When buying a buy to let property, one way to improve returns is to buy a property with a tenant already in place. The main advantages of this is that firstly you will have a tenant in place from day 1 which means zero voids. Also, if a tenant is already living there, it is likely that little or no work will be required at the outset to get it into a lettable condition. In addition, if the vendor is selling with a tenant in situ, it will not appeal to home buyers and will only apply to BTL investors which is a significantly smaller market and hence possibly a more attractive price can be negotiated.
Questions to ask
You should be asking the requesting the following via your solicitors:
- When did the tenants originally move in? – depending on the date you want to ensure that the regulations were followed (e.g. deposit protection, Right to Rent etc.)
- Copies of all ASTs and other notices (e.g. rent increase correspondence) – you need to ensure that the tenancy is governed by an AST (as opposed to a sitting tenant which is very different and would be problematic).
- Copies of rent statements – has rent always been paid on time? Be especially careful around Christmas/January time since that is when most people have higher expenses and may have difficulties in paying their rent.
- Details of all maintenance requests and actions taken. You want to check that (a) the landlord has been attending to issues and (b) that the requests from the tenant are reasonable.
- Are there any outstanding maintenance requests?
- Original check-in report and subsequent inspection reports. Does the landlord currently intend on making any deductions?
- Up to date and electrical certificates.
- What references were carried out at the inception of the tenancy? Are there any guarantors? Copies of documentation from that time (although as we discuss below you should be doing your own referencing in any case)
- Are there any ongoing or have there in the past been any disputes with the neighbours (common thing include noise, overhanging trees, and car-parking)?
We cover some of the more important areas in more detail below.
Security of tenancy
You need to check that the tenancy in place has been correctly set up – that the AST has been properly set and all legal requirements have been followed such as tenancy deposit registration. If this has not been done correctly, you may struggle to remove the tenant if the time ever comes to do that.
Transfer of Deposit
If the deposit is being held in a custodial scheme it should be a simple matter of transferring it to the buyer on completion.
If the deposit is being protected via an insured scheme, it is not possible to transfer it to the new landlord. The existing deposit must be closed and a new one set up by the new landlord. In particular, if there is a letting agent involved who holds the actual money, this can further complicate matters.
As the buyer, you do not want to be in a position where you have registered the deposit from your own funds and then wait for the (previous) letting agent to pay the money over to you. If they don’t, you are stuck since going to court is your only option. You need to make clear to all parties that the depsoit will be an improtant part of the conveyancing process and that there will be terms in teh conveyancing documentation taht protects the buyer.
The way to deal with this as a buyer is to set up the deposit with the relevant company but do not fund it. Then ask whoever has the deposit money to fund it. Concurrently with this, as part of the conveyancing process, hold back the amount of the deposit in escrow (held by the solicitors – preferably yours) with the intention that if the deposit is funded by the vendor (or his agent) on the day of completion, then that money will be released to vendor. If not, it will be released to buyer so that they can fund it.
Do not accept a situation where the vendor or letting agent tells you that they will transfer it to you at a later date unless you are protected via money in escrow.
We are amazed at how many times we see properties on sale with tenants in situ where the rent levels are significantly below market. The story is always that “the tenant is very good and the landlord wanted to keep them and never increased the rent”. You need to be very careful in this type of situation. The rent may have worked for the vendor at the price he/she bought but may not work for you. In this situation, if the tenant is early into an AST with no break clause, you may be stuck with a tenant paying low rent for a long time. Even if they are on a periodic, there is a risk that if you try to push the rent up straight after buying you may get off on the wrong foot with the tenant and they may not be able to afford to pay the higher rent – in this case you will need to issue a S21 and go through all the hassle of finding a new tenant in any case.
In these situations, we would suggest one of two options. Firstly, you could ask the vendor to issue a S13(2) to increase the rent early in the buying process. That way the tenant has already made at least one payment prior to completion and you know that they are fine with it. The (slight) risk here is that the vendor may think that with this higher rent he doesn’t want to sell the property any longer! Also, this only works if the AST allows it (if tehy are still within teh original term) or there hasn’t been a rent increase in the past twelve months (if in a periodic tenancy).
The alternative is to speak to the tenant beforehand and explain to them that you will be pushing the rent up after purchase. If you have explained this to the tenant well in advance, they will be more likely to accept it, as long as it is in line with the market. In such cases, we try to arrange completion on a rent day. This has two advantages – no pro rata of rent (buyer gets that month’s rent as part of completion statement calculations) and you can issue a S13(2) on the day of completion (since it can only be issued on a rent day). This way, teh first you recive (one month after completion) will be for the higher amount.
Make sure you use a solicitor that is experienced in buying with a tenant in place. There are certain legalities that need to be done which an experienced solicitor will be able to navigate for you. For example, you will need a letter of authority from the vendor which you will need to serve to the tenant.
We strongly recommend you perform your own references on the tenants. This should be done while the conveyancing process is underway (but well before exchange). Again, you must communicate to the tenant why you are doing this (since you will need their cooperation). Also, we always pay for this out of our own pocket since it is unfair on tenants to have to pay for this again. If references come back fine then you are good shape. If not, you need to think very carefully and you may want to ask for vacant possession.
Assuming you have reregistered the deposit, you should notify the tenant and provide the necessary information (including the certificate, prescribed information, and the scheme leaflet). Also, provide the tenants with the new bank details for rent payments as well as a S48 form which informs them that you are the new landlord.
You should also do another check-in report and give them contact details for maintenance queries.
While buying with a tenant in situ is more complex than buying a vacant property, if done properly, it can really boost your returns. The key is to ensure you have strong communication with your solicitors as well as the tenants. If the vendor does not allow you to speak to the tenants, that should set alarm bells ringing.
If you have a good solicitor, this should help to guide you through this process.