You just bought your dream home. But the house comes with a tenant. What to do
It doesn’t happen often, but every once in a while would-be buyers run across a house for sale that also comes with a tenant.
Sometimes, the seller wants to holdover. Other times, a renter occupies the place and still has time left on their lease before they must skedaddle. Either way, the sale requires some special handling.
When the seller wants to stay, they become your tenant and should be treated as such. That means a lease, or at least an agreement stating, among other things, their exact length of stay.
There are good reasons sellers want to remain beyond closing. Perhaps they are moving to a new house that is still under construction and not ready for occupancy. Possibly the seller of their new place needs some extra time of their own, or maybe the seller hasn’t even found another house yet.
There’s also a good reason why a buyer will allow a seller to stay on. Such an offer might sweeten the pot just enough for the seller to choose your offer over someone else’s. And if you offer to allow them to stay rent-free, your offer becomes even more attractive.
Whatever the reasons, both buyers and sellers should tread lightly. And for the protection of each side, everything should be reduced to writing — perhaps with the help of a real estate attorney or at least that of an accomplished real estate professional.
”As long as there is agreement up front on terms, conditions and price, it can work well for both parties,” says Jeff Dowler of eXp Realty in Carlsbad, California, who has done several such transactions.
The deal’s term can be anywhere from a few weeks to two years. But Donald Payne, the broker-owner of Vision Realty in Columbus, Ohio, warns that anything longer than 60 days could louse up your financing. After that, the lender may consider the house an investment property that calls for a higher interest rate and more stringent terms.
Payne also suggests calling your contract “a post-possession licensing agreement” rather than a lease. Otherwise, because of strong tenant-rights rules, it will be more difficult to evict the seller should that step become necessary.
It’s an entirely different ballgame when the house you are buying is occupied by someone who still has time left on their lease. How you treat them will go a long way toward making your step into landlording successful or not.
As noted above, buying a tenant-occupied house moves you into the realm of investor financing. At the same time, though, the extra income could help you qualify for a mortgage.
But realize that the tenant didn’t sign up for this. They didn’t know their life was going to be interrupted time and again so the house — their house — could be shown to would-be buyers.
If there is a written lease in place, you as the new landlord have to abide by it. That means you can’t raise the rent, you are responsible for major breakdowns and you must give proper notice that they’ll have to move out when the lease expires.
If the tenant decides to become uncooperative, your foray into property management can be disastrous. In some places, it can take months to remove a tenant. So tread lightly.
One of the best ways to keep a tenant happy is to cut them a break on their rent. How much is up to you and your financial situation. But if they have only a month or two left on their lease, you just might want to tell them they don’t have to pay anything at all. You might even offer to help pay for their move. And make sure they know you intend to return their security deposit in full.
If the tenant still has more than a few months to go, you can wait until the lease expires or you can employ the same tactics above to try to persuade them to leave early. But if they won’t budge, try to keep your relationship with them as amicable as possible. The last thing you want is to ruffle their feathers, especially in states where tenants have the upper hand under the law.
The key is to maintain an open line of communication. “The best approach,” advises Eric Michael, an agent with Remerica Integrity in Northville, Michigan, “is to make sure that everyone is on the same page.” And Mike Yeo of 3:16 Team Realty in Frisco, Texas, agrees. “The tenant needs to know what’s going on.”
Sometimes, though, even a well-informed tenant can become a problem.
Bill Somerset of RE/MAX in Dover, New Hampshire, has been involved in the sale of a tenant-occupied house only once, and it didn’t work well. “The tenant stopped paying rent, so we had to go through the eviction process.”
The bottom line is to do your homework before proceeding. Obtain a copy of the lease, read it and make sure you understand your rights and those of the tenant.
If you end up buying the place, you are assuming the seller’s responsibilities as a landlord. As long as they pay their rent, the tenant has the legal right to remain until the lease is up and you give proper notice that you do not intend to renew. You cannot remove the tenant just because you want to live there.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
