Many lettings agents are concerned about the banning of the tenant fees starting in the spring of next year. Let only agents are trying to figure out ways in which their businesses would survive the laws next year.
These letting agents did not want the hassle of managing properties so they encouraged landlords to instruct on a let-only basis. With no experience or track record, they were forced to sell their service on price alone and many charged fees of just four or five per cent of the annual rent for a tenant find-only service with no renewal fees. They quickly found that it was not possible to make a profit from such a low fee so they started to make up for their low fees to landlords by charging fees to tenants. Many firms are currently earning 30 per cent of their fee income from tenant fees.
Many firms are currently earning 30 per cent of their fee income from tenant fees. The maths for a typical small let-only business might mean getting 4% landlord fee from annual rent , other landlord set-up fees , tenant fees.
The Third Reading of the Bill will be on 5th September in The House of Commons.
The largest/sophisticated firms are already planning an even more sophisticated response to the tenant fee ban. I can’t give details yet due to commercial confidentiality but in essence they are planning to offer a range of additional services to both tenants and landlords. The commission earned from these services should be enough to compensate for the impact of the tenant fee ban.
Interestingly, a number of large firms are also reconsidering whether they will be prepared to offer any landlords a let-only service in future on the basis that without the tenant fee, the service will no longer be profitable. This will be a massive change for the letting industry to get to grips with.
The mathematical analysis that I have set out above has led to a huge drop in the value of let-only businesses. Before Brexit and the announcement of the tenant fee ban, a let-only basis was worth perhaps two thirds as much as a managed business with the same turnover. Now, let-only businesses only sell for half as much as managed letting businesses and their value is still falling.
So, if you own a let-only business, what can be done to survive disaster? In my opinion, the only permanent solution is to persuade your let-only landlords to switch over to a rent collection service either immediately or next time there is a change of tenant. It is not easy to do this and it will take you several attempts to persuade some of your landlords to make the change but many of my other clients have achieved it successfully and the profitability of their businesses and their capital value has been improved significantly.
We have about nine months left under the tenant fee ban comes in so the time to start implementing these changes needs to be now.
