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Buying a house with a tenant in situ - good or bad?


andrew cox

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Dear all,

 

Would it be worth buying a investment property to let that has tenants already living there?

 

I have just spoken to an agent about a property that is (superficially anyway) a bargain.  It is owned by a building society who repossessed it from an investor that failed to make their repayments and is on the market at 30% less than identical properties next door.  The resident tenant originally owned the house and on divorcing the house was sold to a company with an agreement that they could continue to live there.  The house was then sold on to another investor with the same tenency agreement and it was they that defaulted.  The building society tried to boot the tenant out and it went to court where the tenent won and the old agreement stands.  They are entitled to remain there for another 4 years on an Assured Shorthold Tennancy Agreement.  The ROI at the selling price with the current rent is very attractive (about a third higher than anything else nearby) and the property itself is in a great area with all the 'fundamentals' in place.  The tenant has apparently kept the place immaculate (presumably they still feel as though it is their home).  If the purchase could be made in cash with a view to mortgaging it later do you think it is a good deal?

 

Andrew

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Hmmmm.... that 4 years remaining rings some alarm bells. 

 

I AM NOT A SOLICITORS - and in fact know nothing about anything.  Just thought I'd caveat that before I gave my thoughts.  :)

 

If I remember my Law for Property Professionals correctly;

any tenancy over 3 years must be signed as a deed and witnessed

any tenancy over 7 years must be signed as a deed, registered with HMLR

any tenancy over 7 years, best practice states, should be a Common Law Tenancy and Contracted Out of the L&TA 1954 (a la commercial leases).

 

So the fact there is 4 years left remaining would make me question how long it was initially signed for.  If it was one of these "rescue" deals where the investor buys a property from a home owner, they may have allowed a Common Law Tenancy in order to pass on all of the repairing obligations onto the tenant, which would explain the immaculate condition (so he's not just acting like it's his home, he is legally responsible for the maintenance).   

 

Rules change when you go outside of the Housing Act legislation and into Consumer Contracts regulations - and I don't know any of the differences so don't ask! 

But it would explain why the mortgage company couldn't evict the tenant because he would have to be in breach of his initial contract.  If there is no Landlord Break Clause, then you are stuck with him until the end of the Contract and must follow the termination clauses to the letter in order to get rid of him at the end of it.  If it's not a Contracted Out tenancy...... I don't know enough, but from the tiny bit I do know - RUN!

 

My suggestion would be to not even contemplate the purchase until you've read the agreement that is in place with the sitting tenant, and then pass it to some smart Law Talking Guy to explain it in a much more accurate and sensible way than I just have. 

 

Hope that was sufficiently foreboding to put you off from doing something because it looks like a good deal.  :P

Damien Fogg
MRICS CeMAP CeFA

Email: damien@theepinvestor.com

Web: www.theEPinvestor.com

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Thanks for the replies.  I am going to discuss it with the solicitor next week.  Our mortgage broker said the same about the difficulty in getting a mortgage.  In a way that might be good as we may possibly be able to knock another huge chunk off the price, buy with cash and only mortgage it when there is a year to go on the AST.  The upside and ROI would still be good if there was a further discount.

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I just completed two flats with tenants in situ, albeit not with 4 yr AST. HSBC had no issue with it already being tenanted. They do not allow broker introductions, direct applicants only, so it may be worth giving them a call once you are happy with the legal side. I got a lifetime tracker @3.79 with 25% deposit and 2k arrangement fee. 4.09 is available with only £99 fee.

They have a very helpful help desk.

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Hi, my last purchase contained a sitting tenant. House was reasonably priced and shd wants to stay long term, rent from day one so I would say legal issues aside go for it

Thanks for tge info on HSBC, my two current lenders wl only seal through brokers!

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Great stuff.  As far as I'm concerned it probably has a great tenant but the mortgage issue is the issue.  Dealing with the mortgage next week but making sure about the tenant tomorrow.  We have a meeting with them in the morning to see what their views are.  If I can knock the building society down some more then we will probably go for it.  I'll keep you posted!

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  • 1 month later...

Amit / Jason / Andrew,

 

I'm thinking of buying a property at auction with a tenant in situ. Their tenancy expires in the next couple of months so will be looking to cease their tenancy, do the property up and flip it/get a higher paying tenant in.

 

My question - should pretty much any BTL provider accept a property with a tenant in situ? What other mortgage products can I pursue?

 

Thanks,

Dhiren

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