Keep Your Tenants Close

According to the Council of Mortgage Lenders (CML), arrears in both owner-occupiers and buy-to-let mortgages are on the up as well as tenant defaults. Recently, the Confederation of Business Industry (CBI) warned that unemployment would crash through three million, just ahead of the likeliest date for the next general election and so it is no surprise the tenant defaults are becoming more and more common, causing both landlords and tenants to suffer in this downturn.

Why are tenants defaulting?

Tenants have the same risk of defaulting on their rent as home owners do on their mortgages. Sometimes this is due to forgetting or direct debit failure, but loss of income is a rising problem in the current environment, and is making it harder for many people to manage their monthly outgoings.

How can landlords avoid this situation?

It is well-publicized that arrears are rising in the owner-occupier market and have also increased in the buy-to-let market, and so tenants are also much more likely to default in the current market. I have noticed over the last six months an increase in instructions from landlords seeking to take possessions against their tenants. My analysis is that this is linked to what is happening in the economy but more specifically, to what is happening in the employment market. Unfortunately it is very rare to find a tenant who tried to pay some of their rent and usually it is the case that if the tenant cannot pay the entire payment.

How can landlords avoid this situation?

Avoiding an empty property comes back to the simple rules of investing wisely in the first place. If you make the wrong decision and buy a property in an area of low tenant demand, there is usually little you can do to fill it.
Landlords who want to minimize their void periods need to price their rent realistically and keep their property well maintained. As the lettings market is thriving, thanks to the property downturn, there is more competition than ever for a tenant to choose the property that suits them and most and so if a property is not up-to-scratch, it will be overlooked.
In terms of avoiding rental default, landlords should ensure that all tenants are referenced to get a good indication of their credit history. However credit history is no guarantee against future financial stability, particularly in the current economic climate.
Credit history references are like looking in a rear-view mirror, a landlord will know about their past history but what about their future? Just look at the current economic climate – 12-18 months ago some city bankers were getting million pound bonuses, now they are being made redundant. An ideal tenant is one that has a clean credit history but then you never know what the future will hold, which is why you need rent protection insurance.
It is always sensible for landlords to get an idea of their tenants’ financial situation, and demand a guarantor if necessary. The rent must be proportionate and affordable for the tenant. There is absolutely no point in installing a tenant who the landlord suspects may have difficulty in pay the rent because the cost of taking action and cost of losing rent will far outweigh the benefit of having received rent for a short period of time.
But landlords are increasingly aware of the risks of not referencing their tenants as they no longer rely on capital appreciation to cover any losses. The current climate is making people more risk averse and the last thing they want is a bad tenant. Any landlord who has experienced tenant default once will not want to go through it again and for that reason it is not uncommon to seek bank and employer references and even references from former landlords as landlords seek to establish the integrity of their tenants.
However there is no secret formula in getting a good quality tenant although landlords should build up a full profile of the prospective tenant, specifically current employment status and employment status and employment history.

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