Assessing Tenant Risk When Buying In-Situ Properties

A question that we are often asked is ‘how do we know the tenants we’re taking on are reliable?’ This is particularly the case when considering an in-situ purchase and it can arise from a suspicion that the seller is trying to offload a problem.

That’s a cynical view, even if it’s an understandable one, so we’re going to look at what potential buyers of tenanted properties can do to reassure themselves that they are, indeed, buying an excellent investment and not a source of grief.

As property professionals, this is a subject close to our hearts. We advocate strongly for in-situ sales and therefore assessing tenant risk is something we have considerable experience of.

In-situ sales – a quick recap

Buying or selling an investment property with tenants in situ can have many benefits to both parties, and few drawbacks.

The seller enjoys rental income up to the point of sale, the buyer benefits from rental income from the point of sale and the tenants don’t have to uproot their lives and find somewhere else to live.

The buyer has the confidence that the property is up-to-date with all legal and regulatory requirements, and doesn’t have to endure a void period while they find tenants.

The only downside, such as it is, is that the seller is aiming for a smaller, more discriminating market as opposed to selling as a vacant property on the open market, therefore prices can be lower.

However, they don’t have to endure a protracted void period or spend money making the property more attractive to the domestic market, so – swings and roundabouts.

However…

As we’ve already alluded to, some prospective buyers may ask if the reason for the sale is problematic tenants.

Realistically, selling a property because you have tenant-issues does strike us as throwing the baby out with the bath water. Although reclaiming possession can be a tiresome affair, it’s less troublesome than selling a property.

All that said, no buyer wants to think that they might be buying a problem so how do you make sure that your future tenants are an asset and not a liability?

In a word – diligence. You neither need to be James Bond nor Sherlock Holmes to obtain the information that will reassure you as to their bona fides. What is required is a thorough and systematic approach to assessing tenant risk.

Going all Raymond Chandler

Below is a list of what we ask and how we find out the information. Different agents may take a different approach, or attach differing degrees of weight to what they find, but this is how we do it. 

• How long has the tenant lived there? This will be listed on the Private Residential Tenancy Agreement (PRT).

Long-term tenants tend to be happy tenants which should bode well for the future relationship.

• Are there any arrears? – As a matter of course we don’t list any properties which have arrears. We get this info from the letting agent/landlord before marketing.

During conveyancing we can get a rent record confirming the tenant’s regular payments.

• When was the last rent increase? The rent increase notice will be available on request to the buyer during conveyancing.

• What is the tenant’s employment status? Are they in full-time employment, students, are they a family or do they get assistance with rental payments from the council?

• Tenant referencing – many letting agents and landlords will conduct tenant referencing prior to the tenancy agreement being signed.

The referencing confirms tenant identity, suitability to pay the rental, and previous landlord/character reference. These documents can be requested during conveyancing.

• The marketing photos and video tours allow buyers to see how the tenants are keeping the property; level of housekeeping, condition of the garden etc. This all gives an indication of the tenants attitude and behaviour.

• Have there been any reports of antisocial behaviour? If present, such reports might indicate problematic tenants and more risk that a buyer might be willing to accept.

• Viewings are an important opportunity which allow the buyer to meet the tenant and ask questions like: what do they like/dislike about the property, what are their long-term plans etc.

All of this gives a good picture of the current tenants, how they behave, their financial responsibility and their general attitude towards the property, their landlord and how they see their future.

It should be more than sufficient to highlight any potential areas of friction and reassure buyers that this is indeed a viable investment opportunity that should deliver a good return.

Advice from the property pros

With the possible exception of persistent rent arrears and damage to the property, none of these need be show-stoppers, but that is a decision for the buyer, a decision they can only take if they have the information to hand.

Therefore due diligence and careful checking of existing tenants is a key process when considering an in-situ purchase.

In fairness, the same can be said when accepting new tenants into an existing property, and the reasons for thorough checking are the same.

In summary…

When buying property you wouldn’t overlook a survey or home report and you’d expect that it had been done diligently. When buying a property with an in-situ tenant, you should expect the same.

The condition of the property matters, and so does the ‘condition’ of the tenant. For the purchase to make business sense, both will ideally meet, or exceed, your expectations.

This is why assessing tenant risk matters so much to us, because we understand the importance to the viability of the whole package. It isn’t difficult, but it requires that you be systematic and diligent if you’re to avoid errors.

Tenant vetting is only a part of what we offer landlords and property investors. We pride ourselves that we have the knowledge and experience to do it well, ensuring that our clients have all the information they need to make good decisions.

We’re always happy to chat; to discuss all aspects of buy-to-let investment, property investments and in-situ property sales or purchases – just get in touch in whatever manner suits you.

Thanks for reading!

Written by Ross MacDonald, Director of Sales & Cofounder of Portolio

Get in touch on 07388 361 564 or email to [email protected]