deductions from the tenant deposit when they move out.
- Is the tenant deposit protected? The deposit should be held in an approved protection scheme. If this isn’t the case, you could be liable for a fine of up to three times the value of the deposit.
- Is it a fixed term tenancy? It’s likely that the tenant will be on a fixed term tenancy meaning you will not be able to serve a Section 21 notice for eviction until this period ends.
- When was the last rent increase? Landlords can only increase rent once every 12 months.
- Who pays the rent? Where is it paid to? It’s important to understand who pays the rent; where it is paid to; and that the amount matches the tenancy agreement. You should be very cautious if you uncover any discrepancies.
- When was the property last inspected? You should confirm when this took place, if it was a quality inspection and if any maintenance issues were raised.
- Are there any ongoing maintenance issues? If yes, you need to know why these haven’t been resolved.
- Are there any verbal agreements? If you discover any verbal agreements, documenting them in writing can avoid future disputes.
Taking sensible steps forward
Purchasing a property with a tenant in situ is a balancing act that requires careful consideration of both the potential benefits and the associated risks.
Make sure that you…
- Conduct thorough due diligence: Understand the tenant’s history, the condition of the property, and the terms of the existing tenancy agreement.
- Consult with experienced professionals: Work with a conveyancer who specialises in properties with tenants in situ to navigate the legal complexities.
- Assess your long-term strategy: Consider how this investment fits into your broader portfolio and whether the potential risks align with your financial goals.
By taking a measured approach and seeking expert advice, you can make an informed decision that supports your long-term investment strategy. Whether you choose to embrace the opportunity or steer clear, understanding the dynamics of a tenant in situ is essential for any savvy property investor.
M A S O N S is a leading letting agent in Hitchin, covering rental and buy-to-let properties in Hertfordshire. Founded on award-winning lettings experience, we specialise in property management, buy-to-let in Hertfordshire, and residential lettings – drop us a line at [email protected] or call us on 01462 557477.
Please note: this article should not be interpreted as legal or financial advice.
