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Recent developments in the housing market have caused many landlords to consider putting their investment properties up for sale. Whether they intend to capitalize on the record 18% increase in home prices or they’re reacting to the continued fallout of the eviction moratoriums, landlords aren’t lacking in motivation to sell. Sometimes that means listing a property with rental occupants in place.
For investors looking to buy a house, the presence of tenants comes with its own set of advantages and disadvantages, depending on your perspective. We’ll examine the legal and practical ramifications of buying a house with tenants, in order to help buyers make an informed decision.
Before purchasing a house that’s occupied by tenants, investors should be aware that the rental lease is attached to the property, not to the owner. Like easements or covenants that run “with the land”, leases are legally binding documents that stay in place even if ownership changes hands. That means that all terms – including rental rates, obligations, and eviction clauses – will stay in place until the lease expires.
When buying a house with tenants, you become the landlord. That title comes with various responsibilities depending upon state and county laws, but in general, you’ll be required to continue providing an environment that is safe and habitable for the tenant. This “implied warranty of habitability” is considered standard in almost every state’s tenant-landlord laws.
To be more specific, the following are usually the minimum requirements of habitability:
In addition to the basic rights provided for above, the tenant is also entitled to any rights stipulated in the lease. For example, if the lease says that the landlord is responsible for lawn maintenance or for paying the utilities, those things must continue to be done under new ownership until the lease term expires.
When buying a house with tenants, it’s important to read through the current lease carefully. Here are a few tenant rights that may affect buyers and new landlords:
When buying a house with tenants, there are a few options to consider, depending on the situation, the lease contract, and the goals of all parties involved.
Some investors see a tenant-in-place as a benefit to the purchase. There’s something to be said for instant cash flow without any vacancy, turnover, or tenant screening.
If you’re considering a home with a tenant who you plan to keep in place, you’ll want to do your due diligence, though. Remember that not all tenants are good tenants, so you’ll want to ask for concrete data on this particular tenant’s history before making a decision. See below for a list of information you’ll want to request.
If you determine that you do not want to purchase the home with the tenant in place, you can add a vacancy contingency to your offer. Basically, you make your offer contingent upon the seller removing the tenant prior to sale. That puts the burden on the current owner to break the lease (and pay any penalties), offer the tenant an early-termination incentive, or evict the tenant if it’s within their rights.
Some leases are written with a clause that terminates the agreement upon sale of the property. If that’s the case, the tenant usually has a specified amount of time to vacate the property upon sale. If they refuse, they’ve broken the terms and legal action can be taken.
Other leases may be written with an early termination penalty clause, meaning the landlord and the tenant both have the right to terminate (with notice), but they’ll incur a financial penalty. For the tenant, this may mean the loss of the security deposit, so for the landlord the sum is probably the same. Check the lease terms.
Even without an early-termination clause, landlords can still offer a financial incentive for tenants to move out before the lease expires; this type of offer is sometimes called a “cash for keys” or “tenant buyout” agreement. Cash for keys agreements are legal in all states, but procedures and limitations can differ, so be sure to check your local laws before offering one.
The catch is that tenants have the right to refuse a cash for keys offer, so there are no guarantees for buyers looking to use this method to remove a tenant. If you’re planning to offer this type of incentive to renters, you’d do well to make an agreement prior to finalizing the sale.
In some locations, tenancy laws allow owners to legally evict tenants if they (the owner) or a close relative plan to make the property their primary residence. This is considered a “no fault” eviction, assuming the tenant has kept the terms of the lease.
In order to protect the tenant, OMI evictions are subject to burden-of-proof limitations, however. Usually that means that the owner/relative must begin to occupy the property within a certain period of time (such as 60 or 90 days) and must stay there for a specified amount of time (such as 1 to 5 years). If you are a buyer in this situation, it’s best to seek counsel from a real estate attorney because tenants may be able to claim wrongful displacement if the law is not followed correctly.
Before buying a house with tenants, an investor should weigh the pros and cons carefully. There is, of course, risk involved in buying any property, but when tenants are involved, the stakes get higher.
Pandemic-related eviction moratoriums have created a few complications for landlords, which means that anyone looking to buy a house with tenants will need to be extra careful right now.
Eviction moratoriums were not designed to forgive rental payments, and now that many of those pandemic accommodations have expired, tenants find themselves in a position of great back-rent debt to landlords. On average, tenants are behind on rent by $3700 country-wide, though in some areas that number soars over $10,000. Buyers are not required to settle this debt, of course, but the situation is problematic on a few levels for new investors.
A tenant who owes the current owner in arrears may not be motivated to pay you for future months of the lease contract. That breach of contract is cause for eviction now, right? Well, yes, but in some states, a pending relief application is grounds to delay an eviction, so it’s still not going to be easy to get rid of a tenant who won’t pay. For example, according to CNBC, “Until June 2023, showing that you’ve applied for rental assistance in Nevada can be considered a defense against eviction.”
However, in most cases, once the lease term is up, the renters are no longer protected by any governmental provisions. They have no right to the property at all, and as such, they’ll need to leave or be evicted –– in theory, at least.
In some cases, the seller may already be moving through eviction processes now that moratoriums have been lifted or relaxed. But even if a seller assures you that the eviction is already in motion, buyers should still proceed with caution. Eviction processes are long and complicated even during “regular” times, and now a backlog of filings may draw out the proceedings even more.
Image source: Statista
As with most purchases, it depends on your personal goals with the house. If you want to do a quick flip or if you plan to live in the home yourself, then buying a home with tenants may present more hassle than buying an unoccupied home.
For investors, buying a renter-occupied home can be great because there’s a built-in source of income already in place. However, there can be inherited issues that might put you in an unappealing situation. As always, investors should do their due diligence and weigh the pros and cons when considering this type of home purchase.
Under most circumstances, the answer is no, you cannot evict a tenant with an ongoing lease when ownership changes hands. The lease is connected to the property, not the owner, and remains valid even when the house is sold. But if you (or a close relative) plan to make the house your permanent residence, some areas allow no-fault OMI evictions.
That being said, eviction is not the only way to remove a tenant after buying the home. Sometimes there are allowances for early termination written into the lease. See the above purchasing options for more ways you might be able to remove a tenant without eviction.
The lease terms contracted with the previous owner remain valid until the lease expires. Therefore, you can only raise the rent after the time limit on the original lease is up. It’s advisable to notify the tenant of an impending rent increase a few months before their contract expires, though. That way, the tenant then has a choice to either remain in the home at the new rent price or find another living situation.
In the case of month-to-month renters, you will need to read the original lease terms. Though their residency is only technically secured for the month, there are probably provisions for when and how a rent increase can happen. In most states, landlords need to provide at least 30 days written notice of an increase.
There are several things that you should ask to see before buying a house with tenants. Ideally, the seller will give most of this information to you before you make an offer of purchase, though some (like the deposit) will be provided at closing.
Finding a house with tenants in place might be as simple as doing an advanced search for “tenant occupied” on your favorite real estate listing website. But as the saying goes, not everything that’s simple is easy. Often it takes more investigative research and deep dives into several investor-friendly databases to come up with potential purchases.
That’s where our team at New Western can help. Our professionals can help you find available houses with tenants in place by accessing lesser-known sources and utilizing creative methods. We’ll also help you analyze the numbers so you know if the deal is right for your portfolio. If you decide that buying a house with tenants is right for you, we’re here for you every step of the way.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
