Tips on buying a property with tenants
Inherited, bought or taken ownership of a property with tenants in situ? Want to continue running it as a buy-to-let? Kate Faulkner runs through what you have to consider and the steps to take in order to ensure a smooth and legal transition.
- Pros and cons of taking on a property with tenants in situ
- What to find out before buying a tenanted property
- Inheriting a rental property
- Handing over the reins
- Getting to know the existing tenants
Pros and cons of taking on a property with tenants in situ
Firstly, here are the pros.
Rent comes right away
The big benefit of taking on or buying a property with sitting tenants is that you'll receive rent from day one. You might also be able to take a personal income from property if the rent is higher than the costs associated with owning and maintaining the property.
These costs would include:
- any mortgage payments
- regular maintenance and upkeep
- utilities you might be liable for
- contributing to an allowance for things like voids and tax.
Ready to legally let
The other key benefit is that the property should already be legally let, i.e. the previous owners should've met all of the health and safety requirements. This means:
- fire alarms and smoke detectors (carbon monoxide if necessary) should already be in place, as well as any required fire doors and extinguishers
- gas and electrical safety checks should have been carried out and valid certificates passed on to you;
- the general condition of the property should pass a local housing officers Housing Health and Safety Rating system, ensuring a decent standard of living for the tenants.
No need to refurbish right away
Another plus is that you probably won't have any immediate need to spend money on furnishing or refurbishing the property. If the sitting tenants have been happy to stay on through the change of ownership, chances are they're satisfied with the standard of accommodation and are not going to leave in the near future – unless they tell you differently!
You may decide you want to refresh the décor and contents, but the transfer of sitting tenants means you don't have to do it right away. If you bought a property with vacant possession, you would almost certainly have a period of time without any rental income when you would have to spend money on getting it ready to let: décor, fixtures and furnishings, health and safety measures, and obtaining all necessary certification.
So there are a lot of pros, but here are also the cons.
Things might not be above board
The biggest con of taking on or buying a property with tenants in it is taking on the risk that things might not be up to scratch. If the previous owner was not letting the property entirely legally, you might have to spend some time and money putting things right – and that's not always easy to do when the property is occupied. Also, be aware that if the local council finds out that the property isn't being legally let before you've had chance to put things right, you could be the one ending up being fined.
Removing existing tenants
If you decide you want to get rid of sitting tenants for any reason, then that may not be easy to do quickly. You'll have to give them proper notice of at least two months. However, if they're still within their initial 6-month agreement, you won't be able to give them notice until month four. Plus, if the tenants haven't been given the correct paperwork from the start, such as a How to Rent Guide or they have requested repairs which haven't been carried out, you may not be able to evict them at all.
In light of these issues, it's vital to ensure the potential cons are all things you should be able to check out before you take ownership.
What to find out before buying a property with tenants in it
If you're buying a property with sitting tenants, make sure you're using a solicitor or licensed conveyancer who has experience in handling this kind of transaction. These experts should know exactly what to ask and be able to anticipate potential pitfalls.
These are some of the important questions that need answering by the seller:
- Does the property have valid energy performance, gas safety and electrical safety certificates?
- When were the last safety checks carried out?
- What fire safety measures have been installed and are they fully functioning?
- Does the property require a licence and what are the details?
- Are there any local council restrictions that the seller is aware of about the type of let that is permitted?
- Is the property furnished? If so, request confirmation that furnishings comply with match/fire resistant standards and ask for any warranties or guarantees.
- Have all portable electrical items had Portable Appliance Test within the last 12 months?
- Was a full inventory taken at the start of the tenancy? If not, request that one is carried out.
- When did the current tenancy begin and what are the details?
- Has the deposit been registered and with which scheme?
- Have there been any problems with the tenant and has rent always been paid on time?
- When is rent due and how is it paid?
If all those questions are answered, you should be able to avoid the cons highlighted in the last section.
Inheriting a rental property
If you've inherited a rental property, you won't have been through the full legal purchase process, which means you won't have had the opportunity to address all those issues before taking ownership.
The first thing you need to do is use the list in the above section and check everything yourself as soon as possible. Ideally the property is let and managed through an agent who is a member of one of the following associations:
- Association of Residential Letting Agents (ARLA)
- National Approved Letting Scheme (NALS)
- Royal Institution of Chartered Surveyors (RICS)
These organisations should be able to give you all the information you need. If it suits you, the easiest thing is probably to leave it to the estate agent, certainly until you can find your feet.
However, if the estate agent isn't a member of one of these bodies, they may not be keeping up with the legal side of letting and may not have client money protection (CMP). If they don't have CMP they could run off with your rent.
If you're new to buy-to-let, remember part of your job will be to make sure the following tasks have been sorted.
- A Gas Safe registered engineer has carried out a full inspection of the gas system and issued a Gas Safety Certificate.
- A 'Part P' registered electrician has inspected the electrical system and carried out tests on all portable electrical items.
- A full fire safety risk assessment of the property.
- A representative from the housing department of the local council has advised on whether the property satisfies their requirements. This is especially important if the property is a House in Multiple Occupation (HMO) whether licensed or not.
- An independent inventory clerk, ideally one who is registered with the Association of Independent Inventory Clerks (AIIC), has carried out a full inventory on the property, so you have a clear record of the condition and contents at the point you assume ownership.
Handing over the reins
It's easiest for all parties if there is sufficient time between exchange and completion to arrange for transfer of services and utilities on the day you assume ownership – ideally at least two weeks. However, those things can also be sorted out retrospectively, if you're happy to continue with current suppliers. If you wish to change providers, most will require anything from two weeks to a month's notice.
In terms of rent, it's easier for everyone if the sale completes on the day rent is due. However, you can legally arrange apportionment – i.e. the seller agrees to pay over you the remainder of the month's rent on completion. Remember to give the tenants in situ sufficient notice to change their Standing Orders or amend other payment arrangements.
The various deposit protection schemes make it easy to transfer ownership of the deposit. You simply need to open an account with your chosen scheme provider, if you don't already have one, and give the seller your landlord ID or reference number. They can then simply transfer the deposit to your account.
The tenancy agreement
Legally, a change of ownership of a property doesn't affect a tenant's right to be there, as per the original tenancy agreement they signed. Ideally, speak to the tenant and find out whether they're happy to sign a new assured shorthold tenancy agreement with you, which will oblige you both for a minimum of 6 months.
If they don't want to do that, both you and the tenant are bound by the terms of the previous agreement they signed, which you need to check is legally accurate.
Of course, if you're not happy with the situation, you can wait until you're able to legally give them notice to leave, but then you'll have to find new tenants.
Dealing with the agent
If the property is let and managed by an agent, then leaving them in charge initially will make things a lot easier for you. This is because they will deal with the tenants on your behalf and may also be able to handle some of the other administration for you.
Once you own the property, you can then compare their service to other agents and change if you think it's necessary, especially if they haven't got client money protection or aren't a member of a professional organisation.
Do be aware that you should sign a contract with them, so make sure you know what the minimum term is – i.e. how long you're committing to using their services. If you know that you don't want to continue using the agent, then you should inform the seller as soon as possible so that they can give notice as some agents may have charges that apply.
Do you need a new inventory?
There shouldn't be any need to have a new inventory carried out, as you're simply taking over the tenancy as it stands from the previous landlord. However, if you don't think the original inventory was very good, then it's advisable to instruct an independent inventory clerk to carry one out as soon as you take ownership. Remember that you have to arrange access with the tenant.
Find out more information about landlord rental property inventories and inspections.
Getting to know the existing tenants
Whether you're continuing with an agent's fully managed service or not, it's always worth introducing yourself to the tenants. It's worth doing so they know you're now their landlord and to also let them know they can contact the agent if there's anything they need – reiterating that nothing will change for them.
If you're intending to manage the property yourself, then you should contact the tenants as soon as contracts have been exchanged and ideally arrange to meet. Be careful not to jump into property management without some way of keeping up with legal side of lettings as it's very easy to fall foul of the law. This means using a qualified agent or being a member of a local accreditation scheme or landlord association such as the Residential Landlord Association.
Essentially, buying a buy-to-let property as a going concern should be beneficial to you if you do your due diligence. Just make sure your legal representative does a thorough job of checking all the letting-specific requirements and, if you're in any doubt about the quality of anything, have all of the appropriate checks and works carried out.