Landlords - you play a valuable role supporting the Private Rented Sector (PRS) but just how transparent are the fees you are being charged?
The role private landlords play in providing housing stock is more important than ever. In a recent 2018 Citylets Rental Report, Scotland’s private rented sector (PRS) had risen 5% year on year. Robust demand for properties of all sizes in Scotland’s major cities underpinned growth and interestingly larger 3 and 4 bed properties recorded the steepest gains reflecting the increasing number of families settling in rented accommodation.
Whilst there are some professional landlords operating in the market, the vast majority of landlords owning properties that make up the private rented sector typically own just 1 or at most 2 properties. It may, for example, be an elderly family member’s home that has been inherited or a former property that has been retained instead of being sold when the owner has decided to find a new home. As a result, most landlords have a day job, lead busy lives and so choose to utilise the services of a letting agent for the day to day management of their investment properties. How much an agent then charges for their services clearly has an impact on just how effective an investment their buy to let property proves to be.
Letting Agents are required to invest a lot of time and effort when a new property needs to be prepared for the rental market and will need to pass a number of one off costs of alarm installation, mandatory safety checks, etc. onto the landlord to ensure it meets the strict criteria demanded of a long term rental property. Thereafter, a further charge is usually necessary to market the property that will incorporate advertising, organising and undertaking viewings, securing and referencing a suitable tenant.
Following these initial costs, if the landlord wishes their agent to deal with all ongoing day to day issues, almost all letting agents are happy to offer a full, comprehensive management service in return for a charge that equates to a monthly % of the rent – a figure that can range from around 9% through to as much as 15% of the rent which will be deducted each month by the agent as and when rents are received.
Some agents believe that this simple, easy to understand monthly deduction is sufficient to recompense their time in the ongoing management of a property but that’s not the case across all agencies. Others may take a different view and as well as the monthly % they deduct, they will levy additional charges for say, drawing up any revisions to tenancy agreements, undertaking routine inspections or organising repairs as and when required.
So if you are a landlord already using an agent or indeed contemplating which one to entrust your investment property to, do you have a clear understanding on any extra charges that could levy?
One other way that agencies can sometimes boost their income is by striking up commission arrangements with other contractors (for example, plumbers, electricians, appliance repairing engineers) who will pay them a % for any work introduced. So, if say a plumbing repair comes to £200, for an agent on say 10% commission, they may receive a payment of £20 from the plumber as a sort of reward for passing the work to them.
And if you already have a trusted relationship with say a plumber, electrician or handyman, providing they have the necessary liability protection in place, will your agent be prepared to engage with them for any future repairs?
Until fairly recently, such commission arrangements could remain hidden from a landlord but with the introduction of the The Letting Agent Code of Practice (Scotland) Regulations 2016 - that all letting agents in Scotland now have to adhere to - there is a requirement on letting agents to be far more open on whether they benefit from such commission arrangements. However, the code demands that agents divulge “any financial interest in providing third-party services (for example, commission for using certain companies, products or services)” but only if a landlord requests it. So, for many agents that have had long standing arrangements unless a landlord raises the issue directly, such practices are likely to continue. As well as the issue of trust, there is a perhaps stronger argument that if these commissions weren’t being paid, the actual repair bills themselves could in fact be provided at a lower cost to the landlord.
For many landlords that maintain regular contact and have built up a trust relationship over many years with agent, the chances are that they will be happy with the service received, had things fully explained and will be comfortable with the overall level of fees charged. But for some landlords that only hear from their agent when there’s a problem or unexpected bill to be paid, there may be some uncertainty or discomfort as to the overall level of fees being charged for the services rendered.
So, given the increasingly important role you are playing in the private rented sector, it certainly is worth pondering how transparent are the overall level of fees that your agent is charging and whether they are benefiting from any commission arrangements that you may not even be aware of.