Whether you’re an investor or purchasing for your own use, you may consider buying a home with a tenant living in it. Regardless of your intended use, you’ll need to take some things into consideration and make sure you do your homework in order to provide for a smooth transaction and know exactly what you’re purchasing. The tenant has rights, even after you complete the purchase and it’s important for you to know your responsibilities up front in order to keep out of legal hot water and allow yourself the enjoyment of your new home, whether you move into it or continue renting it out. Buying a home with a tenant currently living in it requires a bit of extra work, but with a bit of forethought and knowledge, it can be done successfully.
Like most real estate purchases, your best friend is knowledge. If you find a home that you absolutely love and it has a tenant living in it, your first step should be to find out how long the tenant has a lease for. Many people erroneously think that the tenant must move out once ownership changes hands. This is not the case. The lease stays with the property after the home sells and you as the new owner must honor the conditions set forth by the lease, which may or may not be favorable to you or in worst case scenarios, could be a nightmare lease that you want nothing to do with. We’ve seen leases written so poorly that their legality and enforceability come into question (this is why we always recommend having a Realtor involved in the process as the Texas Association of Realtors® provides an excellent Residential Lease for use by its members).
Paragraph 10 of the One to Four Family Residential Contract (Resale) covers the sale of a home that is currently being leased and states that the seller must provide a copy of the lease(s) and any move-in condition form signed by the tenant with seven days of the effective date of the contract (Paragraph 10.B.(2)). It is highly recommend that the buyer has an option period that extends beyond this date to give them time to receive and review the lease to be sure it meets their needs and criteria.
If you find the lease terms satisfactory and are happy with the situation, then you may proceed with the purchase. If there is something you do not like in the lease, you may want to reconsider your purchase. Remember, you have to honor the lease and everything in it, you cannot simply decide that you’ll do things differently as a landlord. You cannot evict the tenant because you are buying the home and find the lease to be unfavorable. The lease stays in place and you are obligated by its terms. If you’re buying a home with a tenant living it and you cannot agree to take on the lease under the terms as set forth, you do not want to buy that house. We know we’ve said that a few different ways in this paragraph, but it really is that important and it is often misunderstood.
Responsibilities of Buying a Home With a Tenant
If you agree to take on the lease by buying a home with a tenant, you in effect become the new landlord upon closing and funding of your purchase. As a landlord, you have a host of new responsibilities and you may want to familiarize yourself with the Texas Property Code. This is one of those areas where ignorance of the law will not excuse you from complying with it. If you don’t feel you know enough or you don’t want to find yourself on the wrong side of the Texas Property Code, Fair Housing laws, or the Consumer Financial Protection Bureau, you may want to consider hiring a property manager to take on the day to day operations of your new rental business. Don’t forget, your homeowners insurance will most likely not cover you in a renter-landlord situation, so you’ll want to contact your insurance agent to make sure your coverage is up to snuff.
At closing, you should be given the security deposits from the current lease (and the tenant will have to be notified in writing of the change in responsibility for that deposit) and any prorated rents that may have already been paid. You will need to notify the tenant of where to send their rent and who to contact for repairs and in emergencies (did we mention you’re now responsible for all of that – read your lease, it should outline what your duties and responsibilities are).
Whether you intend to continue renting the property out or you bought it for your own personal use, you’ll need to watch your timelines on the lease. Whether you’re using a TAR Residential Lease or one drawn up by your lawyer, there should be timelines for notices and termination of the lease. For instance, in the TAR Residential Lease, there is a whole section (Paragraph 4) about automatic renewal and notice of termination – failure to comply with these timelines could renew the lease into a month-to-month lease without either party even noticing.
Buying a home with a tenant living in it isn’t impossible or even that much harder than buying a vacant home, but like anything in life, you need to pay attention to the details so that you know exactly what your responsibilities are and what you’re signing up for by taking on a lease that someone else wrote. Remember to get those copies of leases early so that you may review the documents and make sure you understand the terms and conditions set forth, because as the new owner, you are legally bound to the same.
image courtesy of kozumel