Buying a home with tenants in place

Some homes for sale are occupied by tenants who will remain after the sale is complete. It is important to understand tenant rights, landlord obligations and the associated risks when you purchase a home that is still occupied by tenants.

A home sale does not alter tenant leases

lease agreementThe sale of a home typically does not change the terms of tenant leases. You inherit all of the landlord obligations and terms of the lease, whether you like them or not. Let’s say you buy a home with tenants who have a 12-month lease. You close the sale six months into their lease. You are obligated to let them finish out the remaining six months of their lease.

As a buyer of such a property, you have two options to change the tenant lease terms. You can request that the seller renegotiate tenant leases with different terms, or you can do it yourself after closing. In both cases, you or the seller may have to offer to buy out a tenant who was hoping to stay for the duration of the lease. The tenant doesn’t have to agree to any changes if they have a valid lease.

I am going to live there myself. Can’t I just evict the tenants?

If you intend to owner-occupy your new home, you still need to follow landlord-tenants laws to remove your tenants, and you may or may not have the ability to terminate their lease.

If a tenant is on a fixed-term lease (12 months, 6 months, etc.), you only have two options. You either let the tenants finish out the lease term, or you need to negotiate with them for an early termination. They do not have to agree to an early termination.

In the state of Washington, you do have the ability to terminate a tenant on a month-to-month lease, provided that you give them written notice at least 20 days before the start of the next rental period. Properties in the city of Seattle also allow this, but termination of month-to-month leases is highly restricted by the Just Cause Eviction Ordinance.

Review lease documents before you close

If you are inheriting lease obligations with your home purchase, you must spend the time to review the lease documents prior to closing. Poorly written or sloppy property management records make it riskier to take on a longer-term tenant.

Make sure that the existing lease is well-written and structured with local rental laws in mind. If any of the lease documents are lacking, force the seller to straighten them out as a condition of your closing.

Make sure that there is documentation of any prepaid rent or security deposits, including a check-in report describing the condition of the home when the tenants moved-in. If the tenants cause damage that you intend to take out of their security deposit, you won’t be successful unless you can properly document the property’s original condition. We strongly recommend that you have a walk through with the tenants prior to closing where you can verify the current condition and speak with them directly about their lease terms and condition of the home.

Get your money at closing

Inheriting tenants means that you are inheriting their security deposit and any prepaid rent. Verify that these funds are being transferred to you on your closing statement. State law may require that you hold their security deposit in a trust account. Your closing agent will also pro-rate the current month’s rent payment between you and the seller.

Make sure you are properly insured

Renting out a home involves risk that must be properly insured. You want to make sure that your insurance provider is aware that the home is currently rented to make sure that you are covered for tenant injuries, negligence and other catastrophes.