Due diligence on buying a property with a tenant in place?

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Due diligence on buying a property with a tenant in place?My business partner and I are about to purchase our first buy to let property – a one bed flat in Southsea with a tenant in place.

We are keen for the tenant to stay on (he has indicated he is happy to) so what is the best way of handling deposits and AST’s in this situation?

The solicitor has advised that as long as some sort of AST is in place, the mortgage company will be happy.

The managing agent (who is also handling the sale) has told us that his deposit will not be returned due to extensive cleaning required (fairly dirty tenant who smokes). Our concern is that the tenant might struggle to find another deposit for us, when we buy the property.

Has any one had experience of this situation before? Although on the face of it this sounds less than ideal, we are happy to buy the flat in a ‘dirty’ state if the tenant is happy to stay, as he is paying good rent and is a reliable payer apparently.

Whenever he moves out, we have factored in around £4k refurb as it will need a new kitchen/carpets and redecoration of at least one room.

Our plan is to try to get a new 1 year AST in place prior to Exchange or completion, to minimse our risk and guarantee cashflow prior to a subsequent refurb in (for example) 12 month’s time. However we won’t have a date of commencement for this AST until a completion date is known so I am wondering how feasible this is?

Any other suggestions of how to minimise risk in this situation, prior to incurring cost of solicitor/IFA/surveyor would be appreciated.

Is it appropriate to ask the managing agent for records of payment history and any disputes?

Thankyou

Jon Baker

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Comments

  • Hi Jon

    A few things occurred to me as I read through your Readers Questions article.

    1) Offering a new 12 month AST. This only really gives you added protection is the tenant is “good for the money” if he chooses to up sticks mid tenancy. Has he got assets or a good job? If not, how would you enforce the agreement and know you can recover your losses? It might just be better to keep him there on a statutory periodic tenancy, that way it will be easier to get him out if/when YOU want/need him to go.

    2) You have every right to ask the letting agent for the tenants payment history but the agent can refuse to provide it and may well quote Data Protection as a reason for not doing so. Make it clear to the agent that you are happy for him to retain the management of the property and for the existing tenant to maintain his tenancy if you can satisfy yourself that it makes sense to do so. The agent will then be incentivised to seek permission for the tenant to pass on the information you require and the tenant will also have good reason to agree. If they do not agree you have to wonder why?

    3) The deposit belongs to the tenant, NOT the agent. If the existing landlord is retaining the deposit on the grounds that the smoke damage has reduced the value of the flat I suppose that’s a commercial decision you have to make. If I were you I would make my offer conditional on the deposit remaining the property of the tenant. You may need to increase the purchase price by the amount equal to the deposit but there is an opportunity for a bit of extra negotiation here. You will also learn very quickly whether the agent is just trying to pull a fast one.


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  • Your solicitor will tell you about a notice that can be served on the tenant informing him who his new landord is and thereby allowing him to stay on his existing terms. Thereafter you can consider which routes you want to take. Make sure the tenant confirms the terms of his present agreement AND he does not hold any form of security of tenure. The deposit should be transfered to you on completion irrespective of the state of the property. If LHA is involved make sure the existing landLord tells the council you own the property and you have an authority to discuss the case from the tenant with the council. Agree any arrears before exchange.


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  • Jon Dean says:

    Jon

    Having gone through the same process you are I have a couple of gotchas;

    1) First ensure that you put the facts relating to the tenant in a written form and ensure it is exchanged between the solicitors. That way there can be no ambiguity.

    2) If you are going to take over the tenancy then ensure the your solicitor draws up an assignment document which is signed before completion. Trying to get this done after the event will be a nightmare. You might as well just issue a new AST.

    3) As Mark has stated the Deposit is the tenants, not the landlords or the agent. If you are assigning lease then the deposit need to move with the lease. This is where it might get a little complicated. If the previous landlord makes deductions. Once it has passed to you, you are responsible for repaying it at the end of the tenancy not the previous landlord, if it is incorrectly protected or the tenant places the deductions in dispute it is you that will have to remedy the situation and not the previous landlord.

    4) If the previous landlord does make a deduction then you will have not deposit for damage etc. And the tenant has no incentive to look after the property. You may need to ask the tenant to top up or give you a new deposit, at which point they may decide to leave anyway.

    5) Unless you are going to jump straight in and renovate the property, keeping the tenancy periodic has distinct advantages in terms of getting possession for whatever reason.

    My first experience of taking over a property with a sitting tenant hit all of the above.

    The tenant was in arrears which was not disclosed during the due diligence despite being specifically asked by my solicitor. The opposite side answered No to this one and then said that that’s what the managing agent had said to them. The agent stated that they had never been asked that question and would have answered Yes.

    The previous landlord assigned the lease to me but pinched the entire deposit. Again the agent stated that they were instructed to do this. As you can understand the tenant was not very happy about this situation.

    Then about 2 months after the completion of the purchase while in the property with a builder discussing potential renovations the Bailiffs turned up to cease goods to the value of.

    We parted company shortly after this incident, when I found out that several county court judgements were in place against the tenant for non-payment of bills.


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  • I would take him on but that deposit should be left with the tenant and transferred to you as its no concern of the agent. It sounds as if the current landlord may be penny pinching. If it needs a 4K refurb then you could factored that into the deal as a whole and let him keep it if you think it may rock the boat and you lose the purchase.

    I will go and see the tenant separately and make my own arrangements with them outside the deal. I will interview them as if I was doing my own DD and I will take some rent in advance maybe as security. They will comply esp if they want to stay on and its then a win win situation for all


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  • Jon Baker says:

    Thanks all for your very useful comments.

    I found out today that the tenant is currently on an AST until Feb 2014 so that is good news (I think)

    Although the agent has said they will be charging us a fee, for ‘finding’ the tenant – cheeky!
    I assume we cannot be obligated to pay that, since the property was always going to be sold with tenant in place?

    I should have said we are planning to manage it ourselves, although I suppose we could try to get the fee dropped if we continue with current agent.

    The agent has indicated the deposit will be retained on account of the dirty flat (they want to do a full clean prior to completion) but we are saying that this is not necessary, if it will help the tenant (presumably the agent doesn’t care about that!)

    Our offer was accepted on Wednesday so we are about to instruct solicitor.


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  • Levi Santos says:

    In Oct 2012 I bought two properties at the same time. My first two BTL properties. I bought it from an investor over the internet, who I never met because he lived in Australia. I live in South Africa. Both these properties had tenants in them. I wanted to buy BTL properties with tenants as I have a full time job and I couldn’t spend my boss time looking for tenants. The investor had no managing agent and I decided to look after the properties myself just to get a feel of how this all works.

    On the one property, the investor gave the tenant his deposit back and the tenant in turn gave me the deposit that I requested. I gave him two months to come up with the deposit. The investor had told me that he would give the tenant his deposit. I put these conditions in the new lease once I took over. I had no problem.

    The other property the tenant gave me two months notice because he had already told me that he wanted to leave. I let him stay on for two months and I got a new tenant within a week. I got the new tenant to pay a deposit. The new tenant actually waiting two months to get in and he gave me the deposit two months before going in. So I had a deposit from the beginning from the second tenant.

    Regards
    Levi
    South Africa (Johannesburg)


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  • @Jon

    This letting agents sounds like bad news!

    His attitude would put me off buying this property and I would let the landlord know why I was pulling out of the deal.
    Mark Alexander recently posted…Due diligence on buying a property with a tenant in place?My Profile


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  • Doreen Marr says:

    I agree with Mark Alexander….. the letting agent is playing this sale to his advantage. I would contact the Landlord, advise him you are only prepared to go ahead with the sale if you purchase the property without the involvement of the letting agent. You have already stated you would wish to manage the property yourself. Even if you do chose to have the property managed you would be better to switch to a new Agent. Just reading the items the agent intends to charge you for throws up alarm bells……….. you would be walking into a disaster if you keep the existing letting Agent.
    A good agent would not charge for ” Cleaning the property when a tenant is already residing there……….. no way that remark is a scam and suggests the agent intends to keep the money and does not want to return the deposit. ” Also charging you a finders fee….. when the tenant is already established. ….cheeky as you say, this will not be the only thing they will try on. If try this sort of thing you are really asking for trouble if you continue to deal with this agent. Try to get the deal negotiated directly with the landlord, and have the landlord terminate his contract with the letting agent. You can then start afresh. The landlord can have the tenant agree, via the solicitors, for the security deposit to be transfer to yourself. If follow this advice, things move smoothly, if not I am sure the agents will continue to raise other charges.

    Good Luck


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  • It would not surprise me in the slightest if the agent is also trying to charge the existing landlord a fee for terminating his contract too.

    I’ve come across agents like this before. They charge viewing fees to landlords and tenants, they charge for “organising” EPC’s, Gas Checks and periodic inspections and they get their tradesmen to load their bills in order to give the agents and back hander for referring any work. I’ve even come across agents who charge for correspondence and telephone calls! There may have been a time when they could get away with this but competition is super hot these days. Look elsewhere I suggest.

    As a matter of interest is this letting agent a member of any professional bodies? If they are not part of an Ombudsman scheme they will already be breaking the law by acting as an Estate Agent as the Estate Agency Act 1979 states that any person or company acting for buyers and/or sellers of a property must belong to a redress scheme. In order to do that they must also have PI insurance. This is also worth looking into, just in case you end up being sold a lemon and need to complain.


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  • Jon Baker says:

    Thanks, the selling and managing agent are one and the same – ***MODERATED*** in Southsea, who we believed were one of the better ones.

    Unfortunately I have no way of contacting the landlord except through the agent.
    Once the solictor is involved I am hoping things will become clearer.


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