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For many landlords, purchasing a property with tenants in situ is attractive. This is because, once the transaction has been completed, they will take over the existing tenancy.
According to the House Buyer’s Bureau, there were 12,518 properties with tenants in situ listed for sale in September 2023. Evidently, it is becoming an increasingly popular investment choice for landlords.
However, before diving in to sign on the dotted line, it is important that you conduct your own due diligence checks and you feel confident that the property is fit for your intended purpose.
Why Would I opt for a Property with Tenants in Situ rather than one with Vacant Possession?
There are many reasons why properties with tenants in situ are attractive to prospective landlords:
- A lower guide price – Generally, they are cheaper than properties sold with vacant possession. This is because the market is restricted to investors only whilst the tenants remain living there.
- A guaranteed rental income once the transaction has been completed – Even if your completion date is mid-month, your solicitor will apportion the rental payment between the buyer and the seller.
- A tenancy agreement is already in place – This will relieve the stress of finding a new tenant upon completion.
- No immediate refurbishment will be needed – The tenants living in the property will have made the space ‘their own’, and therefore, it will have been maintained to a fair standard.
Is it the Right Investment for Me?
As with any purchase, the legal principle of ‘Caveat Emptor’ (buyer beware) will apply to your property with tenants in situ. This means that you must do your own due diligence work (see below) as, once the transaction has been completed, the seller will be removed from any liability if you encounter any future problems.
Prospective landlords also need to consider how they will finance their purchase. Whilst properties with tenants in situ are attractive to cash buyers since they are typically sold at a lower price, they are categorised as ‘high risk’ in the eyes of many lenders. This is because you cannot select the tenant yourself.
Prospective landlords also need to consider whether the property in question truly satisfies their investment criteria or if they are purely attracted to the lower purchase price. Potential factors to consider include:
- Location, location, location – Is the property close to public transport links, reputable schools, and local amenities?
- The reputation of the area – Is there a high crime rate?
- The demographic of the area – What type of tenant are you trying to attract: young professionals, families or students?
Ultimately, you want to ensure that your property is fit for your intended purpose.
How do I Carry out my Due Diligence Checks?
In short, thoroughly.
Do not be fooled by sparkling interiors and seemingly ‘happy’ tenants. Instruct a surveyor to inspect the property and meet with the tenants in situ. Have they built a strong relationship with the existing landlord? Do they have any grievances about the property?
Do not rely on the existing landlord’s due diligence work and conduct your own investigations. Ensure that all of your paperwork is in order before the exchange of contracts.
You should be alive to your obligations outlined in HM Government’s ‘How to rent: the checklist for renting in England’ [see sources below] and ensure that the existing tenants have the following:
- A gas safety certificate – You cannot assume that this was provided at the outset of the tenancy. Therefore, you should instruct a Gas Safety Engineer to conduct a gas safety check and then provide the tenants with the updated certificate. This must be repeated annually.
- A deposit protected in a government-approved scheme.
- A copy of the guide outlined above.
- An Energy Performance Certificate with a minimum rating of ‘E.’
- A report that shows the working condition of the property’s electrical installations – Fixed electrical parts must be inspected every five years, and throughout the entirety of the tenancy, national electrical safety standards must be satisfied.
- Evidence that carbon monoxide and smoke alarms are in working order.
Your obligations do not stop here. You have an ongoing duty to maintain the structure of the property, deal with any issues stemming from the utilities and carry out any reasonable repairs when requested.
Remember, it is all in your best interests to do so if you would like to build, or even sustain, strong relationships with your tenants in situ.