Agents fees and landlords

Posted: 27th Jan 2017

Buy to Let Tax ChangesAmongst tenants, letting agents have traditionally been given something of a bad press. On top of the deposit taken at the beginning of a tenancy and the rent subsequently charged, letting agents have been used to charging tenants for a range of so-called administrative charges – such as their costs involved in taking up references or in printing out the tenancy agreement itself.

According to a report in the Independent newspaper on the 23rd of November 2016, individual tenants may have been charged an average of between £200 and £337 (or as much as £500 in London) by letting agents.

A government decision towards the end of November 2016 the bad press against letting agents is likely to switch from the tenant to the landlord.

The decision

The government’s decision was a simple one – but at a stroke, threatens to be yet another financial burden on an increasingly pressured business of buying to let.

Letting agents are now banned from charging fees to tenants.

The consequences

Both landlords and letting agents are unanimous in identifying the real losers in the government’s decision as the tenants themselves.

The argument runs that letting agents still need to do the work for which they formerly charged tenants – they still have their costs to recover. Since it is no longer possible to charge the fees to the tenants, the onus for covering those costs simply may pass to landlords.

Since landlords, too, need to cover these additional costs, the inescapable result could be that rents need to be increased. This is a move which neither letting agents, landlords or tenants themselves are likely to welcome.

Maintaining profitability

There are two further options if rents are to remain competitive and landlords continue to make the necessary profits from their buy to let business:

  • either landlords dispense with the services of letting agents; or
  • letting agents must increase the value added nature of the services they provide to landlords.

This is the message that appears to emerge from recent market research conducted by the UK Association of Letting Agents (UKALA), the results of which were published on the 13th of December 2016.

Currently, some 1.1 million or 57% of all landlords in the UK instruct letting agents – typically to help in the advertising of their let property, the selection and interviewing of tenants, taking up references, drawing up tenancy agreements and conducting inventories. 36% of that number use letting agents on a regular basis and 21% of them as and when the need might arise.

The UKALA’s findings, however, suggest that nearly a half of landlords are likely to cancel arrangements with letting agents if the costs begin to impact on the profitability of their buy to let businesses. This is made all the more likely in view of the removal of tax relief on mortgage interest paid by landlords takes ever greater effect during the course of 2017. The National Landlords Association (NLA) has estimated that some 400,000 landlords are going to be adversely affected by these tax changes.

Some letting agents offer a “full service” property management arrangement – dealing not only with lettings but also maintenance and repair contracts. The UKALA’s research suggests that more than a quarter of landlords who use such a “full service” option are likely to end the existing contract with their letting agent.

A little over 21% of landlords using a “lettings only” service are also likely to dispense with the services of their letting agent.

Only 36% of landlords said that they may continue to instruct letting agents even in the face of an adverse impact on the profitability of their buy to let business.

There are regional differences, of course, in the responses given by landlords. Those in Scotland, for instance, seem to be the most likely (56%) to dispense with the services of a letting agent, whereas in the West Midlands that proportion falls to just 29%.

The letting agents’ perspective

The UKALA recognises that letting agents may be forced to pass on the costs that were previously charged to tenants on to the landlords. But the Association also recognises that landlords are in the business of trying – against increasingly difficult odds – to turn a profit on their buy to let businesses.

Inevitably, landlords will need to scrutinise very carefully whatever part of their operating costs needs to go to a letting agent.

In these circumstances, says the UKALA, letting agents may need to prove their indispensability to landlords and make greater effort to demonstrate that their services deliver genuine value for money – services which landlords themselves may find it difficult, if not impossible, to deliver.