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How to reduce letting agency costs

Tuesday 13th August 2013

Jonathan Monjack, chief executive of The Happy Tenant Company, offers property investors advice on how best to reduce their expenses when it comes to dealing with letting agents.

One area that is often overlooked by property investors is the cost of running a buy-to-let property. A recent survey of landlords conducted by YouGov found that only68% of buy-to-let landlords take account of letting agency fees when looking at returns on their investment and only 46% factor management expenses. Costs can make a substantial impact on the profitability of a buy-to-let investment, and one of the highest is agency fees.

Landlords with too little time and or who live too far away from their portfolio to self-manage have to rely on letting agents to find tenants and manage their property. Unfortunately, the letting industry has developed a culture of little integrity, where many operators seek to milk both landlords and tenants with high fees and hidden charges for little work. But by being diligent in selecting your agent and being aware of the tricks of the trade as well as asking the right questions it’s possible to reduce your costs.

Do your homework
It’s best to select an agent that is a member of any of the professional bodies such as The UK Association of Letting Agents, Association of Residential Letting Agents and Residential Landlords Association. They also should be registered with the Property Ombudsman scheme, a dispute redress scheme, which is currently voluntary but is due to be mandatory in 2014. It’s also important to check with the relevant body whether the agent that claims to belong to it actually is a member, as some unscrupulous operators make false claims. Long established local agents who satisfy the above criteria often provide a more cost effective and better service than some of the bigger chains.

Find out how much they charge and shop around
A major problem in selecting an agent is many are not upfront about what charges you’ll end up paying. Some are even deliberately misleading. For finding a tenant most agents charge a commission, which is based on a percentage of the annual rental income. Landlords typically can expect to pay from 8% to 12% plus VAT. Tenancy contracts are usually for a year on a rolling basis with the letting agent being paid commission on one year’s rental income in advance. Avoid any agents who claim to have a tenant for two or three years and ask for two or three years of commission in advance. You should never pay this as there is a high risk of the tenant leaving before the end of the tenancy agreement. In some cases the tenant is even bogus.

You also need to know if they charge renewal fees. This is often charged at a similar rate to the tenancy finding fee and is for the annual renewal of the tenancy agreement. Effectively the agent is repeatedly charging the finding fee, which is work they’ve already been paid for, so negotiate these down or simply choose an agent that doesn’t charge them.

Ask for portfolio discounts
You should be able to negotiate a discount from the letting agent’s standard rate for tenant finding fees and property management fees if you have more than one property. Even better is to club together with other landlords to negotiate a group discount. The Happy Tenant Company represents large groups of landlords and is able to secure significant discounts from its panel of vetted, reputable letting agents because of the volume of work it supplies. For example, it has secured let only rates with its approved panel of letting agents, starting at 4%, with no renewal fees.

Look for mark-ups and other hidden profits – insist on seeing invoices
When a tenant is identified, letting agents can charge landlords for tenant referencing, inventory, cleaning and various administration fees. Make sure you get a clearly priced menu of how much these costs are before you sign-up with the agent. Even worse, many agents double charge the tenant and the landlord. For example, the outgoing tenant and landlord may both be charged for the check-out cleaning costs and inventory. It should be clearly identified who should be responsible for which costs. And for any third party costs,insist on being able to see the invoices.

Once a tenant is installed you may want the letting agent to manage the property. Maintenance is usually charged on a percentage of the rental income. This can be as much as 6%, which together with the tenant finding fee of 12% can add up to a cost in excess of one fifth of the gross rental income when VAT is included. On top of the property management charge, there is the cost of maintenance work where letting agents have an opportunity to make secret profits by marking-up contractors’ invoices by astronomical amounts, sometimes by as much as 300%; and taking commissions from the contractors they give work to, which are ultimately payable by the landlord. Ask if they can provide you with these invoices, how much of a mark-up they apply, if any, and if they apply administration fees and how much they are.

Conclusion
The first step in cutting letting agency costs is finding a good agent in the first place. Those that are totally transparent at the beginning and charge reasonable rates are less likely to spring surprises with hidden fees that can undermine your investment. Even better if an agent is recommended by a trusted source. But there is much you can do to control costs with an existing agent, such as insisting on seeing invoices. If they object there are always alternative firms which can provide a considerably better solution.

              

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