WARNING : A Crimewave is about to happen

“I am becoming increasingly worried that the introduction of the tenant fee ban next spring will lead to a huge surge in the number of lettings agents who resort to stealing their client account money.  My opinion is not based on a psychic premonition.  It is based purely on mathematics.“

Let’s consider the example of a small letting agent turning over £300,000 per annum mostly from let-only properties.  At the moment, they might be making a profit of 20% of turnover which is £60,000.  This provides a comfortable living for the proprietor.  But agents like this currently earn up to one third of their income from tenant fees, so after the tenant fee ban comes in, their income will drop to £200,000 and a £60,000 profit will become a £40,000 loss.

In theory, the proprietor of such a business should recognise that it is unviable and should cease trading in an orderly manner.  However, in my experience, this is not what happens in practice.  People have an awful habit of burying their heads in the sand until a bad situation becomes an even worse one.  This is the time when the temptation to dip into the client account becomes irresistible.

People never intend to do it but one month they borrow £10,000 to pay the VAT bill with every intention of paying it back in just a few weeks’ time.  Then, in a few weeks’ time, they need another £10,000 to pay their tax bill.  Then, a month later, they need another £10,000 to make a member of stuff redundant.  Then, before they know where they are, they are hopelessly in debt with no chance whatsoever of ever paying the money back.

A let-only business that turns over £300,000 per annum could easily be holding £300,000 in tenant deposits.  In theory, they should all be protected but it is remarkably easy for a desperate letting agent to “forget to register” say one in three of the deposits taken.  Doing this provides £100,000 of working capital and so long as money is available to pay back deposits as they are requested, the deceit can be hidden for a very long time.

But this is only half the problem.  If the agent is also collecting the rent, they will have an opportunity to “borrow” money from their landlords as well.  The rent roll for a business of this size is likely to be circa £200,000 a month.  If landlords are told that for administrative reasons, rentals cannot be paid until seven days after receipt, they gain access to another £50,000 of working capital.  If they can be made to wait for two weeks, this rises to £100,000.  The rules for protecting landlord rental money are far less robust than the rules for protecting tenant deposits and this makes it much easier for desperate letting agents to get away with it.

Depending how long they bury their heads in the sand, the agent turning over £300,000 per annum could easily run up a client account deficit of up to £300,000, half from landlords and half from tenants.  Once the tenant fee ban is introduced, they will have no chance of ever being able to pay this money back from their profits.

Until recently, such agents would have sold their business but, for the reasons that I have explained in previous articles, there is almost no market for let-only businesses any more.  So the only remaining option is a full-blown liquidation which will leave their poor landlords facing huge losses through absolutely no fault of their own.

So, what can and should be done?  Well, if you run a small letting agent, you need to be sure that you put plans in place right now to change your business model sufficiently to survive without tenant fees.  This will mean switching from a let-only model to a more sustainable rent collection model with recurring monthly income.  It will also mean finding new services that you can sell to landlords and tenants such as deposit protection schemes and rent protection insurances.  Finally, it will mean finding the selling skills necessary to push up your fees to landlords and to recover these fees through charging higher rents to tenants.

If you cannot convince yourself that your business can be viable without tenant fees, you need to get out now whilst you can still recover some value from selling your business.  And if you try to make a go of it and fail, you need to promise yourself now that you will never, never dip into the client account.  Losing your business is terrible but ending up with a prison sentence is far, far worse.

Finally, the regulators have a role to play here.  In a perfect world, agents would be forbidden from holding any client money before the tenant fee ban is introduced but the very least that is needed is a much more robust inspection regime to protect both landlords and tenants from dishonest or desperate letting agents.  This cannot be allowed to be another case of the stable door being closed after the horse has bolted.

Adam Walker is a business transfer agent and management consultant who has specialised in the property sector for more than twenty-five years.