David Lawrenson, landlord, author and founder of LettingFocus.com, says too many tenants and would-be guarantors fail to appreciate that guarantors have to demonstrate that they have enough spare income to pay rent, if the tenant does not. Others fail to appreciate that we will want to reference and document-check them very carefully.
If you operate as a landlord in the student market or you let to tenants who are dependent on housing benefit, you will probably know all about using guarantors.
Our own property portfolio is marketed to non-students and working tenants, so we don’t tend to have to worry about guarantors too often, as the applicants usually have enough income and free cash to afford our rents.
But now and again, our credit checks and other checks on an applicant’s income are such that we cannot offer a tenancy unless the tenant can find a guarantor.
So, how does one check out a guarantor’s suitability?
Well, here is what we do.
We have a number of rules that we follow – and our checks on guarantors are every bit as stringent as checks on tenants. In fact, more so.
The first thing we do is tell applicants what we expect from the guarantor in terms of proofs of income and validations. We also ask to speak to the guarantor so we can tell them the same information too.
We do this because the fact is that many people who are called on to be guarantors will have absolutely no idea what being a guarantor entails nor an appreciation of the fact that we will need to check them out carefully, just as we would a tenant-applicant.
In order not to waste our time, we need to have this conversation as soon as possible.
We usually insist that the guarantor be a homeowner of a property in the UK. I say “usually” as there are some exceptions to this, but not many. We might allow say a director of a big UK public company who earns north of £100,000 a year, but who is not currently a homeowner. This type of person would presumably not want a County Court Judgement against their name. But most people in such positions tend to be homeowners, of course.
Being an owner of property in the UK matters because it is a lot easier, (should it come to it), to enforce a legal claim for monies owed by someone who has a property than one who does not.
We don’t take their word for it either. We always check ownership of a property. It costs just three pounds a pop, online at the Land Registry.
The next thing to check is the guarantor’s income and outgoings.
With all our tenants we ask to see at least three months’ worth of bank statements, or six months’ if self-employed. And it is the same for guarantors.
For a tenant applicant, on the bank statement check, we would simply look at their income and outgoings to see especially rent going out and income coming in, plus whether the account is being increased over time or is being depleted each month.
But there is a big difference for guarantors. With a tenant applicant, it is OK that each month they may be saving say just £100 a month, (as long as their past rental was the same as their new rental amount will be and as long as they are not overdrawn or clearly otherwise in debt). But this situation would absolutely not be OK for a guarantor. If it was, then one could legitimately ask the guarantor this question. “If I had to look to you to pay the £1,000 rent because Mr. and Mrs. X had not paid, where would you get the money from?”
And it is a fair question that many would-be guarantors do not seem to have thought of. Many will answer, “Well, I know Tenant X. He is my son, and I know he won’t default on rent or cause damage to your property”. Our answer to this is, “Well, I’m sure you do know him well, but we don’t – and if we have to come to you for the rent, we have to know that you can find the money quickly to pay us.”
Put simply, the guarantor has to be quite well off with enough free cash flow to easily cover the rent amount, if called on to do so by us.
Our other checks will include a basic credit check, for which we need the last three years of addresses and full name and date of birth of the guarantor. We would also check ID and comply with the Right to Rent checks and ask for an employment reference (if they are not self-employed). The latter might seem a little over the top, as we already have seen their main bank statement, but here we would be seeking confirmation that they are not under threat of redundancy.
The guarantor will sign the legal deed which will set out what they are liable for and for how long – this will normally be for the duration of the tenancy and for any extensions to it. The signature on the deed of guarantee must be witnessed by a third party who is not party to the tenancy agreement.
How many letting agents follow our meticulous approach to checking guarantors. Most, I suspect, just run a basic credit check and leave it at that.
We say that is not sufficient.
If you use a letting agent to find tenants, have you checked what processes they follow, recently? If you are a un-agented landlord, what do you do? Are your checks on guarantors as robust as ours?
David Lawrenson is founder of www.LettingFocus.com, is an independent expert and consultant in residential property investment. He has no links to other companies but he specialises on providing independent advice on buy to let and property investments for his clients. He can be reached at email@example.com
Mr Lawrenson is author of two books for landlords, including the UK’s highest selling property book, “Successful Property Letting – How to Make Money in Buy to Let” – the new edition of this has just come out. He is also author of the brand new self-published book, “Buy to Let Landlords Guide to Finding Great Tenants” which is available from his website.
— LandlordZONE (@LandlordZONE) March 29, 2017