A sitting tenant can lower a property’s value by 20% – 40%, depending on the type of tenancy, tenant rights, and current market demand.
However, the term ‘sitting tenant’ can be used for a number of situations, with some resulting in larger drops in value than others.
Here, we look at all the elements that are taken into consideration when valuing a property with a sitting tenant.
How Much Does A Sitting Tenant Devalue A Property?
A sitting tenant can reduce the value of a property by anywhere between 20% and 40%. The exact drop depends on the type of tenancy agreement in place, so it’s always worth taking a close look at this before you buy.
There are two main tenancy types that sitting tenants will be under, these include:
Assured Shorthold Tenancy (AST): These usually result in a price drop of around 20-25%, but can be dependent on the exact terms of the tenancy and how reliable the tenant in situ is.
Assured or Regulated Tenancy: These give the tenant much higher legal protections and can lead to a property devaluation of 30-40%, or even higher in some cases.
Why the drop in value? Well, it’s for a few key reasons:
Firstly, having a sitting tenant in place means the landlord is limited in terms of what they can do. They inherit a previously agreed-upon tenancy agreement, and this lack of control makes the property less appealing. This is especially true of protected tenancies, where tenants have significantly more rights with strict limitations on evictions and rent increases.
Secondly, it reduces the amount of potential buyers that a property can attract. Properties with tenants in situ will usually appeal mostly to landlords, meaning there is less demand. These properties are also harder to mortgage, so are more suited to cash buyers.
Because of this, demand is usually lower, which in turn drops the price.
What Affects A Property Valuation With A Sitting Tenant Involved?
Not all sitting tenants are created equal, and elements like the agreement, the length of the tenancy and rental income all play a part in the valuation.
When valuing a property with a sitting tenant, property experts will consider:
The length and terms of the tenancy: Longer-term agreements and regulated tenancies lower the property’s appeal to many buyers, meaning the value is like to take a bigger dip.
Tenant rights: If tenants can stay indefinitely, or pass the tenancy to a family member, it makes the property harder to resell and therefore reduces its value.
Rental income: If the rent is low and, due to a regulated tenancy, can’t be increased to match market rates, it impacts the investment value of the property.
Property condition: If it’s in a bad condition, it’ll bring the price down, especially if refurbishment can’t be done easily with tenants in place.
Demand: In cities with high rental yields, a sitting tenant might be seen as a better asset than in areas with lower rental demand. The rental yield (and potential rental yield) will affect how valuable the property is as an investment.
How To Value A Property With A Sitting Tenant
If you’re trying to work out the value of a property with a sitting tenant, here are some ways to calculate it.
Alternatively, if you’re looking to sell a property with a sitting tenant but are struggling to work out the value of it, get in touch with the team at Swift Capital today at enquiries@swiftcapital.co.uk to find out how we can help.
We will usually look at:
Discount To Market Value
Start with what the property would be worth if it were empty and apply a discount based on the type of tenancy. For example:
- AST: Subtract 20-25%
- Regulated tenancy: Subtract 30-40%
Yield
For property investors, the rental yield (rental return) is an important metric. The higher the yield, the more valuable the property.
To work it out you just need to calculate: (Annual rent ÷ Purchase price) × 100
Then, you’ll need to look at the yield compared to the local area. For example, in Manchester, an investor might want 7 – 8% yield, while in London, 4 – 5% might be enough.
Length of Tenancy
This is usually used for life tenancies where rent may be very low due to restrictions.
A surveyor will look at how long the tenant is likely to live in the property, then use this to apply a discount. The longer the term = the bigger the discount.
Professional Valuation
Alternatively, if you’re looking for a professional valuation of a property with a sitting tenant, get in touch with the team at Swift Capital today at enquiries@swiftcapital.co.uk to find out how we can help.
How To Increase The Value A Property With A Sitting Tenant
Increasing the value of a property with a sitting tenant can be hard, but there are ways to do it.
First, make sure the property is in good condition. Keeping up with repairs, giving it a fresh lick of paint and making sure the garden is tidy can make a difference.
If you can, it’s also worth trying to increase the rent to bring it up to a market rate. That way, buyers looking at the rental yield might see it as a more appealing investment.
Finally, speak to the tenant about an early exit. Many times, tenants might be happy to leave early if they know their property is changing hands – and ultimately, selling it empty can help you regain some of the value.
In summary, anything you can do to show off the property as a low-risk, well-managed investment will help to increase its value.
How Easy Is It To Sell A Property With A Sitting Tenant?
It’s harder to sell a property with a sitting tenant, but it’s not impossible.
Selling with a sitting tenant reduces your pool of buyers. Most people looking to buy a property want to live in it themselves. And if they are looking to invest, they are unlikely to want to inherit someone else’s tenancy agreement.
There are a few ways to sell:
Via an estate agent – Good for finding buyers who know buy-to-let properties, but may take longer.
At auction – Can mean a quick sale, especially if priced right, but it may go for less than you’d hope.
To a property buying company like Swift Capital – Fast and stress-free, but can mean selling for a reduction.
Valuing A Property With A Sitting Tenant
Valuing a property with a sitting tenant isn’t as easy as looking at local listings and popping on a price tag.
The type of tenancy, tenant’s rights, property condition, and market demand are all important elements to consider when working out how much your property is worth.
Need help with sitting tenant sales or getting an accurate valuation expert? Get in touch with the team at Swift Capital today at enquiries@swiftcapital.co.uk to find out how we can help.