I recently purchased a house on behalf of a client who was looking for a hands free HMO investment.
Despite the market being extremely buoyant (when we checked at one point, almost half of all houses for sale in Salford mentioned they could be suitable for conversion to an HMO! But that’s a different post for a different day), there are still deals to be had if you’re willing to put in a little bit of work and you know what to look for.
That’s what I want to talk about here – one particular tactic we used to secure a house for a great price that was on the open market, despite everyone fighting over every other similar house, most of which were selling for much higher prices.
To set the scene a little, we were trying to source an HMO conversion in Manchester and were able to purchase a 3 bedroom house for £87,500 for our client. Everything on the street and in the area was selling for £105,000 + in a similar condition, or £130,000 + if renovated.
We’ve got a budget of £45,000 to turn this house into a great 5 bedroom HMO, and given its location close to the Trafford Centre and the tram line, it should rent very well. But I’m getting ahead of myself…
How were we able to buy a property on the open market for 17% below market value?
The answer is surprisingly simple, and can be applied in so many different ways. It all comes down to being willing to solve a problem that other people either a) can’t or b) won’t solve themselves.
Problem solving in property investment is where the real deals can be done, whether it’s figuring out a creative solution to an awkward layout, taking care of an off-putting structural problem or, as in our case, buying a house with an existing tenant.
Feedback from the agent was that potential purchasers were put off by the fact this house had a family living in it who would ‘come with’ the purchase.
First time buyers obviously didn’t like this as they would want the house for themselves, and as the house was in an ideal location and layout for an HMO conversion, investors were wanting something they could renovate quickly.
This meant that the property remained unsold, and the bank (it was a repossession) were keen to move it on.
What to watch out for when buying a house with tenants
Buying a property with tenants can be tricky, and the horror stories are enough to put most people off, but the real risks are limited.
The main thing to watch out for is what’s called a protected tenancy. This is basically any tenancy that has been in place since 1989 or earlier. When you have a long term tenant like this, you really should consider walking away from the deal.
Protected or regulated tenancies are virtually impossible for the landlord to bring to an end. As long as the tenant wants to stay there, they can. Rents are controlled, and are usually set at a very low level, so even if you’re buying a house as a buy-to-let, the yield or ROI with a protected tenant is going to be virtually non-existent.
Even on more recent tenancies, some problems can still crop up. If the tenant is on a fixed term tenancy rather than a periodic tenancy, it can be many months or even years before you can evict them.
There are many rules and regulations which can make it difficult for tenants to be evicted in anything like a quick time period (even on periodic tenancies, depending on things like how frequently they pay their rent).
These rules are too diverse to cover here, but the best advice is to get a copy of any tenancy agreements prior to making an offer, and get your solicitor to check them over for any potential delays.
Why were we confident to proceed?
In our case, the tenant was on a periodic tenancy and paid their rent monthly, so we would be able to serve them notice and with any luck have them out at the end of 2 months. Even if they dragged their feet, they wouldn’t have many grounds to stay their beyond a few months.
We also had the opportunity to speak to the tenants during the viewing process, and were able to get some good information from them. When the repossession proceedings started on the owner, the tenants started looking for alternative homes so were already in the frame of mind of moving.
They had begun looking, were receptive to the idea of moving house, and appreciated that the major remedial work to the house would require them to move out. They weren’t happy with their living conditions, so a simple conversation with them gave us a lot of insight into their frame of mind.
We worked with the tenants to find an amicable solution rather than trying to fight them and force them to leave. We remained in open communication with them throughout the purchase process, and helped with their search for a new property.
We also let them off with their last month’s rent and helped them track down their registered deposit which they didn’t know how to find. All of these little steps didn’t take much time, or really cost us anything, but the end result was ideal.
The tenants found a property that they were happy with, and instead of taking almost 3 months for the Section 21 notice to expire, the tenants were out of there in 4 weeks. During those 4 weeks, because we’d been helping them and had built a good relationship with them, we were able to get our trades in to price the job and get our work schedule lined up so work could begin as soon as they left.
Become a property problem solver
So instead of having a lengthy battle on our hands (the type that put of most prospective purchasers), we worked with the tenant to help them move on quickly. They’re happy, we’re happy, and we got a great discount on our latest project.
It just goes to show that seemingly complex problems can be solved relatively easily, and when you open your eyes to becoming a problem solver, a whole world of discounted properties opens up to you.
Our architect told us once that most ‘structural’ problems that put off buyers can be solved for a few thousand pounds. Obviously you’d want to check out each individual situation before proceeding, but imagine getting a £20,000+ discount on house because of an issue that’d only cost £5,000 to fix. That’s a good ROI!
So whether the house you’re looking at has existing tenants, structural problems or maybe some issue with the legal side of things, before you discount it immediately, spend some time thinking through if it really is a major issue, or just enough of an issue to put everyone else off and allow you to buy a great property at a great price.