I recently had some clients that purchased a home that had tenants in it with 6 months remaining on their lease. When the lender learned of this the deal almost fell apart as they wanted to occupy the home, but since they could move in within 60 days of closing, they were being reclassified as investors rather than owner-occupants and their interest rate was going to rise significantly. Luckily for my clients they were renting a larger house in a nice neighborhood so the tenants and the buyer's landlord agreed to a trade of houses. My buyers only had to wait 3 weeks to move into their new home after closing, so they were able to get a loan for the owner-occupied rate. The tenants got a new 12-month lease on a house they liked. It worked out well for all.
In any case, where tenants are occupying a home you want to purchase, it is important to understand tenants rights, landlords obligations and the potential risks involved when you purchase a home that has tenants living in it.
A home sale does not alter tenant leases
The sale of a home does not alter the terms of tenant leases. As the new owner, you inherit the tenants and their lease. As the new owner, you must honor the remainder of the lease.
You can try to change the tenant lease terms, but the tenant ha the final say to accept any change or not. You may ask the seller to renegotiate the lease with new terms, or you can try and renegotiate yourself after closing. You or the seller may offer to buy out a tenant so they will willingly break the lease for an amount of cash agreeable to them, usually enough to make it worthwhile for them to move early but again the tenant doesn’t have to agree to any changes if they have a valid lease. And if there is a property manager involved you may have to buy them out of their contract as well. In Washington state, if your tenant is on a month-to-month lease you do have the ability to terminate the lease, if you give your tenants written notice at least 20 days before the beginning of the next rental period.
Review the lease documents before you close
If you are inheriting a tenant with a lease that comes with your new home, make sure you spend the time to read the lease thoroughly before closing. Poorly written leases or bad property management records make it much riskier to take on a longer-term tenant.
Be certain that the lease is well-written and structured with local rental laws in mind. If any of the lease documents are not clear or not well written, force the seller to straighten them out as a condition of your closing.
Make sure you get all documentation of security deposits or last months rent, including a check-in report of the condition of the home when the tenants moved in. If the tenants do any damage that you want to deduct from their security deposit, you will need proper documentation of the property’s original condition. It is highly recommended that you do a preliminary walk through with your new tenants before closing to verify the current condition of the home and talk with them directly about the terms of their lease as well as the condition of the home.
Get your money at closing
When you inherit tenants you will also inherit their security deposit and any prepaid rent. Make sure that this money is being transferred to you on your closing statement. Most states will require you to hold tenants security deposit in a trust account. The closing agent will also pro-rate the current month’s rent payment between you and the seller.
Make sure you have the proper insurance
Make sure that your insurance provider knows that your new home is currently rented so that you will be covered for tenant injuries, negligence, and other catastrophes.