Pros and Cons of Buying a House with Tenants
When buying a property with tenants, you need to consider the risks involved, whether you keep the tenant (a sitting tenant) or buy with vacant possession. There are pros and cons to both. However, the problem is normally the type of tenant.
- Are the tenants good payers?
- Have there been any disputes?
- Do they have a Right to Stay?
- Was the tenant's deposit registered with a DPS?
- What is the condition of the property?
There are some Pros and cons to consider, which is why some landlords start with a clean slate and buy the property with no tenants. When buying with vacant possession, they can thoroughly inspect the property's condition, choose their new tenant, and sign a robust Assured Shorthold Tenant Agreement. If you are a landlord who is selling, then read this article - Selling a rental property with a tenant
Pros and cons of buying a house with tenants
Pros of buying a house with tenants
- No gap in rental payments.
- No "finders fee" to be paid for finding a new tenant.
- A tenant with a track history in the property.
- Previous landlord has legal documents: gas, EICR electrical check, Right to Stay evidence.
Cons of buying a house with tenants
- Risk taking on a bad/disgruntled tenant.
- You're responsible for any legal documents/procedures.
- Evicting the tenant will take over 3 months.
If you feel the Pros outweigh the Cons, read on for the 5 things you must do when buying a house with sitting tenants.
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5 things you MUST do when buying a house with tenants
If you are buying the property with sitting tenants, here are the top 5 things to check before proceeding:
1. Check the tenant's payment history
It is every landlord's nightmare to have a property they aren't paying for. So, it is important when buying tenanted property to find out if your new tenants have missed or been late paying their rent. Speak to the landlord or letting agent to find this out.
2. Are there any ongoing or historical disputes?
When buying a house with tenants, you must understand if any issues haven't been resolved between the tenant and the existing landlord. Issues such as maintenance in the property, broken equipment, or even defects such as dampness need to be brought to your attention so you can gauge what needs to be done.
You may find tenants with unrealistic expectations of what the landlord maintains. The best way to address this concern is to talk separately with the tenants and the landlord.
Ever wondered how you could reduce your income tax on rental property? Read our article, which goes through the different strategies you can implement to help.
3. Know your tenant
The checks you do for a tenant in 'situ' and a new tenant don't differ, so when buying a tenanted property, you should ask for:
- Right to Stay evidence
- length of time living at the property (longer than a year would indicate a tenant who has renewed their AST at least once)
- a copy of the AST - best practice is to get the tenant onto a new agreement directly with you under the same term length and rent
- references from previous landlords
- identification (you need to know the tenant on the AST is the same as the tenant living in the property)
- last 3 month's pay slips
- (if applicable) rent guarantor details
4. Deposit Protection Scheme
When letting property or buying a house with tenants, it is a landlord's legal obligation to both register a tenant's deposit at a Deposit Protection Scheme (DPS) and also to provide the requisite DPS documentation to the tenant. Hence, they are aware of where their deposit is and how to reclaim it. Getting either of these wrong could leave the landlord being faced with a court case and a penalty of up to 3 times the deposit value.
You must make sure the tenant deposit is returned by the existing landlord to the tenant or transferred from the current DPS to your DPS. Once you receive the deposit or register it, you must ensure you provide the prescribed information to the tenant (even if it is in the same scheme).
5. Condition of property
To avoid confusion when buying a house with tenants (and identify issues such as damp), you should agree with the existing landlord to inspect the property as if the tenant were moving out. Ignoring standard wear and tear, you should agree on the property's condition with the existing tenant and landlord when you take ownership of the tenanted property. This protects you from any disputes over conditions or damage caused by the tenant after you buy the property.
These sign-in and sign-out checks should always be done using an independent inventory clerk who logs the condition of the property at a given time and then can reassess any changes in the future. The inventory clerk includes pictures so that disputes that go to court can be more readily handled. A mistake to make is to think your photos are adequate - sadly, the photos need to be evidenced, dated and signed off by both tenant and landlord.
Make sure to get the existing landlord and tenant to agree on the current condition, and for the landlord to agree then to release the deposit to the tenant. You don't want to get caught in the middle of a landlord, and tenant claim over damages, as these can drag on for months.
Can you evict tenants when you buy a house?
The tenant has the same rights they agreed to within their tenancy agreement, which means they can only be evicted after their fixed terms expire. There are exceptions, such as if you have not paid the rent. you're engaging in antisocial behaviour. there's a 'break clause' in your contract.
If you plan to evict the tenant, check the date the fixed term ends in the tenancy agreement. You must then serve the tenant with a Section 21 Notice giving the tenant 2 months to vacate. The 2 months can tie into the end of the fixed term IE if the fixed term ends on the 30th of June; if you serve notice on the 30th of April, this gives the 2 months' notice required to link in with the fixed term ends.
Read more - The Eviction Process.
Buying a tenanted property with vacant possession on completion
If you opt not to buy the property with a tenant in situ, the seller should ensure the tenant has vacated before exchanging contracts. While there is no risk for the buyer, the seller would be in breach of contract if the tenant was still occupying the property on the day of completion.
If the tenant hasn't vacated, removing all their possessions, the buyer could refuse to complete, and the seller would have 10 days to grant vacant possession. Read more - Can I pull out after the exchange of contracts?
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
