Own an investment property with sitting tenants and thinking about selling? It’s not an easy decision. A buy-to-let property is a great source of income on an appreciating asset. However, managing a property with tenants can be a headache, particularly if you have problem tenants in the property. We’ve written this guide to help you navigate the sale of a tenanted property and its differences from the sale of a vacant property. We’ll cover some key definitions, the reasons that you may want to sell with tenants in situ, routes to market, how to conduct viewings and keep your tenants in the loop, and much more.
Selling a property with a tenant in situ is becoming increasingly common as a result of market trends. Selling a property with tenants can be a little more complicated than the sale of a vacant property. You’re naturally selling to a smaller market as you’re only addressing investors looking to purchase a secondary property. There are also a number of considerations to take into account regarding the sitting tenants. Read on to find out more or use the menu below to navigate easily.
What does ‘tenants in situ’ mean?
Put simply, tenants in situ just means that a property already has a tenant in it when it comes to the open market. Depending on the terms of the tenancy the tenant may have the right to continue to occupy the property even once it’s changed ownership. The change of ownership doesn’t override the tenancy agreement nor the tenants rights.
Why sell a tenanted property?
Selling a tenanted property isn’t an easy decision. We mentioned the source of income and the ownership of an appreciating asset. So why would you want to sell? We’ve covered some of the most common reasons that you’d want to sell a property with a tenant in situ.
- Equity release: many buy-to-let owners opt to offload some tenanted properties as they approach retirement to free up cash and pursue other goals. For example travel or paying off the mortgage on their primary residence.
- Troublesome tenants: difficult tenants can certainly make the sale of your tenanted property more difficult, but not impossible. The headache of untidy or loud tenants or unpaid rents can drive many landlords to sell up and cut their losses.
- Section 24: section 24 of the Finance Act (2015), also known as ‘tenant tax’ removed mortgage interest relief for landlords. It means that the percentage of mortgage interest landlords can offset against their mortgage fell by 25% year over year. From 2020, landlords are only able to claim 20% in tax credit based on their loan size and mortgage interest amount. This obviously vastly reduces the profitability of buy-to-let properties and means that a landlord who is paying a higher rate of tax could see an effective income yield of almost half that of a lower rate taxpayer. We recommend speaking with a professional tax advisor or accountant about your tax liability under section 24. The impact can be sizeable.
- Rising interest rates: there are rumblings that the Bank of England is considering increasing interest rates to combat the risk of inflation. If the mortgage is sizeable vs the value of the property, or even an interest only mortgage, the exposure to rising interest rates can be considerable. This risk can drive the sale of a tenanted property.
- Tighter regulations: in response to the increasing evidence of ‘slumlording’ the government has begun to roll out a host of regulatory measures to improve living conditions for tenants. These include: selective licensing, compulsory electrical certifications, energy efficiency standards, to name just a few. These measures increase the legal burden placed on landlords and in turn their costs to remain compliant.
- Difficulty increasing rents: increasing rent generally happens in response to broader market conditions. Imposing these increases on tenants is often difficult and results in backlash and negative press. Many landlords opt to sell up to avoid the headache of having to increase rents to maintain their yields.
- Property repair costs: properties require maintenance and the cost of labour and materials can be considerable. Set this against the backdrop of a shortage of builders in the UK and increasing material costs, and the option of selling up with tenants in situ can actually be more cost effective than conducting the refurb work and keeping ownership of the property.
Can you sell a tenanted property?
Absolutely. There are some additional considerations to bear in mind when selling a property with a tenant in situ though. We’ve listed three of the most important here.
- Tax: the higher the price you’re likely to achieve as a result of the sale of your tenanted property, the higher payments of capital gains tax (CGT) you’re likely to incur. CGT can be up to 28% of the increase in value of your investment over the time of ownership. As with other investments, you are able to offset the cost of any capital improvements against your tax liability.
- Finance: if you have a mortgage on your rental property then you could be eligible for penalties if you’re ending the agreement before the fixed term expires. If you’re close to the end of your policy then it may be worth waiting the extra couple of months to save the fees. Alternatively, if you’re within 1-2 months of the expiry of your term, consider that conveyancing etc. usually takes this long to complete anyway, so it may be worth listing the property now as your term will likely expire before completion.
- Tenancy Agreement: check whether the tenancy agreement allows for a new person to assume the role of landlord. You should also check whether it’s specified in your agreement that viewings are allowed in the last few months of the tenancy. This way you can ensure that you’ll be able to conduct them and sell the property. The final (and crucial) thing to check in the agreement is the length of the notice that you’ll need to serve before the end of the tenancy agreement. If the property is on an Assured Shorthold Tenancy agreement (or AST) then you’ll need to wait 6 months. This is the minimum period for right of occupation.
Selling a tenanted property with estate agents
Using an estate agent is the most common way of selling a tenanted property in the UK. Before jumping into your decision, take some time to review local estate agents and pick the right one for the job. Some tips on selecting an estate agent.
- Track record: look for an agent that has a proven record of selling properties quickly and for a good price.
- Compare: draw up a list of local estate agents and list their pros and cons to develop an effective comparison framework and help you make your decision
- Personal recommendations: one of the best ways to establish if an agent is right for you is to speak to friends and family about their experiences.
- Cost: if a low cost sale is a priority consider an online agent. Their fixed fees typically range from £600 to £2,000. Alternatively, a reputable cash house buyer like SmoothSale can buy your house for cash free in as little as 7 days.
It’s important to make sure that your preferred agency has experience in selling tenanted properties. They’ll have to keep the tenants informed about viewings and operate within the statutory rights that are granted to the tenant. We’ll take a look at these now.
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What are your tenant’s rights?
Your tenants have rights and you need to be aware of them to make sure that you’re conducting your house sale legally and in the interest of fairness. Specifically your tenants have the right to:
- 12 weeks notice to quit: any notice must be given to the tenants at least 12 weeks before they leave the property. This is the case regardless of the reasons for eviction. If the tenant then stays beyond the 12 week notice period then the landlord will have to apply to the court for a possession order.
- Right to stay until end of the contract: if the tenant has an agreement and is within their contract then they must be allowed to stay until the end of the contract term unless the landlord gets a possession order due to breaches of the agreement or the contract allows for early termination.
- Fairness of contract terms: all contracts in the UK must comply with the Consumer rights act. This sets forth that a contract term can only be enforceable if it is fair, prominent and transparent. If the term significantly imbalances the rights to the detriment of the consumer then it is considered unfair. It’s important for landlords to be aware of this provision. Terms that allow the landlord to terminate the agreement early because they want to sell the property could be deemed unfair and therefore satisfy this requirement.
Selling a tenanted property at auction
The growth in the number of auction houses in the UK and the increasing transparency of the sector is leading more and more sellers to take this route to market. There are some pros and cons of using an auction house that you should be aware of.
- Buyers are typically proceed-able and have the cash funds available, allowing them to buy your house for cash. This is ideal if you’re looking to sell your house fast.
- There is a high level of intent from buyers at auction. You won’t have to deal with time wasters who aren’t really interested in buying your property.
- Buyers are committed as they have to place a deposit which they will lose if they drop out of the transaction. Therefore the incidence of buyers pulling out of the transaction is much lower than purchases through estate agents.
- ‘Gazundering’ is impossible with auctions (the buyer dropping the offer just before completion) as the price offered during the auction is fixed.
- You have to be prepared to accept a slightly lower price than you may be hoping for since you’ll be competing against a number of other properties in the auction.
- There are additional fees that you should be aware of. For example, you may have to pay more for enhanced advertising and access to the online platform. You’ll also have to cover your legal costs, which can be expensive.
- You will need to host open days for potential buyers to come and view the property. This can cause some disruption with your sitting tenants, so if you’re opting to take this route to market you should discuss it with your tenants first.
- Be careful with your reserve price. If you set it too high you may put off prospective buyers and not get any bids. If the price isn’t met, you may end up wasting a load of time and effort for no result.
Conducting viewings on a tenanted property
Maintaining a good relationship with your tenants as you conduct your house sale is crucial, since you’ll need their cooperation with viewings to ensure that they run smoothly. This is particularly important if your agreement does not have a viewing clause. A viewing clause is a clause in the tenancy agreement that allows the landlord or agent to conduct viewings on the property whilst it is tenanted.
Bear in mind that all tenants have a right to enjoy the premises within the terms of their agreement. You should give your tenants plenty of notice and be courteous about your requests for viewings. If you forcefully enter the property to conduct viewings then you will be considered guilty in the eyes of the court regardless of whether you have a viewing clause in your tenancy agreement or not.
How to tell a tenant you’re selling your property
Honesty and transparency is the best approach when informing your tenant that you’re selling your house. By being upfront and clear about your intentions and the likely timeline of the sale, you’re more likely to have your tenants onside and they’re probably going to be more inclined to be cooperative when it comes to arranging viewings and house visits. It may even be the case that your tenant is interested in purchasing the property themselves, so it’s good to give them the opportunity to do this early on in the process.
Be clear and honest about your reasons for the sale of your house and reassure your tenants that you’ll keep them informed and updated at all stages of the sale.
Transferring tenancy agreements and deposits
If the tenancy agreement is made between the tenant and the landlord then on the day of completion the tenancy agreement that you have with your tenant will transfer to the new landlord. The terms of the existing agreement remain valid and enforceable even though you are no longer named as the landlord. For the sake of accuracy and best practice you should make sure that the agreement is updated to reference the change of landlord and their new details. Keeping your tenant (or ex tenant) informed that their agreement remains the same is a good idea.
It is a legal requirement that your tenant’s deposit should be placed into a government approved protection scheme. During the conveyancing process you’ll be asked to prove this. This deposit will need to be transferred to the new landlord once the property sale is completed. The exact method of transfer is likely to depend on the scheme that you use, so contact the scheme to check what the process is to make sure you’re doing things by the book.
Sell tenanted property fast
If you’re looking for an easy route to market to sell your tenanted property fast for cash then a reputable cash house buyer like SmoothSale could be a good option.
Our cash house buyers service is designed for vendors looking for a guaranteed sale of their property in as little as 7 days and we have a history of purchasing tenanted properties in the UK. Alternatively, we offer an ‘Investor Marketing’ route to market for vendors who want to sell their property to our network of trusted investors in under 30 days.
Get a cash offer today! Alternatively, get in contact on 0800 368 8952.