Tenants at your fingertips

At the back of any auction catalogue you'll find the bargain section, a collection of houses and flats at up to half price. The catch? They have sitting tenants.

At the back of any auction catalogue you'll find the bargain section, a collection of houses and flats at up to half price. The catch? They have sitting tenants.

Most sitting tenants are hang-overs from the days when tenancies were so heavily protected it was virtually impossible to remove those in residence. Eventually, evil landlords like the notorious Peter Rachman would solve the problem physically - one of Rachman's sitting tenants had his roof ripped off.

The introduction of assured shorthold tenancies means that a landlord wishing to sell has to wait just six months before gaining vacant possession, explains Mike Green, a valuer with north London estate agents Copping Joyce. But old-style regulated tenancies pose a more complex calcul- ation because the tenant has security and the rent is set by a council rent officer. "Rent officers tend to live in a world of their own and will usually cut the rent by about 20 per cent from the market level," Green says.

To take account of the lower income, the price of the freehold is usually about 80 per cent of the free market rate. The real problem comes in working out a price for one of the dwindling number of protected tenancies, issued under the old Rent Acts and fixed at a rate that was probably low in the 1980s and is now derisory. "Protected tenants who pay their two-and-sixpence a week do not offer a proper income, so what people do is look at the prospects of getting vacant possession," Green explains.

Given that removing the tenant's roof is just as illegal and immoral as it was in Rachman's day, investors have to take a good look at one of the hard facts that nobody likes to face: how long the tenant is likely to live. "You need to know how old the tenant is and their state of health," Green says. "As a rule of thumb, properties with protected tenants tend to go for 50 to 60 per cent of their free market value."

Up north, regulated tenancies fetch higher prices, according to Edward Waterson of Carter Jonas in York. They also seem to be more willing to take a bet on how long the tenant will last. "I have been very surprised to find people paying up to 90 per cent of the free market value for registered tenancies," he says. "One has to bear in mind that regulated properties are not usually of high value, usually about £150,000, so many investors regard them as a better bet than the stock market."

Sometimes properties with sitting tenants are sold because of a breakdown in trust between landlord and tenant, says Tony D'Alton of Knight Frank. In such cases, selling at auction is usually the best option. "Properties with sitting tenants or squatters can be sold at auction, though the tenant has the right to purchase the property at the auction price within a month."

D'Alton sold a Georgian house on the river in west London a while back with two sitting tenants, one of whom was a lawyer who made himself so unpleasant to the freeholders, a local family, they decided to auction the place.

"He exercised his right to buy the place at the auction price of £1.1 million, then chatted up the lady downstairs and paid her out," he says with some bitterness. "Then he offered the house with vacant possession at £2.2 million, making £700,000 for no outlay at all."

In the case of a house in Fulham, however, it was the buyer who got lucky. "I was asked to sell a house in Fulham where the old lady who lived in the ground-floor flat had totally refused to cooperate with the landlord who lived above." D'Alton approached a developer he knew and bought the place as part of his retirement portfolio.

"He then went to talk to the old lady and offered her a place in the upstairs flat while her flat was renovated," he says. "She then turned round and said 'Don't worry my dear, I only wanted to bugger up the landlord's plans - I am moving out to live with my sister.' The developer paid half what the place was worth and got vacant possession without having to pay her out."

John Weatherall, auctioneer with Andrews and Robertson, is auctioning a number of properties with sitting tenants on 13 July. "Depending on the age of the tenant they go for 70 to 80 per cent of the free market price," he says. "They are very popular, and as they are getting fewer, they are more and more in demand."

Andrews and Robertson's auction is at the New Connaught Rooms on 13 July - ring 020-7703 2662 for a catalogue or visit www.a-r.co.uk