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)
Administration and referencing fee: £50-250
Tenancy renewal fee: £50-£150
Check-in/check-out fees: £50-£150
Deposit protection fees: £10-£30
Tenant find fee: £50- 2 weeks rent
Tenancy Contract (AST) fee: £50-£150
Tenancy renewal fee: £150
Gas Safe Certificate: £60 – £90
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.
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.