Closings can be complex, and when you’re closing on a property that’s serving as someone else’s home, you’re working with some nuanced constraints that require a little extra attention to detail. When you approach this finality after negotiating with a seller, it’s normal to feel a sense of anticipation and relief. But when you’re arriving at the closing date and not able to immediately access the property that you’ve spent a lot of money to purchase, things can feel a bit strange.
As a real estate investor, even if you’re a new real estate investor, you know that buying an investment property with an existing tenant is quite different from buying a home for personal use.
Not only are there legal and financial considerations that may not apply to a primary residence, but you also need to factor in the rights of the tenant and the responsibilities that come with being a landlord.
Professional help is essential, and as your Real Estate Gladiators, we have been on the front lines of many challenging closings, including those that involve occupied properties. We have been in this arena before, and we can help you buy your new investment property with confidence and compliance.
Let’s take a look at the key differences between buying an investment property with tenants in place and a traditional home purchase. Our job is to provide you with essential tips and insights that will help you navigate these specific complexities of real estate investing.
As always in our educational blogs, we’re providing general information that can be useful for a majority of the investors who are closing on a property. If you’d like to discuss the particularities around your own negotiations and closing, please get in touch with us. We’d be happy to take a look at your specifics. Until then, let’s talk about what to expect at closing when you’re buying an occupied investment property.
First Things First: Review the Purchase Agreement and Seller Disclosures
Let’s not get ahead of ourselves.
Before you even think about closing, we’ll want to carefully review the purchase agreement and any seller disclosures. This is especially important with occupied properties, as tenant-related issues may affect the terms of the agreement.
| Purchase Agreement
This is the formal document that outlines the terms of your deal. In Washington State, it’s common for the agreement to contain specific clauses addressing the property’s occupancy status, rent payments, and whether tenants are current on rent. If the property is rented out, make sure that the lease terms are clearly outlined and that you are aware of the length of the current lease, the rent amount, and any other special stipulations. |
Seller Disclosures
Sellers are required to disclose any known issues with the property under Washington State law. This includes any tenant complaints, issues with property maintenance, or problems related to the building or land. Pay particular attention to disclosures about tenant complaints or problems that may arise at closing related to the tenant’s rights or behavior. |
Understand Tenant Rights and Lease Terms
We’ll tell any investor buying an occupied property that it’s extremely important to understand the rights of the current tenants and to familiarize themselves with the lease terms. Washington State law provides tenants with significant protections, so you’ll want to know what you’re inheriting when you take ownership of a property.
| Tenant Rights in Washington State
In Washington, tenants are entitled to protections even if the property changes ownership. These protections include the right to receive proper notice if they must vacate the property and the right to live in the unit until the end of their lease (unless there’s a breach of contract). |
Lease Terms
Review the existing lease before closing. The lease terms dictate how you can interact with the tenant after you take ownership. For example, if you plan on raising rent or terminating the lease, Washington’s rental laws will allow or disallow that. If the property is subject to a Section 8 voucher or rent control program, this will affect your rental income and operational plans as well. |
Obtain a Tenant Estoppel Certificate
Never heard this term before?
You’re hearing it now, and it’s essential. A tenant estoppel certificate is a key document you should request from the seller prior to closing. This certificate serves as a formal statement from the tenant confirming the terms of the lease and their understanding of the rental situation. It helps confirm things like:
- The amount of rent currently being paid
- Where the security deposit is, and how much has been paid
- Any disputes or issues the tenant may have with the landlord
- Whether the tenant plans to vacate before the lease ends (if applicable)
This document can help verify that the lease is legitimate and that there are no hidden issues or unpleasant surprises, such as unpaid rent or other tenant-related conflicts that could impact your purchase.
Establish a Tenant Relationship
Whether you’re a people-person or not, there’s a new relationship in your life. At closing, you’ll officially take ownership of the property, and depending on your plans, you may need to interact with the current tenants. If you intend to continue renting to the existing tenants, it’s important to establish clear communication right away. The alternative, of course, is working with a professional property management company. In that case, your property manager will be responsible for reaching out to the tenant and establishing a relationship. Either way, we advise the following.
| Notification of Change in Ownership
In Washington State, tenants must be informed of any change in ownership. Typically, the seller is required to notify the tenant in advance, but it’s also a good idea for you to follow up with a written notice confirming the change and providing your contact information. This ensures that rent payments are made to you moving forward and that the tenants understand the new ownership structure. |
Expect to Honor Existing Leases
If the tenants have a valid lease agreement, you are legally obligated to honor the terms of that lease. If the tenants are month-to-month, you can make changes such as increasing rent or deciding to terminate the lease, but you must follow Washington’s legal procedures, including giving appropriate notice. |
Confirm Title and Liens
When closing on a property, it’s essential to ensure that the title is clear of any liens, encumbrances, or claims against the property. This is particularly important when dealing with occupied properties, as there may be issues tied to unpaid rent, judgments, or other financial obligations.
Review Closing Costs and Fees
Real estate transactions in Washington State come with various costs, and occupied properties are no exception. Be sure to review all closing costs to avoid any surprises at the closing table. These can include the following:
| Escrow Fees
In Washington, escrow companies are typically responsible for managing the closing process. The escrow fee is often split between the buyer and seller, but you should review the purchase agreement to verify how the fees are being allocated. |
| Property Taxes
Property taxes in Washington State are almost always prorated at closing, so you’ll be responsible for your share of the property taxes from the date of ownership forward. If the property is occupied, ensure you understand how these taxes will be handled. |
| Insurance
You’ll also need to arrange for insurance before closing. This is especially important if you’re planning on keeping the property rented out to tenants. Be sure to check that your insurance covers liability and loss of rent. Investigate whether the tenants have renters insurance. |
Final Walkthrough of the Property
Before you attend the closing, it’s advisable to do a final walkthrough of the property. This is especially crucial with occupied properties, as you want to ensure that the tenants are abiding by the lease terms and that there are no hidden issues that might affect the value of the property.
You’re looking at property condition. Check the general condition of the property to confirm that no damage has been done by the tenants. Make sure that the appliances are in working order and that the property is well-maintained. If you can, get a sense of tenant behavior. Are they paying rent on time? Are there disputes with neighbors? Do pets roam freely? Find out.
Sign the Closing Documents
It’s the big day: you’re closing on a new investment property (applause).
At closing, you’ll need to sign various documents to finalize the transfer of ownership. These documents will typically include:
- Deed of Bargain and Sale. This is the document that officially transfers the property from the seller to you.
- Closing Statement. This document outlines the final breakdown of the costs and fees associated with the transaction.
- Lease Assignment or Assumption. If the property is occupied, you may need to sign documents related to the assignment or assumption of the tenant lease agreements.
Once the closing is complete, there are a few important post-closing steps to take.
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Send a Welcome Letter to the Tenants If you plan on continuing the rental relationship, send the tenants a letter welcoming them to the new ownership. Include your contact information or your property manager’s information and any relevant details about rent payment instructions. |
Ensure Rent Payments Are Directed to You Double-check that tenants are aware of where to send rent payments moving forward. You don’t want the previous owner to continue collecting your rent. |
Plan for Property Management Most investors understand the value of professional property management. When you’re not actively managing the property yourself, this is the time to engage a property management company to handle tenant communications, maintenance requests, and rent collection. |
Why Buying an Occupied Property is Such a Good Idea
Yes, there are some extra steps required when you’re buying an occupied property. But what a fantastic opportunity – to buy an investment that’s already generating income.
We feel pretty strongly about buying occupied properties, and we think that in most situations, it’s an excellent investment move.
- Immediate Cash Flow
One of the most attractive benefits of purchasing a rental property that is already occupied by tenants is the immediate cash flow it provides. As soon as you close the deal, you’re already generating rental income. This is a significant advantage over buying a vacant property, where you would need to find tenants and wait for rental payments to start coming in. For investors looking for steady income streams, buying a tenant-occupied property offers a head start.
- Reduced Vacancy Risk
Vacancy is one of the biggest risks for landlords, as an empty property generates no income. When you invest in a rental property that already has tenants, you avoid the risk of extended vacancy periods. If the tenants have a solid rental history and are currently paying rent on time, there’s a lower chance of facing a vacancy anytime soon.
- Proven Tenant History and Rent Payments
Another key advantage of buying a tenant-occupied property is that you can review the tenant’s history before purchasing the property. By obtaining the tenant’s payment history, you can assess whether they’ve been consistently paying rent on time, which is a clear indicator of their reliability. You may even be able to obtain references from previous landlords, giving you more confidence in your investment decision.
The risk of non-payment or late rent is one of the primary concerns for landlords, so acquiring a property with tenants who have demonstrated financial reliability is a great way to reduce this concern. Obviously, nothing can guarantee future performance, but it certainly improves your chances of maintaining steady income.
- No Need for Renovations or Marketing Costs
If you purchase a vacant property, you’ll likely need to spend time and money on renovations, repairs, and upgrades to make the property attractive to potential tenants. You’ll also need to market the property, which can involve listing fees, advertising, and potentially a realtor’s commission. These additional costs can add up quickly.
When buying a rental property that’s already occupied, many of these costs are often eliminated or minimized. The tenants are already living there, which means the property is likely habitable and maintained to a degree that keeps them satisfied. Don’t let this make you lazy; you should still conduct a thorough inspection of the property to ensure everything is in good working order, but the savings in terms of repairs, renovations, and marketing can be significant.
- Long-Term Stability and Lower Turnover
Tenant turnover is costly, both financially and in terms of time and effort. When a tenant moves out, you face the task of cleaning the property, repairing any damage, and then finding a new tenant. This can be disruptive and costly, especially if you need to cover a few months of vacancy while you search for the right renter.
By purchasing a property with tenants already in place, you minimize the chances of turnover in the short term. This is especially true if the tenants have a lease that is long-term or if they have been in the property for a while and are happy with their living situation. The more stable your tenants are, the more predictable your cash flow will be.
- Potential for Rent Increases and Lease Renegotiation
When you buy a rental property with tenants in place, there’s the potential to increase rent when the lease renews. If the current rent is below market value, you can plan to raise it after the lease expires (following local laws and regulations, of course). This gives you an opportunity to increase your return on investment over time.
Additionally, when the lease ends, you may have the chance to renegotiate terms with the tenants, potentially improving the terms of the lease agreement, whether it’s by increasing rent, requiring a longer lease term, or adjusting other clauses.
- More Reliable and Stable Investment
While buying a property with tenants may not produce the same adrenaline as finding an unoccupied gem and revamping it for maximum value, it can be a more stable and reliable investment, especially for first-time investors. You’re essentially purchasing an income-generating asset that already has an established cash flow.
Investors who are looking for a low-maintenance, hands-off investment often find that purchasing a tenant-occupied property is the right choice. This is particularly true if the tenants have a history of maintaining the property and following lease terms, as you won’t have to worry as much about immediate repairs, legal issues, or vacancy concerns.
Closing on an occupied property in Washington State requires careful attention to detail and a thorough understanding of tenant rights, lease terms, and legal requirements. By following this checklist and ensuring that all aspects of the transaction are handled properly, you can avoid common pitfalls and make the most of your investment. Whether you plan to continue renting the property, renovate it, or eventually sell it, having a smooth closing process is essential to the long-term success of your real estate investment.
Interested in some warrior-level help? Please contact us at Real Estate Gladiators. We serve Monroe, Issaquah, Bellevue, Everett, Lake Stevens, Kirkland, and other cities in and around King and Snohomish counties in Washington State.
