Photo by FM Properties
When is a ‘good deal’ not a deal?
When you haven’t read your Letting Agent’s contract.
A surprising pattern has emerged from our recent conversations with portfolio investors about their managing agents. It seems that many have only a vague idea of what their agent actually costs them per property per year – and no idea what it might cost to terminate their contract.
Over the last couple of months we’ve had a steady stream of conversations with portfolio landlords exploring how to bring the management of their properties back in house and away from agents entirely. Some are unhappy with service, some are questioning the costs and others simply want more visibility and control over what is happening across their portfolio.
Property investors will typically analyse a deal from every conceivable angle before they buy. Purchase price, refurb budget, finance costs, projected yield. All scrutinised carefully.
Yet the document that governs how that asset will actually be run, the letting agent contract, often receives the lightest scrutiny of all.
Usually somewhere between “a quick skim” and “I’m sure it’s fine”.
Three common management models
Broadly speaking there are three ways landlords manage their properties.
- The DIY approach, where the landlord handles everything themselves.
- Working with operational support, such as a property-experienced VA or virtual property manager who handles the day to day admin and compliance.
- Or the traditional letting agency route.
The agency model is by far the most established. It is structured, familiar, and usually wrapped in a neat contract with clearly defined terms.
Most landlords know the headline number. “Fully managed, 12 percent plus VAT.”
Simple? Sometimes it isn’t.
The curious case of “Fully Managed”
The phrase “fully managed” carries a comforting sense of completeness.
It implies that everything operational is being taken care of for a predictable amount, a fixed percentage of the rent. In practice, the reality can be a little more nuanced.
In the conversations we’ve been having recently with landlords exploring self management, there is often a moment where we start mapping out the real costs of their existing management arrangements.
That moment usually begins with a simple question. “What does your letting agent actually cost you per property per year?” The answer is rarely clear.
Not because landlords aren’t financially aware. Quite the opposite. Most investors can tell you their purchase price, refurb budget and financing structure down to the penny. However, operational costs often get reduced to the headline management percentage.
Most landlords know the percentage. Very few know the annual cost per property.
Meanwhile a number of additional charges quietly orbit around the main fee.
Set up fees.
Tenancy renewal charges.
Notice fees.
Rent increase fees.
Inspection fees.
None of these charges are particularly dramatic in isolation, that said, over time they can move the real cost of management quite a long way from the original headline figure.
And then there is the small matter of the tenant.
When the tenant ties you to the agent
One clause that appears quite frequently links the management agreement to the tenant rather than the contract itself. In simple terms, if the agent introduced the tenant, they may continue earning commission while that tenant remains in the property. Even if the landlord is now managing the tenancy directly.
From the agency’s perspective the logic is straightforward. They found, qualified and introduced the tenant to you.
From the landlord’s perspective the realisation often arrives later, usually when they decide to move away from the agency. At that point the conversation becomes less theoretical and more financial.
Do you wait until the tenant leaves? Or do you pay a buyout fee to regain control sooner?
The small print nobody reads
As I have said, in the last few months we have reviewed a surprising number of letting agency contracts for landlords who were thinking about moving away from their agents.
Nothing we found was unexpected, illuminating certainly but not unusual.
Different agencies structure their exit terms in very different ways, the salesman in me sees this as a way of making it harder for customers to compare offerings.
Some examples we have seen recently include:
Three months notice to terminate management
Buyout fees equivalent to one month’s rent plus VAT if the tenant remains in the property
Termination charges calculated as six weeks rent
Six month notice periods depending on the stage of the tenancy
And in more than one case, the landlord could end the management service but would still need to continue paying commission while the tenant remained in the property. Which could be years.
None of these clauses are hidden. They are usually sitting comfortably inside the terms of business, often several pages into the contract. But like many contracts they appear to operate on the assumption that only a small percentage of people will read them closely.
What are your rights?
Some of these types of clauses have been challenged under Section 62 of the Consumer Rights Act 2015, which deals with unfair contract terms.
The law requires contractual terms between businesses and consumers to be fair and transparent. Certain clauses that require landlords to continue paying commission long after services have ended have attracted criticism. That doesn’t automatically make them unenforceable. But it does reinforce a simple point.
Understanding the terms before signing a contract is considerably easier than challenging them afterwards.
The strongest position you will ever have
Here is the slightly uncomfortable truth.
Once the contract is signed, your negotiating leverage is limited.
The agency will quite reasonably point out that you agreed to the terms. And unless something is clearly unlawful, those terms will usually stand. But before the contract is signed, the situation looks very different.
Letting agencies operate in a competitive market. If you are handing over one property, or better still a portfolio, you are a valuable client. That is the moment when negotiation is entirely reasonable.
Reducing notice periods.
Clarifying what “fully managed” actually includes.
Limiting ongoing commission clauses.
Removing exit penalties.
Those conversations are far easier before the ink is dry.
Avoiding the problem entirely
At some point while writing this article I realised something rather obvious.
The easiest way to deal with a complicated exit clause is not to need one in the first place.
That doesn’t mean the letting agency model is wrong. Many landlords work successfully with agents for years. But if you do go down that route, it pays to understand two things clearly.
Firstly, the true cost of the service. Do the math, and decide if the number, not the percentage is acceptable.
And secondly, the terms under which the relationship can end.
Because a deal that looks perfectly reasonable at first glance can feel very different once the small print comes into focus. And in property, as in most things, awareness tends to be the starting point for better decisions.
If you’re considering leaving an agency, and taking the portfolio back under self management but not sure where to start, get in touch and we can share the Beam guide to portfolio recovery.
About the Author:
Jane Scroggs and Taran Hughes are the founders of Beam Virtual Property Support, in partnership with The HMO Roadmap. Their team of virtual assistants handles all aspects of lettings, compliance, credit control and property maintenance, always focused on streamlining your operations. Learn more about Taran and Jane here.