Even the most experienced real estate investors can get a little anxious at closing time.
The details. The end of all negotiating. The money.
Closings are a time of celebration, whether you’re
selling an investment
or buying a new one. They can also be a bit overwhelming, especially when there’s a specific nuance to the deal that leaves a bit of an edge.
Today, that nuance we’re discussing is occupied properties.
What happens when you close a deal on a property that’s occupied with a tenant?
We’re talking about that, and sharing some of our best advice as
real estate and property management experts
who have been through this many times before. We’ve put together a checklist that we know can be helpful, whether you’ve done this before or you’re encountering the situation for the first time.
It’s both not very different from any other closing and also completely unlike anything you’ve likely ever encountered before.
How’s that for nuance?
Let’s take a look at what to expect and how we can help.
Why Closing an Occupied Property is Different
As any investor or homebuyer knows, the closing process is one of the most pivotal steps in any real estate transaction. For investors dealing with occupied properties, the stakes are even higher. From ensuring tenant arrangements to verifying legal documentation, every aspect must align seamlessly to avoid complications that could sink the deal before it closes.
Whether you’re purchasing a multi-family rental or taking over a single-family property with tenants in place, understanding the distinctions of a closing with occupants is essential.
Here’s what we mean:
When closing on an occupied property, you inherit more than just the structure of the property or the building itself. As the new owner, you’re also stepping into existing agreements, tenant relationships, and potential liabilities.
This is why the process differs significantly from closing on a vacant property.
Occupied properties require additional due diligence, like reviewing lease agreements, ensuring compliance with
landlord-tenant laws, and verifying the condition of the occupied units. Being proactive during the closing process can help you mitigate risks and set the stage for a smooth transition.
Another good idea? Make sure you’re working with a real estate expert who can also provide property management support. This will be critical to your success, and it will make your tenants feel a lot better about the changes that are occurring. Yes, you own the property now. But someone else considers it their home. If you can be sensitive to that, everyone will have a better experience.
Your Checklist for Closing on Occupied Properties
When we approach a closing that includes occupied units or a tenant in a home, we do as much work ahead of the closing date as possible. Being prepared is not only smart, it’s better service to both the buyer and the seller. Most importantly, it protects the tenant who is living in their home and does not want to be disrupted as the ownership of that home changes hands.
Let’s take a look at the checklist, and remember - this can be a flexible document, not one that’s set in stone. Every property is different, and all of your tenants will have their own unique needs. As property managers, we’re always willing to make changes in pursuit of a more personalized experience.
1. Review All Lease Agreements in Detail
Before you show up for the closing date, ensure you obtain and review all lease agreements for the occupied property. You need to know what’s already in place, and unless you have a very good reason for changing something, you’ll have to honor these lease details until the tenancy ends and you can re-negotiate on your own terms. As you’re checking through the lease agreements, pay close attention to:
- Rent amounts and due dates
- Lease terms (month-to-month or fixed-term)
- Security deposit amounts
- Special provisions and rules outlined in the agreements
- Tenant obligations and landlord responsibilities
This information is crucial for maintaining compliance and understanding the property’s cash flow. Cross-check these documents with rent rolls to confirm accuracy. It’s also a good opportunity to get to know how long your tenants have been in place and what kind of rental experience they’ve been accustomed to.
2. Identify Any Outstanding Payments or Debts
Request a detailed ledger from the seller to determine if any tenants owe back rent or other payments. You don’t want to inherit unresolved disputes or unpaid amounts. Include these details in your negotiations or closing agreements. Taking possession of your
new investment property
should not require you to immediately begin chasing down late rents or overdue debts. You want to know where each tenant stands, and why any money that is owed has not yet been collected. Are there pending evictions? Notices that need to be served? Get a full financial sense of the property before you close.
3. Inspect the Property with Occupants in Mind
Coordinate a walkthrough with the seller and tenants, if possible. Most tenants are going to be understanding, especially when they are provided with plenty of notice. Make it clear that you’re not showing up in order to invade their privacy or look for reasons to be displeased. Instead, you want to see the property and how it’s functioning. When
inspecting occupied units, consider:
- The physical condition of each unit
- Any unreported maintenance issues
- Tenant modifications or possible unauthorized alterations
This process will help you assess
immediate repair needs and plan for future maintenance.
Talk to the tenants, if you can. Ask about improvements they’d most like to see and try and get a sense of their satisfaction with the property.
4. Transfer Utility Accounts
Determine which utilities are the landlord’s responsibility versus the tenants'. Coordinate with the seller and utility companies to ensure seamless service transfers for property-managed utilities. Even if tenants are responsible for their own electric and internet bills, the property owner may have to have water and trash services in their name. Provide tenants clear instructions if they need to initiate or transfer their utility accounts.
5. Confirm Tenant Communication Plans
Discuss how tenant handovers will be managed post-closing. This includes notifying tenants about the change of ownership, payment process updates, and your preferred communication methods. Clear communication helps create trust and reduce confusion for your tenants from day one. This is another area where your property manager can be especially valuable.
6. Address Security Deposits
Security deposits legally remain with the property, but they need to be transferred correctly. Ensure:
- You receive a full accounting of each tenant’s security deposit
- The deposits are held in accordance with local landlord-tenant laws
- Documentation includes any prior claims or deductions on the deposits
7. Verify Insurance Coverage
Occupied properties come with additional risks, so verifying adequate
insurance coverage before closing is essential. Ensure your policy includes liability protection, tenant-related claims, and property damage. Double check the coverage period to avoid any lapses during the transition.
8. Plan for Legal Compliance
It’s important to have at least an elementary understanding of the landlord-tenant laws governing Arlington and the state of Virginia. Federal laws such as those pertaining to fair housing are also important. Review laws specific to the ownership of this
rental property, such as those regarding:
- Tenant notification for owner changes
- Eviction procedures, if needed in the future
- Security deposit handling requirements
Being familiar with the legal framework can prevent costly disputes and ensure a smooth ownership transition.
9. Negotiate Agreements on Tenant Occupancy
What if you are buying this property not so much as an investor but an owner/occupant? That’s going to require an even different approach.
If you’re planning to occupy the property personally or need to
make significant renovations, you may need to negotiate relocation agreements with tenants. Discuss “cash for keys” options with the seller, if applicable, or determine alternative solutions that protect both parties.
10. Close with a Legal Expert
Work with an experienced real estate attorney who specializes in occupied properties and landlord-tenant law. They can:
- Review all documents for accuracy and compliance
- Highlight potential red flags in tenant arrangements
- Guide you through post-closing requirements
Including a legal expert on your team ensures you’re fully protected as you move forward.
Building Confidence in the Real Estate Closing Process
