How house prices are affected with tenants in situ?

by Dr Rosalind Beck

14:05 PM, 3rd February 2021
About 4 weeks ago

How house prices are affected with tenants in situ?

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How house prices are affected with tenants in situ?

On Facebook this week, a tenant said that her private landlord wanted to sell the house she is renting. Someone else then said had the tenant asked if their landlord would be willing to sell to another landlord so that the tenant could remain in situ. The tenant replied that their landlord wouldn’t do this as local landlords were offering £20-£30k less for properties with tenants.

I was interested in people’s experience of this so asked other landlords how they think house prices are affected by selling with tenants in situ.

Mick Beeby came up with very clear analysis, I thought, and I reproduce it here with his permission.

An investor buying is interested in two main things:
1) The Tenancy. Whether the tenant pays fully and on time plus looks after the property, as well as all tenancy paperwork, being available and served properly.
2) Yield. Whether the rent vs purchase price are attractive so they can get an acceptable return on investment.

The general issue is the two don’t always go hand in hand, so even a ‘good’ sale to the existing owner might not be a good purchase for a new owner.

One scenario:

The tenant has been in a house for 5 years, always pays on time and no plans to move on. Brilliant you would think, a good prospect for an investor.

The current owner brought the property for £150,000, and they now want to sell for £200,000, to benefit from the great house price increase in that area.

Rent was set at £750pcm so works out at a nice 6% initially for the existing landlord. That is what they are interested in financially, what they paid vs what the return is.

As the tenant has been great in looking after the property and paying on time, rent hasn’t been increased ever. The landlord was happy to get regular payments that cover their mortgage and costs with some profit.

Now they want to sell for £200,000. The potential purchaser looks at that as £750pcm rent against a £200,000 purchase, now 4.5% yield. Hmm, no, that won’t do. To get back to 6% raw yield they need a rent of £1000 pcm. If they buy it is that doable, a £250pcm increase, with the tenant? Not really, so the alternative would be to go through the S21 process to evict and advertise at new market rent or try a smaller increase of maybe £100 pcm. Either way has risks and possible costs. So, it’s either a lower offer, or walk away.

The point is that a good deal for the existing landlord isn’t necessarily at all attractive for a new landlord.

If you are selling with tenant-in-situ you need to look at it from the buyer’s perspective and decide if it is an attractive deal. If not then you will struggle.

Above is the ‘good’ scenario. Often someone will be selling because they have problems with the tenant, either not looking after a property, issues with late payment and/or arrears, or simple lack of communication just meaning they no longer want the stress of being a landlord.

I would add that organisations such as Generation Rent and Shelter and perhaps individual tenants often suggest that it is easy to sell private rentals with tenants in situ. I would suggest that this is because they don’t understand or more accurately don’t care about the financial implications for the seller, who they are expecting to take the hit of possibly tens of thousands of pounds because they happen to have a current tenant who doesn’t want to move.

Comments

Dr Rosalind Beck

19:55 PM, 3rd February 2021
About 4 weeks ago

A landlord called Chris Buckle, has also made some further points he allowed me to share, as follows:

'The fact a tenant is in situ should not in itself mean that the property is worth any less than with vacant possession. However it is often an issue for other parties to the transaction ie mortgage companies, solicitors etc. A tenant makes things much more complicated for them and raises legal issues which need to be overcome. This in turn means more work/hassle for the buyer and issues to overcome. As a result they try to offer less. Provided all the paperwork is correct etc then there should be no difference with or without a tenant.'

Janet Carnochan

8:34 AM, 4th February 2021
About 4 weeks ago

Personally I would never sell with a tenant in situ. In my view probably only about 2% of buyers are private landlords, why would I aim my property at 2% of buyers when if empty I could target 100% of buyers? My properties are all 2, 3 or 4 bed houses so would be attractive to first time buyers or families and like in the scenario above give me a decent yield but wouldn't at the new valuation. Personally as a landlord I don't look at a yield below 6%.

Clint

9:15 AM, 4th February 2021
About 4 weeks ago

Another problem with selling with a tenant in situ is that the sale has to be a cash buy as mortgage companies will not lend with a tenant in situ even if the property is a buy to let.

CazT

9:21 AM, 4th February 2021
About 4 weeks ago

I recently went through this process with a fairly modern 2 bed terrace. I rang various ‘agencies’ who sold to investors and the prices offered were a joke. Luckily, my tenant moved out and solved the problem for me. Put it on the open market and sold it in three days well above market value. I now have one property left which has very long term tenants and I won’t sell this one until I absolutely have to. The rental market is not what it was back in the 80’s - too many people wanting a piece of the action and far too many regulations. It’s a shame, I really enjoyed being a landlord and looking after my tenants ...

Whiteskifreak Surrey

9:58 AM, 4th February 2021
About 4 weeks ago

Reply to the comment left by Clint at 04/02/2021 - 09:15
I am not sure if that statemet applies to the current trend?
We bought with the tenants in situ twice, about 7 years ago and never had a problem with a mortgage.
Worked actually quite well, as we did not have a void and the tenants always paid.

Clint

10:08 AM, 4th February 2021
About 4 weeks ago

Reply to the comment left by Whiteskifreak Surrey at 04/02/2021 - 09:58
That sounds good but I always, seem to be having problems selling with a tenant in situ. I sold a flat in December 2020 and I had a tenant with a very good rent but the mortgagee, insisted that the property was sold with vacant possession and went as far as getting the tenant to sign a declaration that he would vacate before completion.

Fortunately, I had another property to move the tenant to.

Luke P

11:17 AM, 4th February 2021
About 4 weeks ago

Weren’t the Govt. targeting home *ownership*? If so, then it’s ‘goodbye’ to the tenant and ‘hello’ first time buyer!

They cannot have it both ways and, simply because they know it will not happen, pretend that there wouldn’t be (an even bigger) housing shortage if all BTLs were sold to FTBs - who would they blame for the problems then?

David

12:13 PM, 4th February 2021
About 4 weeks ago

Its a market, so high house prices are supported by competition from buyers. If you reduce the market to investors only, then you lose the bulk of that competition and this has to have a knock-on effect on its market value.

You also have to factor-in the cost of::
- the potential for a (current) 12-18 month timescale to evict a non-paying tenant
- the risk of a fine/penalty payment/RRO if the landlord has breached HMO legislation, deposit legislation, HHSRS, etc
- checking that all the tenancy documentation has been properly served and is fit for purpose.

Graham Bowcock

12:32 PM, 4th February 2021
About 4 weeks ago

Reply to the comment left by Clint at 04/02/2021 - 09:15
Hi Clint

That's not actually correct. There are definitely mortgage products available for buyers of let property with tenants in place. It's quite an active market.

Graham Bowcock

12:35 PM, 4th February 2021
About 4 weeks ago

Rosalind

There is definitely a market for property with tenants in, but perhaps not in every area fort every property. Such sales work best in areas where are sginificant rentals, and often at lower values. Trying to sell a £1m house with a tenant in will not work in terms of achieveing value, but a house at, say, £60,000 might sell quite readily. As so often with these threads, some local knowledge is essential.

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