Guaranteed Rent schemes have become a popular way for a minority of landlords to let their properties, which in theory offer a trouble free and risk free method – a true passive investment?
These schemes operate when the landlord lets his or her property to an intermediary organisation which re-lets and manages the tenancies, guaranteeing the landlord a fixed rent and maintaining the property for the whole contract period, regardless of whether the property is fully let or not.
Most of these schemes started when local authorities needed accommodation to meet their housing obligations, but of late an increasing number of specialist companies, letting agents and some property investors have become involved.
Another variation, the so-called “rent-to-rent” schemes, works in a similar way but they are often run by a middlemen, sometimes agents, or enterprising individuals who lack the resources to invest in property themselves, but see an opportunity to make money letting out on margin other people’s properties on a per-room basis.
All of these schemes have their pros and cons and many of them are far from risk free. Usually, for the security of having a guaranteed rent and no management hassle for a contracted period of commonly up to 5 years, the landlord accepts a rental which is around 15% below market value.
Where a local authority is involved there is less risk, providing the contract terms are sound, but where a company or individual is concerned the contract agreed is only as good as the resources behind them.
Things can and do go wrong in these arrangements if the middleman or company do not have sufficient resources to honour their rent “guarantees” or they are not able to return the property in good and tenantable order at the end of the contract term. In the worst case scenario landlords get stuck with tenants who have trashed their property and pay no rent.
These schemes would seem the perfect solution for landlords who don’t want the hassle of finding or managing tenants and if the scheme is run professionally this is often the case, but these “guaranteed rent” schemes will turn into a nightmare if it all goes wrong.
One case in point has been the subject of a recent Channel 4 news report about an intermediary company, London Housing Solutions, based in Catford, south east London which has collected £400,000 in Housing Benefit payments from the council and not paid any of this over to the landlords in their scheme. What’s more, they say they have no intention of doing so.
London Housing Solutions advertised a guaranteed rent scheme to landlords. They signed up the tenancies with landlords and then let their properties to tenants on benefits. The tenants’ housing benefit was paid direct to the company. There appears to be a complicated web between this company and another one called Local Housing Solutions, which share directors and offices, but the upshot is that the directors appear to be reneging on their obligations.
Anyone considering entering into one of these guaranteed rent or rent-to-rent schemes should use caution and carry out their due diligence properly. Where a local authority is concerned there is obviously far less risk as they cannot hide behind limited liability, but some authority schemes are run through sub-contract companies and contracts vary. It’s very important to check the contract to make sure what you are getting before you sign up.
Where the scheme is run by a company it is important to verify the status of these. Two companies which operate nationwide in this field and have stood the test of time are Northwood and Orchard and Shipman. Both these companies trade off long-term reputations in the industry.
If you are dealing with an individual, this is potentially the most risky arrangement of all. Will you get your rent paid on time, will they select good tenants who don’t trash the property, and will you get your property back in a good tenantable state at the end of the agreed term?
Companies in this business with limited resources will be tempted to take on tenants that you as a landlord may reject, simply because they must keep the money coming in to pay the landlord a guaranteed rent each month – they take on too much risk and don’t have the money to pick up the pieces when it all goes wrong.
What’s more, some of these schemes are based on dubious legal foundations where a company or an individual rents from the landlord on a simple assured shorthold tenancy (AST) and sublets to tenants on a licence, a situation which is unlikely to stand up in a court if there is a dispute.
What’s more, if the company does things which are illegal, for example failing to carry out annual gas checks, overcrowding, or breaking the Houses in Multiple Occupation (HMO) regulations, the landlord may find themselves still liable, and subject to heavy fines.
The only way to do this properly, which safeguards the landlord, is by way of a commercial lease between the landlord and the company, and then an AST between the company and the individual tenants.
Managing Director of Northwood, Eric Walker, said it was important to understand Guaranteed Rent and differentiate it from an insurance policy with the excesses and limits such products often contain.
He said: “Offering guaranteed rent is not as easy as people think and a lot of the companies are taking on far too much risk and growing too quickly without the financial resources to support their commitments.”
“We are extremely selective in both the properties and the tenants we take on as it is not in our interests to accept tenants who pose a risk as, by the very definition of Guaranteed Rent, the only losers will be us.”
He added: “We have an in house legal team to deal with any issues in the rare event a problem is experienced, as well as the resources to ensure our guaranteed rent product is backed up.”
“The key to our success has been gradual, organic growth over nearly 20 years, avoiding taking on too much risk as demonstrated by a number of failed companies.”
“Furthermore, we urge all Landlords and Tenants to look for an agent which is a member of a redress scheme and a regulatory body in order that you are covered by Client Money Protection Insurance and Professional Indemnity insurance. Look for the SAFEagent logo or ensure your agent is a member of ARLA, NALS, RICS, NAEA or the Law Society.”
Anyone considering letting their properties in this way should carry out these 10 initial checks:
1.) If you are dealing with a local authority, perhaps the safest bet as far as guaranteed resources are concerned, find out if the contract is up to scratch, and is it the local authority you contract with directly, or an intermediary company or agency?
2.) If you are dealing with a company or an individual, make sure the contract water-tight as far as you the landlord are concerned?
3.) If in any doubt, consider having the contract checked by a good property solicitor before signing.
4.) How long has the company been trading and has this been successful? Make sure you are dealing with an organisation that is long established with a good reputation to protect.
5.) Always try to deal with a scheme that comes recommended.
6.) Ask to be put in contact with existing landlords who have been under the scheme for some time, to get some feed-back on their experiences.
7.) Check out the company background and credit rating by visiting the Companies House website Webcheck system and using a company like TenantVERIFY to do a full company check. This will give a company credit rating score out of 100 and give an idea of the maximum contract credit value the company is good for.
8.) It’s a good idea to find out in advance the kind of tenants the provider is planning to place in your property. Some agencies specialise in benefit tenants and council emergency housing, whilst others will house working and professional sharers or students and the good ones will be highly selective on the type of tenant they take.
9.) Find out how much you will be paying for this service in terms of the discount you are giving below the market rent for the type of property you are dealing with.
10.) Ask the company how they will meet their health and safety obligations and the condition the property will be returned in in relation to a statement of condition taken at the start of the agreement, and make sure all this is properly documented in the contract.
When these schemes are run by a reputable organisation they can provide an excellent way to let your property trouble free with a guaranteed income. But you must take the necessary precautions to make sure you don’t get involved with one of the more risky schemes.
This article is provided by TenantVERIFY (www.tenantverify.co.uk) which is a long-established on-line credit referencing service for landlords and letting agents.