Occasionally I see listings for apartments for sale with "tenants in place." What would be the reasons and advantages for buying such an apartment?
These apartments are seen by some buyers as smart investments, and often come at a discount relative to similar units, our experts say. At the same time, there are some definite drawbacks—most pressingly, the question of when the buyers will be able to move in.
An apartment with a "tenant in place" is just what it sounds like—one where there's already a renter occupying the space. And along with the renter typically comes greater affordability.
"Usually, the price is low because there is a catch: The apartments are sold with long term or rent-regulated tenants who cannot easily be dislodged, if at all," says Deanna Kory, a broker with Corcoran. "So typically they are bought by investors who have a long-term view of purchasing these units."
Tenants occupying the apartment on market-rate or month-to-month leases are easier to move out, though even in these cases, buyers are advised to carefully check the tenant's lease agreement. Since these buyers will also become the tenant's landlord, they should also look into the tenant's credit score and history of rent payments before purchasing the apartment.
This arrangement could be a comfortable one for buyers who need to sell another property and aren't in a rush to move.
"A buyer can purchase a 'tenant in place' apartment while their current home is up for sale and not have to time both sales to occur in tandem," explains Gina Castrorao, rental manager at REAL New York. "They can put their home on the market and plan to vacate in a similar timeframe that the tenant of their new purchase will be vacating while already having purchased the new home."
However, she adds, such buyers should hold off on making a full payment on the apartment until the tenant is out: "It is important to keep some funds in escrow until the current tenants vacate to make sure the home is in proper move-in condition for the new homeowners—for example, nothing was damaged when the tenants were leaving the apartment."
If the tenant is rent-stabilized, then the buyer must really take the long view—or be prepared to negotiate a buyout. This is because when most rental stabilized buildings undergo co-op or condo conversions, they do so under a non-eviction plan, meaning that an outside buyer can't evict the tenant living there.
"If you buy an apartment with a rent-stabilized tenant in place, you can't evict them, and you can't raise their rent [beyond the legal amount set by REBNY each year]," says Sam Himmelstein, a lawyer who represents residential and commercial tenants and tenant associations (and FYI, a Brick sponsor). "You might also be stuck with a successor—the tenants' kids might take over the apartment."
In other words, a buyer might be unable to live in or sell the apartment for a long time—hence the lower price tag. When this happens, the buyer could try to buy out the tenant, a potentially very costly proposition.
Another issue to consider: It's unlikely that the tenant's monthly rent will cover maintenance fees and other carrying costs. And on top of all that, there are additional insurance considerations.
"You need a specific kind of policy for an investment or non-owner occupied apartment. A standard apartment policy would be voided," says Jeffrey Schneider of Gotham Brokerage (a Brick sponsor.) "The pricing is not much different, but you need the correct policy form. You also want coverage to protect your rental stream if a covered claim like a fire or severe water damage displaces your tenant and they stop paying rent."
So why go through all this hassle? Given the lower cost of purchasing the apartment, the investment could pay off handsomely in the long term as the apartment appreciates in value. But it's definitely a risky buy.
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