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The viability of your business without tenant fees

Warning! This article may make some letting agents slightly uncomfortable. A crimewave is about to happen, says Adam Walker and, in his opinion, is not based on a psychic premonition...

Adam Walker

Psychic premonition image

I am increasingly worried that the introduction of the tenant fee ban will lead to a huge surge in the number of lettings agents who steal their client account money. My opinion is not based on a psychic premonition. It is based purely on mathematics.

Let’s consider the example of a small letting agent turning over £300,000 per annum mostly from let-only properties. Now, they might be making a profit of 20 per cent of turnover – £60,000.

However… agents like this earn up to one third of income from tenant fees, so after the tenant fee ban comes in, their income will drop to £200,000 and a £60,000 profit will become a £40,000 loss.

If you can’t convince yourself that the business can be viable without tenant fees, you need to get out now.

In theory, the proprietor of such a business should recognise that it is unviable and should cease trading in an orderly manner. However, this is not what happens in practice. People have an awful habit of burying their heads in the sand until a bad situation becomes even worse.

IRRESISTIBLE TEMPTATION

This is when the temptation to dip into the client account becomes irresistible.

Adam Walker image

Adam Walker

People never intend to do it but one month they borrow £10,000 to pay the VAT bill with every intention of paying it back. Then, later, they need another £10,000 to pay the tax bill. A month later, they need another £10,000 to make a member of staff redundant. Before they know where they are, they are hopelessly in debt with no chance of ever paying the money back.

A let-only business that turns over £300,000 per annum could be holding £300,000 in tenant deposits. In theory, they should all be protected but it is remarkably easy for a desperate letting agent to ‘forget to register’ say, one in three of the deposits taken. Doing this provides £100,000 of working capital – so long as money is available to pay back deposits as they are requested, the deceit can be hidden.

This is only half the problem. If the agent is also collecting the rent, they have an opportunity to ‘borrow’ money from their landlords. The rent roll for a business of this size is likely to be circa £200,000 a month. If landlords are told that for administrative reasons, rentals cannot be paid until seven days after receipt, they gain another £50,000 of working capital. If they can be made to wait for two weeks, this rises to £100,000. The rules for protecting landlord rental money are far less robust than those protecting tenant deposits – so it is much easier for desperate letting agents to get away with it.

HEADS IN THE SAND?

Depending how long they bury their heads in the sand, the agent turning over £300,000p.a. could easily run up a client account deficit of £300,000, half from landlords, half from tenants. Once the tenant fee ban is introduced, they’ll have no chance of ever being able to pay this money back from their profits.

Until recently, such agents would have sold their business but there is almost no market for let-only businesses any more. The only remaining option is full-blown liquidation, leaving their poor landlords facing huge losses through absolutely no fault of their own.

So, what can and should be done? Well, if you run a small letting agent, you need to be sure that you put plans in place right now to change your business model to survive without tenant fees. This means switching from a let-only model to a more sustainable rent collection model with recurring monthly income. It will also mean finding new services to sell to landlords and tenants, such as deposit protection schemes and rent protection insurances. Finally, it will mean finding the selling skills to push up your fees to landlords and recover these fees through charging higher rents to tenants.

FACING FACTS

If you cannot convince yourself that your business can be viable without tenant fees, you need to get out now whilst you can recover some value from selling your business. If you try to make a go of it and fail, you need to promise yourself that you will never, never dip into the client account. Losing your business is terrible but ending up with a prison sentence is far worse.

Finally, regulators have a role to play. In a perfect world, agents would be forbidden from holding client money before the tenant fee ban is introduced but the least that is needed is a much more robust inspection regime to protect both landlords and tenants from dishonest or desperate letting agents. This cannot be allowed to be another case of the stable door being closed after the horse has bolted.

Adam Walker is a business transfer agent and management consultant who has specialised in the property sector for more than twenty-five years.
www.adamjwalker.co.uk

October 15, 2018

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