Why tenant fees are not the only problem

Letting agents are understandably concerned about the impact of the tenant fee ban but unfortunately this is not the only threat to your future income.  A far bigger threat is the financial impact of tenants staying in the same property for much longer periods.  This is not a matter of opinion, it is a matter of mathematical fact.

Let’s assume that an agency is earning £1,200 per annum in management fees from a property, plus tenant fees of £300 and landlord admin fees of £300 each time the tenancy changes.  If, over a three year period, there are three 12-month tenancies, they will earn £5,400.  If the same tenant stays for the whole three years, they will only earn £4,200.

If the property is let on a let-only basis, the impact is far worse.  If there are three 12-month tenancies, they might earn £4,200.  If the same tenant stays for the whole three years, they will only earn £1,400.

This presents letting agents with a very real dichotomy.  The landlords will want each tenant to stay as long as possible.  The tenants hate having to move every year.  Yet the letting agent earns more money in return for acting contrary to both their interests.  This cannot be right.

Tenants are staying for longer and longer in the same property.  Three year tenancies are now common and demand for them from both landlords and tenants is increasing.  The only way for agents to maintain their income is to face up to the problem and move to a charging model that charges the same fee every month regardless of how long the tenant stays.

In order to achieve this, you will need to change your charging basis and dramatically improve your selling skills.  Under the current system, many of the weaker letting agents are selling their service on price.  They focus the client on the headline fee of as little as 5% to find a tenant, then subsidise this by charging sky high tenant fees and landlord administration fees (a term so misleading that it has recently been judged to be illegal).  Then, they maintain their income by making sure that the tenants who move in are guaranteed to leave in six months time.  In six months time, they know that they can charge another lot of one-off fees to another tenant whose visa runs out in six months and so the cycle continues.

Under the new system, you will need to move away from one-off set-up fees and let-only fees and start to charge an all encompassing fee paid monthly.  The problem is that this will leave the valuers with nowhere to hide.  If their monthly fee is 10% and a competitor is charging 8%, they will have to convince the landlord that their service is worth the extra 2% fee and that by paying it, they will get a higher rent, a shorter void period or a more efficiently managed property.  Making this presentation will be difficult and challenging for letting agents who have always been used to selling on price alone.

Even this may not be the end of the matter.  It is my prediction that the demand for longer leases will not stop at three years.  Many people have now given up hope of ever being able to afford to buy their own home and what they crave is the next best thing which is the security of a long-term home which they might not own but in which they can feel secure.

There is no reason why tenants should not eventually be offer lease terms of five, ten or even twenty-five years on similar terms to those that are currently used to let shops and commercial premises.  But this cannot happen unless the letting industry is incentivised to offer leases of this length.  In the medium term, this may mean that letting agents charge fees on a similar basis to commercial agents with a substantial charge for selling a new lease or assigning an existing lease, plus a monthly management charge for looking after the property in a professional manner.

The end result could be an end to people’s obsession with having to own their own home and a much better housing market for everyone but by God, letting agents will need to be nimble on their feet in order to maintain their fee income through a period of such dramatic change.

Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years.