How to avoid defaulting tenants

A recent report has shown that this year 9% of SA tenants in residential properties are not paying rents at all –and 28% are paying late.

“The figures are not nearly so bad in portfolios which employ reputable agents,” says Tony Clarke, MD of Rawson Properties, “but they do show that additional care in the selection of tenants is now essential.”

This process, he adds, is so crucial to the landlord’s future welfare that he should be involved in the checking process.

The first step, says Clarke, should be to look at the tenant’s rental track record. This entails contacting his previous landlords and agents – and this check should go back several years.

“If, for any reason, the tenant tries to limit the names and contact details of previous landlords, that in itself is a cause for suspicion,” says Clarke.

A check should also be made on the prospective tenant’s credit history.

Here, says Clarke, the danger is that the agent will use only one credit bureau – but two or three should be consulted.

“We have had several cases where payment defaults were missed by one bureau but picked up by another – a surprisingly bad credit history can sometimes go undetected.

One of the dangers here, adds Clarke, is that failures to pay rent may have gone unrecorded.

“We find that some tenants will see their landlord as the last people they should pay. They will be conscientious about paying their retail accounts but very slack about their rents. If a landlord is not in the habit of reporting defaulters, a shockingly bad payer can end up with what is apparently a clean credit record.”

Another danger, said Clarke, is that the landlord may give his tenant an undeservedly good rating simply because he wants to get rid of him. Again, therefore, it is essential to check with previous landlords, not just the most recent.

A really shrewd landlord or agent, Clarke adds, will visit the home previously occupied by the tenant and ask the neighbours how they found him. Especially in multi-unit sectional title projects this an be a “very revealing” exercise.

Another check which should always be carried out is with the tenant’s employer – the applicant may well be on the point of losing his job or under surveillance. In big companies, the HR department may have a dossier on the tenant’s work performance which they will not divulge but from which they may be willing to extract a few comments.

Clarke warned that in tough economic times it can be foolish to insist on the prescribed rental increases.

“If the tenant is a good payer, but is now struggling, it can be worth your while to reduce the rental increase.”

It is, also, he said, not a good idea to pressurise the agent too hard to find a new tenant if the property has become unoccupied.

“Tenants chosen in a hurry tend to be bad tenants,” said Clarke. “Be patient and sacrifice two or three months rent. This is infinitely preferable to the expensive, long drawn-out process of getting a tenant evicted. I have known cases where a landlord has lost several years’ rent because he simply did not have the time to institute legal proceedings against a poor payer.”

When a new tenant takes occupation, said Clarke, photographs, or better still, a video should be taken throughout the house to record its condition on handover. Copies of the photos or video should be lodged with the tenant.

Later, if the tenant decides to leave, he may refuse to pay his last month’s rent on the grounds that his initial one month’s upfront deposit payment will cover it.

However, all too often, says Clarke, if a photographic record was made, it can be shown that the repairs, now needed (for which the tenant is legally responsible) will cost as much – or more – than one month’s rent.

The tenant must, therefore, be made to pay his last month’s rent in full.

“In our view, the initial deposit should cover two months’ rent. This is increasingly regarded as the norm.”

Clarke said that in a well run rental agency, the defaulting payments should not be above 1% of the total portfolio.

“I can,” he said, “point to many agencies in the Rawson group and elsewhere which are achieving this – and the main reason is always that they have done their checks with great thoroughness.”

Article by: www.rawsonproperties.com