What to Expect at Closing: A Checklist for Occupied Properties

Real estate closings can be chaotic and stressful even under the best circumstances. 

Add some tenants, and things can feel even more precarious. 

It doesn’t have to be that way, however. When you’re closing a real estate deal on an occupied property, any potential complications can be managed with a little bit of preparation and the expertise of your trusted real estate partners. 

Closing on a vacant property is easier for a number of reasons. But let’s focus on the bright spots. You’re buying an investment that is already producing some income. That’s something to celebrate. 

It’s important to understand what to expect and how to prepare to ensure a smooth transaction when you’re closing on an occupied property. It requires extra attention to detail because there are tenants involved, and you need to ensure both the legal and practical aspects of the transaction are handled properly. As property managers, we’re often called upon to guide investors through what to expect, and today we’re using that experience to provide you with a comprehensive checklist that will make the closing process as seamless as possible.

Understanding Occupied Investment Properties

Occupied properties are those where tenants currently reside, either under a lease agreement or in some cases, without one. There are a few different types of occupied properties:

1. Tenant-Occupied Properties. These properties are rented to tenants with an existing lease agreement.
2. Owner-Occupied Properties. There are occasional situations where the seller needs to live in the property even after the deal is closed. In such a scenario, they would become your tenant, at least temporarily. Or your seller may have family members in place when you close.

There are unique challenges in each situation, and for the purposes of our discussion here, we are focusing on those closings that involve tenant-occupied properties. This is a far more common situation.

Key Considerations Before Closing

Before the closing date even rolls around, there are some things to think about as you decide to buy an occupied property. Here are the details that require your attention when you’re investing:  

• Lease Agreement 

Understand the terms of the existing lease agreements. Review the length of the lease, rent amounts, and any clauses that may affect your plans for the property.

• Tenant Rights 

This is California, and tenant protections are serious. Ensure that you understand the tenant’s rights in the local area where the property is located. This is going to impact everything from rental increases to evictions to options if you want those tenants to vacate the property. Make sure you know the law, and discuss the implications with a local property manager who can also tell you about the legal implications of this investment.

• Rent Payment Status

Check if the tenants are up to date on their rent. If not, you may need to factor in unpaid rent or negotiate with the seller for compensation. This will be an unpleasant situation to inherit.

• Security Deposits

In California, security deposits stay with the property. So check the lease agreement to make sure the process is explained. If it’s not, you’ll want to verify that the proper security deposit funds have been transferred to you at closing. You’ll also want to ensure that the tenant has received proper notice if any deposits need to be refunded.

Once you’ve reviewed these points, you can move forward with the closing process without any unpleasant surprises when it comes to the tenants living in the property you’ve purchased. 

What to Expect at Closing

Closing on an occupied property follows many of the same general steps as closing on any other property, but there are a few additional tasks and potential complications that you should be prepared for. Here’s a breakdown of what to expect:

• Title Search and Due Diligence

The first major step before closing is the title search. This is an essential part of the due diligence process and ensures that there are no liens or encumbrances on the property. It’s especially important for occupied properties because unpaid rent, property taxes, or other outstanding fees could complicate matters. Make sure that there are no unpaid property taxes or homeowner association (HOA) dues. You want to be sure the title is clear and transferable without complications. Any legal disputes with tenants or the property owner should be resolved or manageable.

The title search should also include checking whether there are any court judgments or eviction proceedings involving the tenants that could affect the property’s ownership.

• Tenant Notice

It is important to determine the status of tenant notification about the property sale. Make sure that proper notice was provided according to local laws, as failing to do so could affect your ability to take possession of the property after closing.

If you’re taking over the lease agreements, this step is crucial. Tenants should be informed that their lease will be honored under the new ownership, but it’s also important that they know you may choose to make changes in the future.

• Tenant Acknowledgment at Closing

During the closing process, you may need to sign documents acknowledging the tenancy status and agreeing to honor the existing lease terms. The seller may also have to provide documentation to show that tenants are current on rent and other obligations. Verify that you have reviewed the lease terms and ensure you have copies of any active leases. Collect a tenant rent payment history and clarify any remaining questions around the security deposits. 

• Inspection and Walkthrough

Before the official closing, you’ll conduct a final walkthrough of the property to ensure that it meets your expectations and that there are no unexpected issues. However, with occupied properties, this walkthrough can be a little tricky. Tenant access will be a factor. A property manager can be helpful here, as we can coordinate with the tenants to schedule that inspection. Be mindful that tenants may not appreciate last-minute visits, so it’s important to communicate well in advance.

This inspection is an opportunity to look for any signs of neglect, damage, or maintenance issues that need to be addressed. Although the tenants may not be responsible for every issue, it’s worth noting any problems that could require attention after you take ownership.

Final Step: Transfer of Funds and Property

Once all legal documentation is completed, funds are transferred, and any tenant-related issues are resolved, the ownership of the property is officially transferred. At this point, the seller should provide you with the keys, and you should receive all relevant documentation regarding the property. This includes:

• Closing statement. This outlines the financial terms of the transaction.
• Title deed. This proves that ownership has transferred to you.
• Tenancy documentation. Copies of all leases, rent payment records, and tenant-related documents.

Post-Closing Considerations for Tenants

After closing, will be responsible for the tenants who are living in your rental home. Assuming you intend to keep it as a rental home, you’ll have to reach out to your tenants and establish a relationship or instruct your property management partner to initiate the tenant relationship and put processes in place for things like rental payments and maintenance requests. 

If you’d like to evict the tenants when the lease ends in order to move into the property yourself or to move an immediate family member into the property, make sure you seek legal counsel and the assistance of a property manager. There are specific legal requirements here, including a relocation fee.

A Checklist for Closing on Occupied Properties

This is a lot to digest. So, to make sure nothing is overlooked, here’s a quick and comprehensive checklist to guide you through the closing process for an occupied property:

• Before Closing:
  • Review all lease agreements.
  • Verify tenant payment histories and check for arrears.
  • Ensure tenants are notified of the sale.
  • Confirm that the title search is completed and clear.
  • Verify any outstanding property taxes or HOA dues.
  • Ensure security deposits are being properly handled.
  • Review tenant rights and eviction laws in your jurisdiction.
• At Closing:
  • Review all documents, including leases and payment histories.
  • Ensure that the seller provides documentation regarding tenant status.
  • Confirm the transfer of funds and property title.
  • Ensure you’re receiving keys and access to the property.
• Post-Closing:
  • Communicate with tenants about your intentions for the property.
  • Begin any renovation or maintenance work if necessary.
  • Handle tenant evictions if required according to the law.
  • Monitor rent payments and ensure that all terms of the lease agreements are being honored.

Closing on an occupied property is not always ideal, but with proper preparation, it doesn’t have to be a difficult process. By understanding the unique considerations that come with occupied properties, having a solid checklist in place, and communicating clearly with tenants, you can ensure that the closing process goes smoothly and that your investment is set up for a successful start. 

Keep in mind that every real estate transaction is different, so it’s important to stay informed, be proactive, and seek professional advice when necessary. 

These are general guidelines, and we’d be happy to talk with you about the unique situation that you find yourself in when buying an occupied property. Please do not hesitate to contact us at Redwood Residential Property Management with any questions.