What Does a Good Letting Business Look Like?

We are achieving all time record prices for letting businesses at the moment but the buyers are becoming increasingly choosy about the sort of businesses that they want to buy. As a consequence, the price differential between the best letting businesses and the rest is wider than it has ever been. So, what constitutes a good lettings business?

The first requirement is that the properties must be managed. Let-only businesses have become increasingly hard to sell because there is no continuity of income. This became very apparent during Covid. As a second issue is that the threat of compliance problems is greater because it is all too easy for agents to become liable for mistakes that their let-only landlords have made, often without their knowledge. If you own such a business, you need to try to convert your landlords to managed or part-managed contracts as soon as possible.

The second key requirement is good fee levels. The measure of this is the total fee earned from each property as a percentage of the rent. For example, a business that achieves total fee income of £500,000 per annum from 500 properties earns total income of £1,000 per property, per year. If the average rent is £10,000 per annum, this equates to a total fee, including mark-ups, of 10%. Some businesses achieve total fees of less than 6%. Such businesses will make very little profit and consequently have little value. The best businesses achieve total fees, including mark-ups, of almost 20%. These businesses are in high demand and achieve premium prices.

So, what can you do to push up your fee levels? In short, the answer is to convince your landlords that you are worth more than your competitors. A good letting agent can add value at every stage of the process. Better marketing and a more proactive sales process will mean that you achieve a higher rent for your landlord. You need evidence to prove this during your valuation appointments.

A better marketing campaign will also ensure that properties are let more quickly. Every week that a property is empty means that the landlord loses 2% of the annual rent. An agent who lets a property in a week and charges 15% will therefore give better value than an agent who takes a month to let the property and charges 10%. Again, you need evidence to prove this.

A wider choice of tenants and a better referencing process will mean that there is less chance of picking the wrong tenant, i.e. one that doesn’t pay the rent and has to be evicted. The cost to the landlord of a poor tenant can run into many thousands of pounds. Some horror stories about this should also be included in your valuation appointment.

The next area is compliance. An experienced, qualified and well-trained team will play a very important role in ensuring that the landlords are not left facing expensive fines for compliance breaches. Again, some horror stories about mistakes made by cheap, unqualified, inexperienced and overworked letting agents should also be part of your sales presentation.

Once the tenancy has commenced, the next area is repairs. By having enough staff to conduct regular periodic inspections, a good agent can prevent a minor problem such as a leaking gutter turning into a £5,000 bill to replaster the entire room. And, once a repair is identified, reliable contractors who charge fair prices and are properly supervised can save the landlord huge sums of money.

The next stage of the tenancy will be the renewal and this is another area where a good agent can add enormous value. I have never understood why so many agents charge a lower fee for the second and subsequent term of the tenancy. All this does is to give agents an incentive to get the first tenant out and replace them with a new one. Some agents don’t charge anything at all for the second or subsequent term. If they get nothing, then they will do nothing. A good agent will push hard for the maximum rent increase whilst ensuring that good tenants stay in the property for as long as possible. Some agents achieved rent increases of 10% or more last year. Other agents achieved nothing. Again, this is of huge value to the landlord.

The final stage of the tenancy is the check-out. Again, a good agent will add value here by ensuring that the tenant pays for any damages that they have caused and avoid expensive deposit disputes.

If you want to get a premium price for your business, you will need to ensure that you are achieving decent fee levels. It will take at least a year and probably two years to achieve a significant increase in your fee levels but the impact on the profitability of your business will be huge and the impact on the value of your business will be very significant because all letting agents are not the same and the buyers know this.

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