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.

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