Housing is in short supply, rents are rising, buy-to-let is back in fashion. All good news, but how do you make sure that an applicant will be a reliable tenant? You cannot judge by looks alone, you need to know the story behind the face.
10 million people now live in private rented accommodation, double the number in 2000, accounting for 17 per cent of the UK’s households, up from eight per cent in the 1990s, according to Knight Frank’s latest research.
Mortgages for Business recently conducted a survey of buy-to-let clients and found that 57 per cent intend to add to their property portfolios this year. With competitive buy-to-let mortgage rates, more new landlords invest every day, however, not all of them appreciate the risks involved.
INVESTMENTS CAN GO TO POT
One landlady saw her property investment go up in smoke after failing to reference her tenant. Shirley Ross, who lives in Somerset, let her investment property in Watford last year, only to discover that it was used as a cannabis factory. “The house was left in such a bad state,” said Mrs Ross. “I want other people renting their homes to be aware that this might happen.”
Christopher Hamer, The Property Ombudsman, says that he receives many complaints from landlords saying their agent has not properly referenced the prospective tenant, “So they, as landlord, then have a tenant who will not pay the rent or has seriously damaged the property, or even set up a cannabis farm.
“Diligent referencing is extremely important in picking up indicators that something about the prospective tenant presents a risk. Of course the agent is not liable for the failing of the tenant and the potential confrontation between agent and landlord can perhaps be avoided if the landlord is made aware that the referencing process will not give a full character profile of an individual but is a general overview of whether they can afford the rent and will highlight any potentially negative factors.”
DUTY OF CARE
Michael Portman, Managing Director of LetRisks, says that agents owe a duty of care to their landlord. “Professional bodies including ARLA and NALS have codes of practice which require agents to take relevant references on an applicant. This includes the need to be diligent in identifying fraudulent applications.
“It is all about risk management. Your landlord needs to know who he is letting to and what the risk is. Referencing reduces the risk of picking a bad tenant who could default on the rent, or damage the property or use it illegally.”
The incidence of sub-letting is on the increase, something that can cause major problems for letting agents and landlords, but, says, Michael, referencing checks create a picture of the potential risk.
While the problems are undoubtedly there, the percentage of applicants who are rejected on referencing is modest. Andy Halstead, Chief Executive, LetAlliance says, “We reference 11 per cent of tenants as ‘not acceptable,’ 22 per cent as ‘guarantor recommended’ and 67 per cent as ‘acceptable.’” Clearly though, the important thing is having this information before the tenant is in place.
PRESSURE ON FINANCES
HomeLet’s latest Rental Index show that the average cost of renting a home rose by 2.4 per cent in the past 12 months to £781 per month. Rising rents and increased living costs mean that tenants’ pockets are stretched more than ever.
The number of tenants in severe rent arrears increased by 3.4 per cent to 67,000 during the fourth quarter of 2013, compared to the previous quarter, according to the Tenant Arrears Tracker by LSL Property Services.
Rob Medcalf, Product and Marketing Manager at Assurant, says tenant referencing is no longer a nice thing to do – it’s an essential. “The economic downturn has had a significant impact on household incomes and whilst the economy is improving, the number of tenants in arrears is increasing. In the first nine months of 2013, the Money Advice Trust charity’s helpline received nearly 20,000 calls from people behind with their rent – 37 per cent up on 2011.
“The property represents the landlord’s investment and income. Just as you wouldn’t appoint a new member of staff without taking a reference, you shouldn’t let someone live in your property without knowing that they can afford to pay the rent. Just as a staff reference doesn’t guarantee they will be perfect, a tenant reference doesn’t either – circumstances change. However, it should highlight ‘known’ problems and steer you away from difficult tenants.”
“Tenant referencing is a fundamental part of a letting agent’s service,” said Andy Halstead. “With a high quality reference landlords can be happy that tenants have been thoroughly checked and recommended as acceptable for the rental value.”
For a letting agent, having a good system makes letting a property a much smoother process. Emma Jouhin, Sales Manager, Callcredit Information Group, says, “If an agent has to deal with a late or nonpayer, or one who has absconded, it can cost a large amount in time and money to resolve. Pre- empting this risk by performing a tenant check can help agents manage their tenant risk more effectively, raising awareness of potential bad tenants and allowing the option to put into place measures such as insurance and rent guarantees.”
Applicants may seem hardworking, genuine, people, but, says Gary Abraham, Sales and Marketing Director at HomeLet, the reference process can uncover a less warming history. “The referencing process checks whether they have a poor credit history, had action taken against them for non-payment of rent and confirms they really are who they say they are.
“However, it can only give an overview of the past, depending on the reference type and their employment status. The checks do give a strong indication of financial strength – essential to provide reassurance to landlords that their investment is protected.
“If the applicant is in temporary employment, financially weak or in receipt of benefits, it’s advisable to add a guarantor to the tenancy agreement. However, it’s equally important to ensure the guarantor earns sufficient income to provide that extra security if the tenant defaults.”
Aside from reducing the risk to their business of poor quality tenants, tenant referencing provides letting agents with a solid audit trail which shows landlords what the agent actually did in terms of due diligence.
CHOICES FOR LANDLORDS
Agent Assure offers two services: Instant Reference delivers a report in minutes, including a thorough credit-history search identifying public information, CCJs, bankruptcies, voluntary arrangements and administration orders. It also establishes addresses connected to the tenant and checks for detrimental information; checking the electoral roll to confirm the identity of the tenant or guarantor and the likelihood of a tenant or guarantor defaulting on the rent.
Comprehensive Reference contains everything in the Instant Reference and additional references from employer/income provider and previous landlord. An accountant reference is requested if a tenant or guarantor is self-employed and a final recommendation is given to help make a decision on a prospective tenant or guarantor.
Assurant Let provides two options: Express and Comprehensive. Both can be accessed via a simple and quick online system, 24 hours/365 days a year. The system interrogates multiple databases undertaking detailed background checks in seconds and consolidates the results to provide an accurate and comprehensive tenant reference report very quickly.
The Comprehensive option also generates written reference requests from the previous landlord and the current employer. It provides a simple but detailed five page report indicating the suitability of the prospective tenant and goes beyond traditional references that simply carry out a credit search. The system assesses the prospective tenant’s creditworthiness today based on historical trends and circumstances and their propensity to default in future.
Both the Express and Comprehensive options can be completed by the agent or landlord online (self-fulfilled) or, on their behalf by Assurant Lets’ specialist support team via a managed service.
Callcredit provides several referencing products. CallReport produces an efficient report within seconds, confirming a tenants name, address and date of birth, any linked addresses to that individual, adverse credit history, including CCJs, bankruptcies and insolvencies. This can be accessed online or via APi, 24 hours a day, 7 days a week, using a secure username and password. A score is also provided, summarising the details contained within the report, enabling an even quicker decision-making process if required. Performing a CallReport check can give an indication as to the risk potential of a tenant, thus allowing a landlord or agent to pursue further information on the individual, or put into place contingencies in order to minimise risk as much as possible.
Endsleigh offers two reference levels. The instant reference provides a report in minutes which addresses the key points including: six year credit history search, CCJs, bankruptcies, repossessions and poor payment records; linked address search and residence history; electoral roll and fraud check with a score to identify fraud potential; tenancy score to indicate the likelihood of default on rental payments and an income validation score is used to indicate the degree of confidence in the income stated by the applicant.
The comprehensive reference provides a full report within 48 hours. Includes all of the above plus validation of two references (employer / previous landlord) – all referees are contacted directly; accountant / solicitor references if applicant is self- employed; immediate email notification with final report included when reference is complete and a final decision either Accept or Decline to help make a decision on prospective tenants.
HomeLet offers a range of referencing services. Insight is the simplest. It instantly checks up to three years’ previous addresses, aliases, undisclosed addresses and linked addresses, and validates a tenant’s bank account details before issuing a report. It also cross references the HomeLet Default Database and the HMT Sanctions list.
Enhance is the most rigorous. As well as the checks in the Insight reference, HomeLet contacts a tenant’s previous employer and current landlord.
Optimum contains all of the checks included in Insight and Enhance references, plus a powerful guarantee – HomeLet guarantees to remove the tenant from the property if they fail to pay their rent within the first year of the tenancy. This vital service can save a landlord thousands of pounds in legal fees if a tenant has to be evicted.
Let Alliance offers two primary referencing products. Express Reference provides an instant decision and confirmation document including checks on affordability, electoral roll, CCJs/ bankruptcy/IVAs and non-disclosed information.
The Ultimate Reference includes everything above plus comprehensive checks for previous/current/future employer references; previous/current landlord references; verification of earnings via accountants or pension providers if required and a free Guarantor reference if required.
LetRisks offers Tenant Comprehensive, a full reference including credit check and linked address, identity and fraud information, risk assessment, employment/ salary verification, current landlord recommendation (if applicable), overall tenancy recommendation.
Tenant Standard gives an immediate turnaround to provide a credit check and linked address, identity and risk assessment for potential for fraud.
Comprehensive Guarantor and Guarantor Standard are similar to the above references, but carried out on a proposed Guarantor.
Comprehensive Tenant and Guarantor. As detailed above but the agent is only charged for the Tenant Comprehensive if the Guarantor is submitted at the same time (ie free of charge).
MARAS, which is part of the Towergate Group, has provided over one million tenant references in the last 15 years. Their Credit Check provides an intelligent interrogation of the credit data held about the applicant, including details of any CCJs, bankruptcy orders and other insolvency actions, cross application checks.
They assess the information and provide a credit score for that applicant indicating a very simple pass or fail conclusion. If applied for online, the report is returned within seconds.
Full Reference: In addition to the credit check MARAS obtains such references as are necessary to ensure that the applicant has the means to pay their rent. This may be from an employer (past, present and future), from a pension provider or an accountant. Staff ensure that they speak to the right people to make the correct assessment. If the applicant is currently a tenant they also obtain a reference from their current landlord or from the agent managing that property.
Rentguard offers a range of services, from the Insight service which has a turnaround time of four working hours, to a Full Profile service which provides written verification of the applicant’s current employment and income, as well as a full residential history and credit check. The process establishes if a prospective tenant is using an alias, multiple addresses or even a bogus employer to try and secure a property.
Rentguard also offers full company reference checks for commercial landlords within one working day, including a full report on the company’s financial history.
A number of companies offer rent guarantee or loss of rent and legal expenses insurances, designed to minimise the impact of poor tenants. However, it is usually a condition of the insurance policy that the landlord obtains acceptable written references, often from a specialist tenant referencing company, before the start of a new tenancy.
More information will be in the next issue of PROPERTYdrum.
PEACE OF MIND
Referencing does not provide a guarantee that the tenant will be perfect. It does, however, give a much deeper overview that is significantly more reliable than the letting agent having a simple conversation about their income and situation, it provides the real data to enable a landlord to make an informed decision. Without that, the disappointed landlord may feel more inclined to blame the agent.
Agent Assure www.agentassure.co.uk Assurant Let www.assurant.com Callcredit Information Group www.callcredit.co.uk Endsleigh www.endsleigh.co.uk HomeLet www.HomeLet.co.uk Let Alliance www.letalliance.co.uk LetRisks www.letrisks.com MARAS www.maras.co.uk Rentguard Insurance www.rentguard.co.uk The Property Ombudsman www.tpos.co.uk