What happens when you find the perfect investment property but there’s a tenant living in that home?
You buy it.
These deals often come with built-in cash flow and negotiation leverage. It’s a good way to start or build a portfolio. But closing on occupied properties brings a bit of extra complexity. Understanding what to expect at closing can save you time, money, and legal headaches.
As property managers, we’ve worked with buyers and with sellers and with tenants during the transfer of property ownership. We’ve put together this practical closing checklist that should help you navigate the process.
An occupied property means you’re stepping into existing lease agreements, and you’re also working around the tenant rights that are protected under California’s strong rental laws. Potentially, you’re inheriting a lot of maintenance issues or tenant relationship baggage.
Unlike vacant properties, where closing focuses mostly on financial and title transfers, closing on an occupied property demands additional diligence. Here’s how to get it right.
Pre-Closing Checklist for Occupied Properties
First, you want to review the lease agreement. You need access to:
- Tenant names
- Monthly rent and due dates
- Lease start and end dates
- Security deposit details
- Any addendums (such as pet agreements, parking rights)
If the lease is verbal or informal (always a nightmare, but unfortunately not uncommon), get a written statement from the seller detailing the arrangement. Under California law, verbal leases are valid, but they’re harder to enforce and can be a red flag as you consider whether or not to buy.
Get an Estoppel Certificate
An estoppel certificate is a signed statement from each tenant verifying their current rent, the terms of their lease agreement, the security deposit they paid, and that no promises or arrangements exist between them and their current landlord outside of the lease agreement. This is what will protect you from future disputes if there’s a term or a situation that the seller did not disclose.
Your lender will also most likely require an estoppel certificate before funding a loan on a tenant-occupied property.
Verify Security Deposit Transfers
Under California Civil Code §1950.5, the security deposit must be transferred from the seller to the new owner at the time of sale. You’ll want to confirm the exact deposit amount, and that the deposits are included in the closing settlement statement. The funds should have been properly handled in escrow, and you’ll want to be aware of the strict state laws around security deposits. If and when tenants move out, there are strict documentation requirements when you withhold money from the deposit. Ask for photos and inspection reports from the move-in inspection along with the deposit.
Habitability and Rental Property Condition
Closing on an occupied property means you’re liable for its habitability immediately upon ownership. It’s in your best interests to confirm the property you’re buying has working heat, hot water, and electrical systems. Make sure there is no mold and that pest control is recurring. Confirm functioning plumbing and the lawful placement of smoke and CO2 detectors.
Request recent inspection reports or do your own due diligence with a licensed home inspector. If you’re inheriting deferred maintenance or unpermitted work, that’s your issue post-closing. If repairs are extensive, negotiate seller credits or price reductions before closing.
Closing Day: What to Expect
On closing day, the process involves more than just signing a stack of papers.
There’s often a final walkthrough, which is not always going to happen in a tenant-occupied property because of privacy laws. But, you can request a visual inspection at least and photos or other documentation of the property’s condition. If you cannot walk through the property yourself, we recommend a written tenant acknowledgment of the condition.
- Confirm Rent Proration
When will your first rent collection occur? Rents collected by the seller prior to closing must be prorated as of the closing date. This should be itemized clearly on your HUD-1 Settlement Statement or closing disclosure. Review this closely with your escrow officer.
Don’t forget about other prepaid items like HOA dues and property taxes.
- Receive All Tenant Documentation
At closing, collect all critical documents related to the tenants, including:
- Lease copies (if you didn’t receive them earlier)
- Estoppel certificates
- Move-in checklists
- Maintenance records
- Notices served (such as 3-day notices, rent increase letters)
- Security deposit ledger
Organize these immediately. You’ll need them if a dispute arises or you plan to sell or refinance later.
Introduce Yourself as the New Landlord
Within a few days of closing, you are legally required to notify tenants of:
- Your name and contact information
- Where to send rent payments
- How to request repairs
California Civil Code §1961 mandates this notice. It can be sent via mail or posted conspicuously on the property. Failure to notify tenants promptly can result in confusion as well as missed rent. If you have a property manager to help with this transition, it’s their information instead of yours that will be shared. This is a major benefit of professional management partnerships; your property manager is the first point of contact, not you.
All that’s left to do is to set up your own systems and prepare for the management of your new property. If tenants paid rent through the previous owner’s app, give them new payment instructions immediately.
If you’re transitioning to professional management, ensure a smooth handoff with your management company. It helps to bring us in before you take control of the property.
Closing on occupied properties in California can be a profitable, strategic investment if you go in prepared. The margin for error is slim. But with the right checklist in hand, you’ll have an easier time navigating the complexities.
We invite you to leverage our experience in situations similar to this. We can make the process much smoother for you and your tenants. Contact us at South County Property Management. We serve Santa Clara County and South County, including San Jose, Campbell, Saratoga, Cupertino, Sunnyvale, Los Gatos, Milpitas, Morgan Hill, Gilroy, and neighboring areas.
