14:05 PM, 3rd February 2021, About 4 years ago 23
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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.
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Robert M
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Sign Up17:18 PM, 4th February 2021, About 4 years ago
The problem with selling with a tenant in situ is that most "investors" want to achieve a massive discount, i.e. they want to pay 25 - 35% BMV, which is a bit of a p**s take. Also if that is their aim, then could they be trusted to look after and retain the tenant, or would they evict, renovate, and sell, so as to recover their investment (and profits) quickly? - For landlords like myself who's main concern is looking after the tenant, this is not something that I would not wish to inflict on my tenant.
However, if anyone is looking to buy a property with a tenant in situ, and keep the tenant long term, I have one in Oxfordshire that I'm happy to receive sensible offers on. It's a 1 bed flat in a low rise block (3 storeys). Current tenant has been there since 2009, no rent arrears, no tenancy issues, rental income £750 pcm (scope for increasing, as LHA rate for the area is £772.89 pcm).
TrevL
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Sign Up17:43 PM, 4th February 2021, About 4 years ago
This all seems pretty obvious, of course selling with a tenant insitu both cuts down the amount of potential buyers and increases the potential risks for the successful purchaser over that of a vacant property.
Yes, the new purchaser may benefit from no voids, but at what potential cost?
As for the increase in price, well, if the cashflow hasn't increased (or can't be increased) to maintain the same yeild, then that's just the seller trying to screw as much capital appreciation out of the transaction as possible........this isn't rocket science!!!!
Clint
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Sign Up18:12 PM, 4th February 2021, About 4 years ago
Reply to the comment left by Graham Bowcock at 04/02/2021 - 12:32
That is good to hear. I may try selling with or without investors as, I can always offer the tenant another flat if necessary
Richie
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Sign Up0:47 AM, 5th February 2021, About 4 years ago
Reply to the comment left by Janet Carnochan at 04/02/2021 - 08:34
Been reading a few above: A good tenant, steady return, but not less than 6% thats just B***** greedy and 4.5% is no good either!
I would be very hesitant buying with a tenant apart from the costs and the unknown I would not trust the seller/landlord.
I wait until they have gone or arrange for them to move if not required. If I did decide, due diligence needs to be applied with regard to the tenant (lots of investigation). Dont trust seller or certainly not the agent as they are not working for you to earn their comission.
Graham Bowcock
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Sign Up9:42 AM, 5th February 2021, About 4 years ago
The debate goes on....
If you are buying a property with a tenant in place your key interest will be the yield. To say that certain yields are greedy is just downright unfair on landlords. If they don't get the yield they need why would they buy? Many will be borrowing, so need to earn at least the cost of funds to stand still, never mind cash needed for purchase and set up fees. Then cash is needed in many cases to fund repairs needed (even if not needed now they will be in the future). A|nd all this is before risk/profit.
There is added risk at the moment due to CV restrictions. If you buy a house today but tenant then fails (for whatever reason) to pay their rent how long will it take to resolve? What are the costs?
Investors need to make a return otherwise they will simply not invest.
As for discussions on value, those selling with tenant in place gain from time (the sale can be quicker than waiting for VP) and costs of securing VP. For some, a discount may be worthwhile and may ultimately make little difference to the outcome financially, especially if funds are needed for a new project.
Selling at a discount from VP with a tenant in place is not selling BMV - it is selling at a value that reflects what is being sold (i.e. a proeprty with a tenant in place). There is a difference and it's useful to understand, because it can be managed - e.g. proper documentation, good tenant referencing, well manager properties.
Janet Carnochan
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Sign Up11:59 AM, 5th February 2021, About 4 years ago
Wow. Without any additional information you have labelled me greedy. You have just reminded me never to be judgemental. I make my sole income from property rentals, every potential purchase has to be looked at from the perspective of do the sums add up. In my area neither rents nor property prices are massively high, so a 6% return is very achievable. With relatively low rents I still regularly renew bathrooms, kitchens, double glazing and boilers. All fitted by proper tradesmen. This accounts for quite a large proportion of my rents. I don't draw a fortune in wages from each house. My rents are not above, in fact some with good tenants are marginally below market value (rents from £425 per month), I promptly fix any repairs needed, I am available 24/7, as my tenant if you have a short term issue I will listen to you and see if we can reach a compromise. I make my tenants feel that they have a secure long term home to rent, not just a house. My tenants stay long term and many recommend me to other people looking for good quality rentals with a decent landlord. Never once have I been labelled greedy by a tenant, but I have just been by a man who has never met me, spoken to any of my tenants or has any idea where I live or rental values in my area. Don't judge people without all the facts.
Mick Beeby
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Sign Up12:57 PM, 5th February 2021, About 4 years ago
Reply to the comment left by Clint at 04/02/2021 - 09:15
This is not correct. You can buy using a mortgage perfectly fine with a tenant-in-situ, it does not have to be a cash purchase.
Puzzler
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Sign Up11:31 AM, 6th February 2021, About 4 years ago
Reply to the comment left by Clint at 04/02/2021 - 18:12
Agreed. I have bought with tenant in situ no problem, lender was Precise
Clint
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Sign Up12:17 PM, 6th February 2021, About 4 years ago
Good to know that one can sell with tenant in property. I am selling two properties at the moment and have made sure they are empty. In future, I may try and sell with the tenant in situ as there are still lots of new investors looking for Buy to Lets.
reader
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Sign Up15:16 PM, 6th February 2021, About 4 years ago
Quite clearly there is not just one market for all property, different types of property attract different buyers. Traditional houses will often sell at higher values without a tenant while blocks of flats sell equally well tenanted (bought loads over past 20yrs) There are lenders available for both markets.
In which market to sell your property Is simply down to anticipated investor returns.