How do sitting tenants affect property values and what does it mean for landlords?

For landlords, it can be difficult to sell a property with sitting tenants. Sometimes known as having tenants in situ, it can add a higher level of complexity to any property investment strategy, not to mention the costs.

While it will vary from landlord to landlord, selling a house with sitting tenants on an assured shorthold tenancy agreement could devalue a property by 20% – 25%. For landlords with sitting tenants under a regulated tenancy, their properties could see a reduction in value of between 30% – 40%.

The reason for this is because buyers may be taking a calculated risk in investing in the asset. They will be calculating how long it may be before they obtain possession of the property and sell it on, if that’s their end-goal. Additionally, some high street lenders may not want to lend to buyers looking to buy a rental property with a regulated tenancy involved.

For both buying and selling landlords, there are other administrative costs to consider. Landlords can’t evict a sitting tenant unless they break the terms of their existing tenancy agreement. This tenancy agreement comes with the property as part of the sale. There is no legal obligation for a sitting tenant to sign a new rental agreement if ownership changes hands.

There are also plans in the works to ban 'section 21' notices. Currently, section 21 allows landlords to regain possession of residential property let under an assured shorthold tenancy agreement. They can do so without needing to prove any breach of the tenancy on the part of the tenant. But, the government has so called “no fault evictions” in its sights.

What’s more, landlords must tell their tenants in advance if they are going to sell their property. They also need to give them at least 24 hours’ notice before every viewing. All of this may make sellers hesitant to act. The ones that do are likely to face time-consuming complications and relatively low offers.

But, having sitting tenants may also present opportunities for buyers and sellers alike. Given the pressures the market is facing, we could see rising demand from investors wanting to secure high quality tenants, providing steady income streams.

The market is desperate for more rental supply

Regardless of whether tenants are included or not, the buy-to-let market is desperate for more supply. Our lack of rental stock has pushed up prices, creating an incentive for landlords to sell, and investors to buy before prices rise any higher.

There’s no shortage of demand from tenants either. An average of 11 prospective tenants registered for every available property across 2022. Meanwhile, despite facing a difficult market in recent months, rental yields are still outpacing house price growth. Securing a property with a tenant already included may prove both beneficial, and tempting.

Also, unfortunately, many renters are struggling with the ongoing cost-of-living crisis. A rising number are at risk of falling behind with their rent. For property investors, securing tenants with a track record of paying on time may offer more security than taking a gamble on finding brand new renters.

Where can buy-to-let sellers and buyers come together?

The market could end up in a position where existing landlords are keen to sell-up, while buy-to-let investors may want to lock-in property with paying tenants included. It’ll be crucial for both parties to come together effectively.

Generally, landlords have three options when it comes to selling tenanted properties. They can sell to a home buying company, through an estate agent, or via an auction. The later options may see a boost in activity over the coming months.

In the UK, spring is often thought of as they key property selling season. Indeed, following our recent winter lull, we may see a 17% boost in transactions into the summer. Also, many landlords have turned to auction houses to off-load their stock.

As many as 38% of recent property auction lots were made up of buy-to-let investors looking to exit the market. For buyers, this may present an opportunity to move into the market at a decent price.

But, property investors will want to move quickly on these opportunities. Discounted house prices are unlikely to stick around for long. Also, should demand rise, there may be rising competition among bidders and buyers.

This is where the specialist finance market can help. Bridging funding, along with bespoke buy-to-let mortgages, can be issued in mere days, allowing investors to jump on an opportunity ahead of their rivals. The funding can also be tailored for a range of complicated, or difficult circumstances.

As the economy recovers, confidence should return to the buy-to-let market. Investors in this space will want to partner with a bespoke lender that recognises this.