Tips for Buying a Tenant-Occupied Home
Sometimes buying a tenant occupied property can be a great deal. The seller, aware the situation is more complex than with a vacant house, makes concessions for you—possibly monetary concessions. But take it from me: that complexity I just mentioned can be an outright quagmire. So while I’m certainly not saying you shouldn’t buy a home that’s currently rented, I am saying: know what you’re getting into. This knowledge helps you, the seller and the tenants get through the process smoothly.
In my case, my husband and I fell in love with the house right across the street from the one we were renting. But when it went up for sale, someone else was renting it. We thought it would work out well because we would become landlords only as long as we needed to finish out our lease, then that tenant, who’d been notified by the seller, would move out, and we could move in. With help from our Realtor®, we got copies of the lease terms, including security deposit and rent amount. But behind our back—sometime between accepting our offer and closing with us--the seller dropped the rent without telling us (possibly because she was going to act as that tenant’s Realtor so was trying to maintain a good relationship), and told the tenant she could use the security deposit as the final month’s rent. Now we were set up in an adversarial position: we wanted the rent we’d expected, and we weren’t comfortable allowing her to use the security deposit as rent, because we wanted her to have some motivation to leave the place in clean, good condition. You can imagine how uncomfortable it was, living across the street from someone who now considered you the enemy—particularly when you have a big, soft heart and just want to get along with everyone (like me).
Primary or Secondary Residence?
Obviously, the issue differs depending on whether you’re buying a rented home with the goal of moving in yourself, or if you plan use it as an investment property. But either way, here are some tips for buying a tenant-occupied home.
- When you write your offer, write in an amendment that requires the seller notifies you before altering any agreements with the existing tenants.
- In the purchase agreement addendum, write in the amount of the security deposit and the rules around it. It should be credited you at closing by the seller, and you will refund the tenant based on the condition of the home when the tenant vacates. Make sure you follow any local rules about interest on security deposits if you’re planning to let the tenant stay on (as you would in a second property/ investment situation.
- Your purchase agreement should include prorated rent credit: this means you get part of the rent if you close in the middle of the month—as soon as you’re the owner, that rent is your income. The amount due should be clearly stated in the agreement.
- If you can stand it, you should meet with the seller and the tenant together before closing. Rent, rent collection methods, the security deposit, date of tenant’s move out, and any changes you want to make to the agreement should be clear to everyone, agreed on. Consider a new lease the tenant signs with you in the seller’s presence.
- With short sales, tenant issues can turn what is already a long process into an interminable one. Write into your offer that you want to be notified within 24 hours of any tenant problems, such as over-due rent or a tenant asking to stay longer than the agreed move-out date so you get the jump on these issues that create further delay.
- When you craft a new lease for you and the tenant, the move out date needs to be both clear and legal. Many states have laws granting 30-90 days or more for the tenant to leave. Often the time allotment coincides with how long the tenant has already lived in the home. Some cities, like San Francisco, are famously tenant protective, and you may have to pay the tenant relocation fees. You may not even be able to evict them at all, if the tenant is elderly or disabled.
The nutshell? Dot the Is and cross the Ts, and be sure you know the laws of your local area—a good Realtor® can help with those. You may find the expense and drama not worth it—or you could generate some income for yourself, especially these days with record high rents across the nation. The situation has potential to go either way. Here's to hoping it goes your way.
Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in theSan Francisco Bay AreaandPacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert.