All That Glitters Is Not Gold!

As yet another marketing email drops into my Inbox extolling the virtual virtues of HMO ownership,  I’ve decided I can no longer stop myself from passing comment on the increased hype of HMOs.

The email came from an estate agent I sacked last year for being useless and, eight years ago, actually told me they wouldn’t touch HMOs with a barge pole.  Why then, did they send me and possibly a thousand other property investors on their target list, promises of glittering HMO yields?

The reason, I believe, must be this:  with the rise of online and high street letting agents all scrabbling to secure properties to let, margins are thinner as they compete to offer the cheapest headline service.  However, the fees to cover their operational costs (cars, staff, rates,) HAVE to come from somewhere so they divide and spread their costs.  Here are some examples of fees levied to the tenant and landlord before a let has begun:

(Please note, these costs are based on fact and used for illustration purposes only. Every agency has their own charges for differing levels of services/packages.  Many online agents expect the landlord to carry out viewings)

Tenant Fees:

Administration and referencing fee: £50-250

Inventory:  £50-£100

Tenancy renewal fee:   £50-£150

Check-in/check-out fees:  £50-£150

Deposit protection fees:  £10-£30

Landlord Fees

Tenant find fee:  £50- 2 weeks rent

Tenancy Contract (AST) fee:  £50-£150

Tenancy renewal fee:  £150

Gas Safe Certificate:  £60 – £90

Inventory:  £75-£100

Deposit protection fees:  £25

Property Inspection fees: £60-£100

Anything else they can get away with

And yes, you’re absolutely correct in spotting that some of the fees are duplicated.  Add these costs together, apply VAT and suddenly a £50-£99 headline landlord letting fee can add up to almost a month’s rent.

Now, apply these fees to a single let and you can see why it’s not in the agent’s interest to keep a tenant for longer than 6 months – by turning over tenants on a regular basis, the agent’s fees keep on coming and it ensures the back room staff are employed.

If you were to apply this principle to a 5 bed HMO where most tenants are transient and some won’t even stay 6 months, a letting agent has 5 times as much opportunity to charge letting and admin fees on an even more regular basis.  All they have to do in return is to carry out a bit more maintenance to which they charge the landlord an additional 10% plus VAT on the cost of the job and chase rents a little more often.  I know of one agent who charges the landlord £40 plus VAT to change a lightbulb and has no guilt whatsoever of leaving a room vacant for over a month. No wonder agents who, 8 years ago, wouldn’t go near HMOs due to the hassle factor now regard them as cash cows as tenants expect to pay admin fees just to get a room viewing.

My partner spotted this trend a few years ago and set up his own letting agency based on the simple model that he would receive a fair percentage of rent collected from tenants without any additional fixed fees.  He now shares the landlords desire to find good, long term tenants at fair rents and without voids.  Instead of charging recurring landlord fees he offers a fixed percentage to cover the term of the management agreement based on rent collected.  This meant that, if a tenant left whilst he was managing the property, he would secure another tenant with no additional fees to the landlord.  Therefore, it became his priority to find tenants who wanted to stay long term – no more voids for the landlord or management fee voids for him.

Did this approach work?  Yes and by capping the amount of properties he’s prepared to manage means he stays under the VAT threshold and operational costs don’t suffocate the service he provides.

On the subject of lettings, landlords and agents are diametrically opposed: the landlord wants long term tenants and no voids, the agent wants a steady turnover of tenants, the ability to charge new tenancy fees and doesn’t give a stuff about voids as the agent isn’t paying the mortgage or interim utility bills.  Did you know that some letting agents draw up contracts demanding their percentage from rents DUE not just rents collected.  Therefore, if a tenant reneges on his AST early, management fees are still applied.

My point is this: if you’re going to be a landlord (HMO or single let), don’t believe that your letting agent is doing a better job than you just because they’re charging for it.  Of course, if you’re unable to manage the property due to distance or work commitments, it’s worth seeking out a decent agent you can work with and, believe me, there are some extremely professional ones out there.

Conclusion:

HMOs do offer landlords glittering yields, providing the shiny profit isn’t tarnished by unnecessary agent fees and voids.

Want to learn more about Letting Agent Agreements?  Click here to see Tessa’s blog about what to look out for before signing anything from your letting agent.

6 Comments

Filed under Management of an HMO

6 responses to “All That Glitters Is Not Gold!

  1. Jane Macswayne

    Totally agree I have never used a managing agent as I am the only person who has my financial interests at heart. Luckily I am only 10 mins away which makes it easier. On hmos lot more work and sure there are good agents but they need to put in a lot of work to keep things running smoothly.

  2. Robert Mellors

    I used letting agents many years ago, but found that they were all useless and charged a lot for a service that amounted to very little, so I got rid of them all and don’t use them at all now. I can only give my experience of them, and maybe there are some good ones out there somewhere, but I’ve never managed to find them!!!

    • Hi Robert. Thanks for commenting. I agree with you but I do think agents are the right choice for someone who wants to be completely hands off. I now have a fabulous agent in Sunderland sorting out the properties up there and they are two formidable ladies who take no c**p! Agents claiming they know how to run an HMO effectively need careful looking into as most problems seem to occur outside office hours and the ability to overcharge a landlord is phenomenal. I’m sure there are lots of happy investors out there who trust their agent with HMOs but, if it goes wrong, we both know it can go badly wrong and will be hard for the landlord to gain control if they don’t know what they’re doing

  3. Tom

    Good article and good advice. Would you mind forwarding your husbands contact details as I am looking for a strong agent. Many thanks Tom

  4. Pingback: Ben Reeve Lewis Friday Newsround #194

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