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Tenant fees? NO. Tenant References? YES!

The tenant fee ban may change the way agents reference potential tenants, says Joanne Christie, but the process is still critical.

Joanne Christie

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There are many areas of life in which we’d like to get more for less, but, perhaps, it is tenant referencing that is at the front of many agents’ minds at the moment. We’re just months away from the tenant fee ban stopping agents from passing the referencing cost onto tenants, yet at the same time, identity fraud and illegal subletting remain persistent problems that mean the need for robust referencing is as great as ever.

Fortunately for agents, many of the referencing providers are well aware of the issues they are facing and there is a host of new products and services coming onto the market that could help agents cope with the fee ban.

Our system allows an agent to start a reference in seconds, it will automate the systems and keep working with the tenant until it has what it wants. Then it will send everything back to the agent. Simon Tillyer, Shefflets.

Simon Tillyer - Shefflets - imageFor a start, there are new referencing providers in the market that are reducing the costs involved. Take Vouch, for example. Founded by letting agent Simon Tillyer of Shefflets in Sheffield, it offers referencing for just £5, which Tillyer says is “a massive 75 per cent cost savings from what is generally available”.

Largely, the company cuts costs by automating processes. “The traditional systems are slow, they are all outdated and they are all based on a call centre. We use technology; we get the tenants to do the work.

“Our system allows an agent to start a reference in a couple of seconds, then it will go off and automate those systems. It will keep working with the tenant until it has got what it wants. Then it will bring everything back in and send it back to the agent.”

At another relatively new and low-cost provider, Home PPL, Open Banking, which was introduced to the UK marketplace early last year, has helped the company streamline its processes. “We have been using this for a while now. So if a tenant opens up their bank account we are instantly able to approve their income – we can judge how many times a month they receive an income, what the level is, how long they have been working there, etc – and on top of that we are able to make a fair judgement on whether they are paying rent on time as well. So that is a new, very interesting technology that more and more people are starting to utilise,” says Business Development Manager, Ata Abatay.

The human touch

However, some agents are sceptical of the tech-based approach. “There is no doubt that using technology for referencing reduces cost, however, our experience has been that the pure tech services aren’t as robust as referencing suppliers which offer a human element,” says Clynton Nel, Director at Johns & Co.

Automated referencing will be an attractive proposition to some but it won’t work for our market where referencing requires a case-by-case analytical approach. Peter Hermon-Taylor, Maskells.

Peter Hermon-Yarlor - Maskells - imagePeter Hermon-Taylor, Head of Lettings at Maskells, agrees. “The recent rise of proptech firms has seen, among other things, software designed to streamline front end administration and automate referencing provision. No doubt some volume agencies will view this as an attractive proposition as it will allow them to cut staff costs as they employ fewer administrators. However, this approach won’t work for our market where referencing is much more nuanced and requires a case-by-case analytical approach.”

Letting agents should beware of cutting costs. Referencing shouldn’t be downgraded; it is an investment in your client’s most valued asset. Vivienne Nelson, Reference My Tenant.

Vivienne Nelson - Reference My Tenant - imageOne referencing provider that is going against the trend and focusing on manual rather than automated referencing is Reference My Tenant. Director Vivienne Nelson says agents should beware of cutting costs when it comes to referencing. “Referencing shouldn’t be downgraded because it is an investment in your client’s most valued asset.

“Anyone can get a reference for a tenant – they are very cheap to get – but actually when the tenancy goes wrong and you start peeling away the layers, you might find that actually the employment reference came from a Hotmail account and the landlord reference came from a co-tenant they were living with. You’ve wasted £10 whereas if you’d paid £25 you would have got their tenancy agreement and bank statements.”

She says that one reason that agents in London, in particular, are seeking more human intervention in the referencing process is the rise in illegal subletting. “Some of our clients have had some issues where a tenant has taken on a property by giving bogus information, gone through referencing and turned it into an Airbnb.”

We know that sub-letting rented homes has become a huge problem in the lettings industry. It is particularly prevalent in prime central London. Susan Cohen, Pastor Real Estate.

Susan Cohen - Pastor Real Estate - imageSusan Cohen, Head of Lettings at Pastor Real Estate, agrees this is an issue. “Sub-letting has become a huge problem in the lettings industry, particularly in prime central London.”

But it’s not necessarily a case of either a manual or tech-based approach – most referencing companies are adopting a mix of both in their approach and many would describe themselves as having a ‘hybrid’ approach.

Indeed, policy changes mean human intervention is a necessity at times, says Simon Skinner, Director of Operations at LetHQ. Although its referencing process is largely automated, he adds, “Many companies now want signed declarations from tenants because of GDPR before they will give us a reference so sometimes you have to go down that route.”

Many providers also offer different levels of referencing. For example, at LettingsHub, CEO Heidi Shackell says. “Although letting agents all offer the same core service, their businesses models can be very different depending on their size and local market conditions. There is no ‘one-size fits all’ solution. We’ve specifically developed our services with a high degree of flexibility for this reason. For example, we can offer tailored reference checking.”

LETTING AGREEMENT IN PRINCIPLE?

Although tenants and politicians may have been critical of the common practice of letting agents charging tenants for referencing, it wasn’t just an income generator, it was also a way of giving agents peace of mind. A tenant was unlikely to fork out for a reference and holding deposit if they didn’t think they’d pass, so the risk an agent would have to tell a landlord the deal had fallen through was relatively low.

Georgina Pierson imageHowever, once the ban is in place there is much less reassurance for agents. “We are expecting the referencing process to change after the fee ban, as agents are likely to be less willing to reserve a property without first knowing that a tenant is a credible candidate,” says Georgina Pierson, CEO at good2rent.

For this reason, the provider, which is partnered with digital identity app Yoti, has developed a rental passport that allows tenants to ‘pre-reference’ themselves to prove their suitability to agents.

“It’s like getting a mortgage in principle before making an offer on a property. An agent wouldn’t take a sales property off the market unless they knew someone was good for it, whereas this is what happens in the letting market all the time.”

We’re expecting the process to change after the fee ban, as agents may be less willing to reserve a property without first knowing that a tenant is a credible candidate.

Like other providers in the space, such as Canopy and Rightmove Passport, the idea is to sell to tenants the benefit of being able to get ahead of the competition. “In the bigger cities in the much faster rental markets that we are seeing now, if you can pre-reference yourself and put yourself above others who are going for the same property, there’s a value in that and I think that will become more and more evident when the fee ban comes in,” says Pierson.

The company has been working to educate agents on its processes so that when tenants do use its service, agents will be willing to accept it in lieu of their usual referencing provider. So far, Pierson says many agents have been “warmly accepting” and she expects this to be even more so once they are faced with a choice of accepting a reference a tenant has paid for or paying for one. Whether or not tenants will adopt such technologies en masse remains to be seen, but if they do it could alleviate one cost pressure agents will face when the ban comes.

Added value

The services offered by referencing providers are increasingly expanding to products which provide agents with commission as companies attempt to help agents counteract the tenant fee ban. “Over the last two years we’ve been dramatically expanding our range of products and services, which we’ve ensured are all designed to be fair to all and in compliance with the new rules. We recognised that letting agents would need help to become more efficient and find new ways to generate additional income, while reducing their current business costs, so we’ve been working to provide as many income opportunities as possible under one roof, so that our clients can benefit from the efficiencies and cost reduction associated with using a single supplier,” says Heidi.

Ati Abatay says Home PPL has been adopting a similar approach. “The tenant fee ban is the hottest topic of our industry. Just like any other provider within the market we have made certain changes. We have always had value-added focus, so we had previous partnerships in place that we offered to our clients. But right now with the tenant fee ban, we have struck new partnerships and we are offering new deals so that clients can offer additional products and services to their tenants to first, compensate for the amount of money they are expected to lose when the tenant fee ban kicks in and additionally increase their offering to their tenants so the tenants move into the property much easier with more convenience.”

This is even the case when referencing prices are low, for example, at Vouch. “Vouch also offers automated new revenue streams. Things like utility notifications, it will handle that and also insurance products such as rent guarantee. It’s all nice and easy and designed to bring some money back into your business,” says Tillyer.

“Obviously the extra income streams are going to be absolutely key in terms of going forward – it could be the difference between making it and not for some agents. We are not saying this is going to fix the whole tenant fee situation for them – it’s not – but this is a good step in the right direction.”

Signs of change

Some providers don’t offer commission, but instead sell insurance products that agents can then sell on to their clients. At LetHQ, for example, Skinner says agents are increasingly doing so with its rent protection insurance. “What we find is that the agent will buy it off us for £99 and then they will include it as part of their management package or they will upsell it to their clients. They might charge the client £150 for it.”

Many companies offer commission, however this is not our main focus. We are looking to achieve the best price we can for our clients, who are likely to take over this cost. Catherine Cockcroft, Aylesford.

Catherine Cockroft - Aylesford - imageSome agents, however, are more focused on price than addition revenue streams. “Many companies offer commission, however this is not our main focus. We are looking to achieve the best price we can for our clients, who are likely to take over this cost,” says Catherine Cockcroft, Head of Lettings at Aylesford International.

Many agents expect to pass the cost of referencing directly on to their landlords, although there are still some that believe, mistakenly, that they will be able to refer tenants to referencing agencies directly, meaning the tenant will pay the company. This view is perhaps understandable given some referencing providers have been advertising direct-to-tenant offers.

However, ARLA Propertymark Chief Executive David Cox warns agents against this once the fee ban is in place. “Once the tenant fees ban comes into force, agents will not be able to send tenants off to a third party referencing agency (if obtaining that reference comes at any cost to the tenant). Clause 2(2) of the Tenant Fees Bill is very clear on this point.”

Dangers of DIY

Although many agents are talking about passing on costs to landlords, there is some doubt in this marketplace about how willing to accept extra costs landlords will be, particularly in light of the other cost increases they are already facing due to tax changes.

Personally, I think that moving away from professional referencing companies is very risky and by doing this you are not providing a service to your client. Josh Sagel, Glentree.

Johs Sagel - Glentree - image“Don’t be surprised to see some agencies take referencing in-house in a bid to cut costs,” says Nel at Johns & Co. Josh Sagal of Glentree Estates agrees, but thinks this would be a mistake. “Personally, I think moving away from professional referencing companies is very risky and by doing this you are not providing a service to your client. In addition to the credit score (something you won’t see from bank statements, payslips or employment letter), agents are not trained to spot whether or not a bank statement is fraudulent. This is something someone in a referencing agency will see immediately.”

Others are worried agents will stop referencing altogether, which would have a knock-on effect on other services to agents. For example, Housing Hand’s Group Operations Director Terry Mason says this would have a big impact on his firm, which provides guarantor services to tenants who don’t pass traditional referencing.

“What we don’t want is landlords and letting agents saying ‘well we’re not going to bother referencing then’, because that would be absolute chaos.”

Housing Hand, which works with 4,000 agents across the country, relies on the referencing information passed over by agents, typically taking on not the tenants that fail outright, but those who are a pass if they can provide a guarantor. “If agents stop referencing then we would probably have to start referencing ourselves. But then we’d have to increase our prices.

“It’s a bit like a spread bet. More people are genuine and pay than don’t but it’s not a big enough difference to say we will accept them without a reference. We still need the letting agent to do the referencing.”

While many may indeed be looking for ways to cut costs, the vast majority of agents are likely to agree tenants still need to be referenced. But by which company, at what price and with what extra benefits is certainly something many are now thinking hard about.

March 21, 2019

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