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.
Buying a House With Tenants
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.
The Landlord’s Obligations
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:
- Structure. A landlord must keep basic structural elements such as the roof, walls, stairs, and foundation intact and safe for the tenant.
- Common areas. For multi-family properties, any common areas such as yards, hallways, stairwells, parking spaces, and the like must be kept clean and usable.
- Systems. All systems are to be kept functional for the tenant, including electric, plumbing, HVAC, and waste systems.
- Water. The landlord is responsible for providing cold and hot running water, within reasonable parameters (e.g. a shortage of hot water after multiple showers in a row isn’t a hardship).
- Environmental Hazards. Anything potentially hazardous such as mold, asbestos, and lead paint must be remedied by the landlord.
- Safety. Reasonable protection from criminal intrusion must be provided.
- Vermin. Extermination of pests and rodents is required.
The Tenant’s Rights
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:
- Right to the security deposit. Upon move-out, the tenant should receive their security deposit back, assuming all standards in the lease have been met. (Buyers should be sure to get this from the seller at closing.)
- Right to vacate in 30 days. Even if the lease contains a termination clause (see below), the tenant is still usually given up to 30 days to vacate the property after the sale.
- Right to receive on-premises notices. Landlords do not have the right to access the premises without notice. Tenants must be given 24-48 hours notice for all appointments, including inspections, repairs, showings, etc.
- Right to receive vacancy notice. Often, landlords are required to give tenants written notice (30 or 60 days) prior to the date their lease expires and they must move out. Laws differ by state.
- Right to original lease addendums. As with lease terms, addendums (such as pet addendums or roommate addendums) stand when ownership changes hands.
- Right of first refusal. Some states allow tenants to match a buyer’s offer to purchase the home.
Purchasing Options When Buying a House With Tenants
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.
Keep the Tenant in Place
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.
Add a Contingency to the Offer
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.
Terminate the Lease
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.
Offer an Incentive for Early Termination
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.
Pursue an Owner Move-In (OMI) Eviction
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.
Pros and Cons of Buying a House With Tenants
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.
- Instant Income. Buying a house with tenants who pay on time is a great way to ensure instant cash flow – you gain a return on your investment from day one. In fact, if you close in the middle of the month, you should receive prorated rent from the seller for the number of days you own the home.
- No Need to Find Tenants. Finding and vetting tenants can be costly and time consuming. Plus while you do showings and screenings, your property sits vacant, which means no rent is coming in. With a tenant in place, you avoid that hassle and loss of income.
- Proper Maintenance Up-to-Date. Assuming the previous owner has kept up their obligations as a landlord, you can be relatively certain that normal living conditions have been maintained. (Though an inspection is still advised!)
- A Built-in “Expert”. Every house has its quirks, from the out-of-place switch that powers the porch light to the one squeaky floorboard in the dining room. An in-place tenant has discovered all the nuances of the property –– and of the neighborhood, for that matter. If you’re lucky, they’ll be the one to clue you in about what needs to be done in a frost and who to become friendly with on the HOA board.
- Unappealing Lease Terms. The previous landlord may have included or omitted items in the lease that could put you in an unfavorable position: pets, smoking, subleases, under-market rent, etc. You can always change the terms when it’s time to renew, but until then, you’re bound by the current agreement.
- Problem Tenants. When it comes to in-place tenants, you don’t know what you don’t know. A renter could look really good “on paper” yet still be hard to deal with. The tenant may have developed some less-than-ideal habits, like middle-of-the-night maintenance calls or repeatedly annoying neighbors with early-morning drumming. As a new owner, it could be difficult to establish new norms with established tenants.
- Inherited Issues. Remember the legal obligation of a safe and habitable living environment falls on you as the landlord. That means any backlog of maintenance requests is now your responsibility.
- Eviction Woes. Even if the tenant seems lovely, a new renter/landlord relationship has the potential for disagreements or misunderstandings that can turn things sour quickly. The tenant may retaliate by causing damage or withholding rent payments, causing the agreement to spiral downward toward eviction. But eviction is a long, costly, difficult process that no landlord wants to go through if they can help it.
Special Circumstances in 2022
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
FAQs Regarding Buying A House With Tenants
Should I Buy A House With Tenants?
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.
Can I Evict A Tenant When I Buy A House?
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.
When Can I Raise the Rent When Buying a Tenant-Occupied House?
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.
What Should I Ask The Seller For When Buying a House With Tenants?
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.
- The executed lease and all addendums
- Screening info and background checks
- Proof of on-time rent payment for as many months as possible
- Expense sheets (is the rent from this tenant enough to cover expenses?)
- Signed move-in condition sheet
- List of items that convey with the property (did the tenant bring the microwave or does it stay when they move out?)
- Security deposit (along with any interest due to the tenant, if applicable)
How Can I Find and Purchase a House With Tenants
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.