Getting LHA payments direct, is it really happy ever after?

Over the past few years there has been an endless amount of articles written on the importance of securing direct payments from local councils. If you attend property conventions, forums or seminars you are often lead to believe that direct payment is the central key to minimising your risk with LHA tenants. So much so that there now seems to be a growing culture of misconception within the industry for those who are new to property investment or to dealing with housing benefits as direct payment is portrayed as the holy grail of LHA. But is this really the case? Or is there more to it?

 

Securing an LHA tenant – The increasingly stereotypical route

Open up the property section of your local newspaper or search through an online portal today and you will see that more and more letting agents are offering their properties to LHA tenants with enticing offers such as NO BOND REQUIRED or MOVE IN FOR FREE. These offers are prime examples of a business model which is based on securing tenants quickly by removing as many barriers as possible that would otherwise usually prevent them from being able to secure a property. Aside from the monetary factors unfortunately for landlords the other barriers tend to relate to vetting procedures which more often than not are relaxed or none existent. This typically results in tenants being secured solely on their ability to qualify for direct payments rather than on their previous rental history and individual merit.

Typical outcome – Your current agent has secured you a tenant quickly and has informed you that they are going to request direct payment from the start which will eliminate your risk. Fantastic! You can relax now. Or can you?

What can go wrong?

On a week to week basis I am dealing with more and more new clients that come to me as they have previously been stung in one way or another by this approach. To put it simply, the fact of the matter is that yes direct payment is a fundamental part of dealing with LHA but there are other significant factors that should also be taken into account to truly minimise risk.

The experience which seems to repeat itself most frequently amongst new clients is that of tenants unexpectedly abandoning properties whilst causing significant damage. Unfortunately, the subsequent impact of such an event falls directly on the landlord’s shoulders as they are often faced with large re-development costs to get the property back to a rentable standard. This in itself can present further issues such as extended void periods and re-marketing costs whilst repairs are being carried out which can lead to additional lost revenue.

Aside from this I frequently come across examples where tenants have handed in their notice after the initial fixed term and although the rent has been paid direct, the property was left in a much poorer condition than when the tenant’s moved in. Again, this can open landlords up to further expense, especially when there is no deposit to fall back on.

Finally, another factor which has often resulted in problems is a tenant’s contribution towards their rent. When dealing with LHA tenants it is not always guaranteed that a party will come forward that is entitled to a bedroom rate that will cover the full rent. This often results in a contribution being required from the tenant each month to top up the amount being paid direct from the council. This can become a problem as this leaves a proportion of the rent in the hands of the tenant. By performing minimal vetting procedures you increase the chance of significant arrears which often a landlord can struggle to recover, especially when no guarantors have been taken as part of the tenancy agreement.

Securing an LHA tenant – The comprehensive route

As I’ve already mentioned I believe that are a number factors that should be taken into account in addition to getting payments direct to truly minimise risk. My outlook is based on the old saying that ‘leopards don’t change their spots’ and in my experience when it comes to tenants this saying could not be more true.

Set a minimum criteria and stick to it!

There are a number of factors that should determine whether or not a potential tenant is suitable for a property. The first would be affordability – how much housing benefit will they qualify for and how much contribution would they have to make themselves? With our properties I set a maximum contribution of £40 per month and refuse to take anyone over that limit as they will inevitably fall into rental arrears. The second would be previous rental arrears – if they have outstanding arrears with their current or previous properties I would refuse to take them unless they can provide proof that the outstanding debt has been cleared.

Request a deposit

Do not go down the NO DEPOSIT route unless you are forced to. Taking this route frequently leads to further costs as even minor repairs cost money. As long as your property is in relatively good order an LHA tenant should pay a deposit. To make your property more affordable in regards to the overall amount required to move in I would advise taking a small percentage (i.e. 20%) of the first month’s rent upfront as the rest will inevitably come from the council. Taking a deposit will make the tenant more inclined to look after the property as it is in their interests to do so.

Request a guarantor

As a minimum requirement a guarantor should be in full time employment with provable income which is equal to at least 35 times the rent. In my experience most LHA tenants can provide this, but if they really struggle I would only consider tenants with a minimum of 3 years previous rental history which can be vetted properly. Taking a guarantor offers you a life line if the tenant fails to pay a contribution or causes damage as they are also liable.

Do your homework

In my opinion all parties involved in a tenancy agreement should be credit checked including guarantors. The last thing you want is to take a tenant or guarantor with a track history of outstanding debt.

Landlord references should additionally be obtained in written form and should go back as far as possible into a prospective tenant’s previous rental history. If done thoroughly landlord referencing offers a true insight into who your prospective tenant really is and how they will treat your property.

Conduct home visits

Home visits are an essential tool when it comes to making your final decision in regards to offering a tenancy to an LHA tenant. Dealing with prospective tenants in an office environment or over the telephone can only tell you so much about a person and their nature. Nothing gives you a greater insight into how a prospective tenant will treat your property than seeing them in their current environment.

All of the guidelines I have mentioned in this article are simple but effective measures that work for me and my clients when it comes to limiting our risk when with dealing LHA.

This article has just featured in February’s addition of ‘Your Property Network Magazine’ (www.yourpropertynetwork.co.uk). In next month’s article I will talk about the importance of a thorough inventory and regular inspections.

Yours Sincerely,

Aaron Phelan

Lettings Director

NGU Homelettings