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The risks of buying a home already occupied by a tenant

On Behalf of | Jan 2, 2024 | Real Estate Law |

The California housing market is relatively competitive. There is a constant demand for housing and inventory levels cannot keep up with that demand. Prices increase in part because of how demand outpaces development.

Those hoping to buy a home, including those who intend to occupy the home as their primary residence and those hoping to invest in the property, may have a hard time finding the right place to buy. Prospective buyers sometimes consider residential properties that already have tenants living there.

Is purchasing a tenant-occupied home a smart workaround when the real estate market makes buying real property difficult?

The rental terms are a key consideration

Purchasing an already occupied unit can sometimes be beneficial. For those aspiring to be landlords or to expand their investment property portfolios, acquiring a property with an existing lease can speed up the timeline between closing and receiving the first rental payment. Even those who want to move into the property may be able to close more quickly if they buy a property that currently has a tenant.

However, they generally do not have the option of taking immediate possession. Those who want to work as landlords cannot immediately remove a current tenant to replace them either. California has relatively robust tenant protection laws, and those laws generally require those buying real property to uphold pre-existing leases.

Therefore, part of the due diligence for buying an occupied rental property involves reviewing the existing lease to see if it is actually reasonable and appropriate. Those hoping to move into the property and using a mortgage to finance the transaction may face extra challenges, as mortgage lenders typically require that they take possession of the property within 60 days of closing. Otherwise, they may not qualify for a mortgage and may have to look into other solutions for purchasing the property.

There are other risks, including the possibility that tenants might refuse to leave, thereby forcing eviction proceedings that are time-consuming and frustrating. Tenants might also intentionally damage the property out of spite because they have to leave after the sale of the home.

Whether or not acquiring an occupied rental property is a reasonable choice will largely depend on an individual’s circumstances. With so much at stake, reviewing the existing lease and the condition of the property with a lawyer can be good initial steps when contemplating the acquisition of a tenant-occupied residential property.