Buying a property with tenants
Here’s a story about a couple who decided to buy a property with an existing tenant and their experiences during the process of buying that investment property during COVID-19.
Buying a rental property with a tenant
Usually, buying an investment rental property with an existing tenant is straightforward if you, the new owner, are happy to keep the tenant and you don’t plan to do any major renovations that will interfere with the tenant’s ability to live peacefully in the home.
According to rental laws, you can transfer the lease and bond to the new owner. Each state has provisions to do this through the appropriate rental authority. You should always get professional advice first.
The contract of sale is completed by your solicitor, conveyancer, or real estate agent detailing the tenant/s details and who is managing the property.
However, for the couple in this story, they didn’t want to take over the tenant because they had plans to do major renovations. And that’s where the story begins.
How COVID-19 and no lease impacted the buying process
The buyer’s situation
Let’s call the buyers Mark and Anne (not their real names). They are a middle-aged couple that decided to buy an investment property in South East Queensland.
Having renovated previously, the buyers were eager to find a property on a large block of land with the potential to subdivide. They also wanted an existing residential dwelling that could be easily renovated to add value: maybe add a bathroom, swap the kitchen, and extend living areas by removing walls.
Anne completed the real estate course in 2019 and felt comfortable managing the rental property herself. Mark has a background in construction and was more than capable of managing any renovations.
The investors found their property. It had an existing tenant. This wasn’t an issue for the buyers at this stage. They were happy to inspect the property and find out more about the tenant.
Their priority was whether the property had potential to be improved and maximise rental return.
The seller’s situation
The seller, George (not his real name), was retired and eager to sell the property. He was unwell and travelled regularly before COVID-19.
This was his second attempt to sell the property. During first attempt, he rejected all offers. Now things had changed.
The property had been managed by the owner for at least eight years and there was no existing copy of the lease.
With the help of the real estate agency the tenant was placed on a periodic lease.
No one was aware of whether the tenant had paid a bond or not! That would need to be sorted by the seller; it was of no concern to the investors.
The property inspection
Mark and Anne turned up to the property inspection early. The existing tenant was standing at the gate and wasn’t happy about the open house and people walking through his home.
This was completely understandable, even though the tenant had been given the appropriate notice and the real estate agent had tried to work with him.
The inspection revealed the house required a lot of repairs, and that the current tenant would have to leave. It wouldn’t be safe, and Mark and Anne felt the house was inhabitable.
The behaviour of the existing tenant during the open inspection also triggered warning bells in Anne that it would be very difficult to gain access to the house while he was living there.
So, both Mark and Anne realised that the existing tenant would have to leave.
However, the couple knew immediately after the inspection that this property had the potential they were looking for. They made an offer. It was accepted.
The sales contract
It was organised for all parties to meet the following day and discuss the sales contract. The agent had a draft sales contract ready.
Before the meeting, Mark and Anne discussed the range of renovations required. Anne was concerned about asking the tenant to leave but accepted it would be impossible to do the renovations with the tenant living in the house.
Mark was eager to secure the property, while Anne wasn’t prepared to sign any contract without ensuring they were protected for all possibilities.
Anne was especially concerned about the situation with the tenant. She was aware that the rental laws had changed in Queensland due to COVID-19.
Impact on sales contract
Mark and Anne definitely knew that the tenant couldn’t stay in the rental property while they did renovations. They needed the house vacated, and this had to be a condition on the sales contract. The tenant would need to find new rental accommodation.
They wisely contacted their conveyancer to discuss the situation. The advice was clear: “You can’t take on the existing tenant.” This meant the tenant was not to be included in the contract for sale.
In the original sales contract, the agent included the tenant’s details and the seller’s name as the property manager. Anne instantly questioned this: “Why is the tenant information in the sales contract?”
The agent suggested the tenant will move out anyway. This is what Anne had to say:
“No! We can’t do our renovations if the tenant is still in the house. The tenant needs to have vacated for us to take over the house.
We can’t risk being delayed in starting renovations. If the existing tenant is still living in the house when we take it over, we will need to go to QCAT to remove the tenant. And we don’t want to do that or put the tenant through that experience. It needs to be done before we settle.”
The owner understood and agreed he would have to give the tenant notice and that we would not settle while the tenant was still in the rental property.
Adjusting the sales contract date
This impacted the date for the contract, which was adjusted by an additional 45 days.
The sales contract had to allow for the period of notice for the end of the tenancy. Due to current changes to the residential tenancy laws in Queensland, the tenant was allowed 60 days notice to vacate.
It is very important to always check for any updates to laws prior to signing a contract.
Settlement conditional on tenant moving out
To ensure the tenant had moved out before settlement, the buyer’s conveyancer provided a clause to make settlement conditional.
This meant if the tenant did not move out by the end of the contract period, Mark and Anne had the option to either cancel the contract without penalty or to extend the contract period.
This allowed for the situation, if the owner had to undertake further action via QCAT (Queensland Civil and Administrative Tribunal), to have the tenant evicted.
Everyone hoped this would not be required.
Sorting out the house insurance
Another issue that needed to be sorted was who was responsible for the house insurance during the contract stage.
It was discovered during this discussion that the owner had not renewed the house or landlord insurance cover for some years.
The investors were told by both the real estate agent and their conveyancer that normally the buyer gets insurance for the house from the contract date. However, in this situation, they would not be able to get protection for any damage caused by the tenant as he wasn’t in the contract but was living in the house and not on a proper lease.
Conveyancer to the rescue.
The buyer’s conveyancer requested a clause to require the seller to maintain insurance or to renew insurance for the property because they were responsible for any damage done by the tenant.
Mark and Anne still obtained insurance for the house after finance was approved. But they knew that any damage to the house directly caused by the tenant before settlement would be covered by the seller’s insurance.
With the insurance issue sorted, the only thing now was to wait for the tenant to move out, so the contract could settle.
Settlement in 75 days
In the final hour of the 60 days notice, the tenant moved out of the property.
Mark and Anne were happy to hear the tenant had found a new home and were delighted that everything had been removed from the property.
They were able to do their final inspection before settlement.
It took 75 days for them to finally get possession of the house. On reflection, the new owners feel it was worth the wait.
Understanding rental laws when buying investment properties
The experience of these owners really emphasised to them how important it is to understand the rental laws in your state. But also understand how they impact both the owners of investment properties and the people who rent them.
Mark and Anne felt it was important to have independent advice, which they got from their conveyancer.
“Our conveyancer was invaluable because she offered another perspective on the buying process. Her knowledge of contract law was outstanding and it really helped protect us when buying a rental property with an existing tenant,” said Anne.