Landlords are not fleeing buy to let in droves, but a steady number are selling up, according to letting agents.
The latest stats from trade body the Association of Residential Letting Agents (ARLA) says the average branch has four buy to let properties for sale – and the figure has stayed at that level since July 2018.
It’s difficult to put a finger on how many private rented homes are for sale, but industry data puts the number of letting agents in England at around 8,000.
At four homes for sale a branch, which means up to 32,000 buy to let homes are on the market.
The possibility is more landlords are looking to quit as regulation and tax changes start to squeeze profits but can’t because they are locked into contracts that mean they cannot take possession of a rented home for at least six months due to COVID-19 emergency rules.
Their options are limited. Either sit tight and wait for eviction rules to return to normal or sell with a sitting tenant.
This guide looks at how landlords can sell with a sitting tenant.
- 1 What is a sitting tenant?
- 2 Giving notice under COVID-19 emergency rules
- 3 Protected tenancies
- 4 Selling a house with a sitting tenant
- 5 Completing the sale
- 6 …and don’t forget the tax
- 7 Selling A Buy To Let With A Sitting Tenant FAQ
What is a sitting tenant?
A sitting tenant is someone renting a private home that the landlord wants to sell. The renter has a contractual right to stay in the home while the terms of their tenancy agreement are in force.
Giving notice under COVID-19 emergency rules
Under COVID-19 emergency rules, landlords must give a tenant a minimum notice period of six months up to March 31, 2021.
The extended notice does not apply to tenants giving notice.
The emergency rules do not stop landlords issuing a notice to quit where that type of notice applies, but the Ministry of Justice has made clear the courts have a huge backlog of cases and the most serious will take priority.
The type of tenancy can make a difference. Some renters have rights as protected tenants.
This generally applies if they rented the home before 15 January 1989, as assured shorthold tenancies came into effect after that date. Although, between that date and 28 February 1997, there could be a number of assured tenancies which have greater protection for tenants.
A protected tenancy gives the renter, their spouse or sometimes other family, the right to stay in the home for the rest of their lives. They also have the right to a fair rent, which is typically well below market value.
These Rent Act 1977 tenancies significantly dent the value of a property and restrict the number of interested buyers.
They are often sold at auction rather than through estate agents.
Selling a house with a sitting tenant
Selling a house with a sitting tenant comes with pros and cons.
A sitting tenancy narrows the marketing options. Someone looking to buy and move into the property is unlikely to want to consider a home with a sitting tenant, which significantly restricts the number of buyers interested in a purchase.
That leaves another property investor as the likely buyer and they may like the idea of taking over a home with a tenant already in place. That means they have a guaranteed income from day one and do not have to worry about several weeks without an income while they refurbish and market the home.
If the tenant agrees to handle viewings, marketing should proceed as normal.
From the outset, keep the tenant in the loop about what’s going on and give at least 24 hour notice of viewings.
Allay the tenant of any concerns about transferring their deposit on a sale as a system is in place to deal with the money.
If the deposit is with an insured deposit protection scheme, the seller passes the money to the buyer who re-protects the cash.
For custodial schemes, the buyer sets up a deposit protection account and the seller transfers the money into the new account.
Cash flow is another factor to bear in mind. Selling a buy to let with a tenant in place means you do not have to fund the mortgage and other bills while the property stands empty waiting for a buyer.
Completing the sale
Selling a buy to let with a sitting tenant should not make any difference to the legal process.
The contract will specify the name of the tenant, the monthly rent and terms of the tenancy.
The seller should make sure the rent is paid to the completion date and that any mandatory checks, like gas safety certificates, energy performance certificates and right to rent checks are valid.
Dealing with the tenant after the keys have changed handed is down to the buyer.
…and don’t forget the tax
Any disposal of an investment property comes with a tax bill.
Within 30 days of the sale, landlords must report the deal to HM Revenue & Customs and pay any capital gains tax due.
Working out the tax bill can be complicated if you have lived in the property at some time or share ownership with one or more other investors.
In general, the chargeable gain is the sale price less the original purchase price less some allowable expenses, like estate agent and legal fees.
Other adjustments may reduce the gain, like the annual exempt amount, capital losses offset against the gain and other taxpayer specific reliefs.
CGT is then paid at 18% by basic rate taxpayers and 28% by higher and additional rate taxpayers.
Selling A Buy To Let With A Sitting Tenant FAQ
Most buy to let homes are sold with vacant possession, but some landlords may need to sell but can’t under COVID-19 emergency rules.
The sale comes with some worries – like how to value the property, keeping tenants happy during the sales process and paying the tax bill due on the sale.
To help allay some of these fears, here are some responses to the most asked questions about selling a buy to let with sitting tenants.
How much is a house worth with a sitting tenant?
First, the valuation depends on if the house is subject of a protected tenancy or assured shorthold tenancy.
A protected tenancy may mean a landlord can own a home for 80 years before taking possession. That’s based on the longevity of the current tenant and anyone who may inherit the tenancy.
A protected tenancy can knock a property value down to at least half the open market price, if not more.
Assured shorthold tenancies can impact the value of a property, but nowhere near as much as a protected tenancy.
Other factors like location, type and condition of the property also come into play, like any other house sale.
The only way to settle on a fair selling price is to ask for some professional valuations.
Where do I sell a buy to let with a sitting tenant?
For homes with protected tenancies, speaking to a specialist auctioneer might be worthwhile.
How do I work out the capital gains tax due?
Speak to an accountant or tax adviser to make sure you offset the correct reliefs and allowances and don’t forget you have just 30 days from completion to work out the CGT bill and pay the tax.
Can I check out the tenants before buying?
Running checks on the renters in situ is necessary before buying a buy to let with sitting tenants.
There’s always the chance the seller is pulling a fast one and trying to get rid of problem tenants.
Reference the tenants before completion. Check they have paid the rent, no other bills are due and that right to rent, gas safety certificates and any other paperwork is up-to-date.
However, you can’t sign a tenancy agreement until you own the property.
When should landlords tell tenants they are selling?
It’s a good idea to keep tenants onside about plans to sell their home from the start. They will naturally be worried that the buyer will evict them, so encourage the buyer to discuss their intentions with the tenants as well.