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The five step guide to tenant referencing
Whether you’re new to being a landlord or you’ve had years of experience of letting properties, finding the right tenant is probably the toughest part of the job.
This is why tenant referencing plays such an important part in the rental process. The checks can give you an idea of how reliable your prospective tenant is likely to be and if they’ll take good care of your property.
So, here’s a simple five step guide to how tenant referencing can help you make an informed decision about who to let your property to.
1. Understand the importance of tenant referencing
After months of developing a property fit for letting out, it can be very tempting to hand over the keys to the first people interested in renting. Not carrying out tenant referencing checks may allow you to start benefiting financially from your property sooner but it could cost you significantly more in the long run.
Before any contracts are signed it’s important that you perform tenant referencing checks to ensure you’re protecting your investment. You may want to get your tenants in and paying rent as quickly as possible but it can be tough to evict them if anything goes wrong.
This is as a result of laws that are in place to protect the rights of tenants against harassment or illegal eviction. Of course, this is great news for tenants but could mean that even if your tenant fails to pay their rent or breaches their tenancy agreement, it could take months for you to gain repossession of your property.
To avoid the hassle and worry of having to evict a tenant, it’s recommended that you obtain a tenant reference before you hand over the keys. The results from the checks that are performed will provide you with an assurance that your prospective tenant can afford to pay the rent and that they have a good credit history. This doesn’t mean that the unexpected can’t happen which may change your tenants’ ability to cover their rent but it does provide you with invaluable peace of mind.
Similarly, tenant referencing will check with your prospective tenants’ previous landlords to help put your mind at rest. If the landlords’ references come back positive it is a good indication that they’ll look after your property too.
Remember that tenant referencing is different to a ‘right to rent’ check which must be carried out at the start of each tenancy. Since February 2016, it’s been a legal requirement to check that your tenant has the right to rent in the UK. Failure to do so could result in a fine of up to £3,000 per illegal occupant.
2. Decide who will perform the tenant reference
Given the risks that are involved in selecting the wrong tenant are high, it’s not worth cutting corners trying to save the cost of tenant referencing. As a landlord, you’ve got a lot to think about so don’t be tempted to juggle too many jobs.
You may think that you could find out all you need to know from a prospective tenant just by asking questions about their job, income and previous rental history. And in some circumstances, you can gather quite a bit of information but there’s always a risk that you’ll miss something, or even worse, you’ll be lied to.
Instead, you’re better off leaving the job up to the professionals. You can request a tenant referencing report from most high street estate or letting agents but considerable time and money savings can be made by appointing a specialist tenant referencing agency. They have the experience and expertise to perform detailed checks and provide a professional and thorough report within a couple of days.
The alternative of running the tenant checks yourself can be difficult and time-consuming. This really isn’t necessary either as there are loads of tenant referencing services available which are reasonably priced. They tend to offer a range of packages with a varying number of checks performed.
How long does it take to reference a tenant?
The time it takes to complete a tenant reference varies depending on what type of reference is being carried out and how quickly the parties involved provide the necessary information. Generally, the checks can take anywhere from a few hours to a few days but most referencing agencies will produce a report within two to three working days.
What is a tenant reference fee?
The cost of tenancy referencing depends on which type of report you’ve requested. The more checks required, the more the fee with be.
A basic package tends to consist of a simple credit check of which the results are almost immediate. However, if you’d like peace of mind that your prospective tenant can afford to rent your property, then you may want to include previous landlord and employers’ checks to confirm reliability and validate income.
In most cases, the tenant is expected to cover the cost of the referencing. You may decide to refund the fee if the tenant goes on to rent your property but if they fail the referencing checks they won’t be entitled to recover the loss.
However, this is set to change with new legislation coming into force in Spring 2019. The Government’s Tenant Fees Ban will make it illegal for landlords and letting agents to charge fees for a tenant to secure a rental property which includes the cost of referencing.
3. Review the tenant reference report
The report that you’ll receive will conclude with a ‘pass’ or ‘fail’ result. This will help you to decide whether to rent to the tenant or not.
There are a number of reasons why a ‘fail’ result will be returned. These include:
- County Court Judgments (CCJs) against their name
CCJs will be highlighted on a credit check for six years even if the debt is been paid in this time. The report will also flag any bankruptcy or administration orders. - Affordability issues
As a rule, tenants are deemed to be able to afford to rent a property if their gross salary is at least 2.5 times their share of the monthly payments. For the self-employed, their income is measured as an average of the last three full years based on audited accounts. - Gaps in employment history
Gaps in employment of six months or longer which are not holiday entitlement can cause a tenant to fail. Short-term employment contracts tend not to be accepted for referencing purposes. - Previous landlord’s reference
If your prospective tenant receives bad feedback from a previous tenant it will act as a huge warning sign for future landlords.
Poor credit score
A credit score can be negatively impacted by missed payments on credit cards and loans but if the score results in a fail on the tenant referencing report it must be pretty low.
Although it’s a good idea to pay attention to the information outlined in the tenant reference, the ultimate decision lies with you. Even if a tenant does fail the reference, you still have the right to rent the property out to them if you so choose.
If your prospective tenant alerts you to a potential issue prior to the referencing taking place, you may decide to take a more lenient approach to the result. However, bear in mind that they’ve failed the reference for a reason so you may want to perform some additional checks before any contracts are signed.
You’ve also got the option to request that the tenant uses a guarantor if you’re concerned for any reason. This involves the tenant finding a family member or friend that is willing to sign a declaration confirming that they will pay the rent on behalf of the tenant if they default for any reason. The same referencing checks can then performed on the guarantor.
4. Carry out additional checks if necessary
Having the professional tenant referencing report results is one thing but sometimes you’ve just got to trust your gut instinct. Make sure you meet your prospective tenants in person and use your judgement as to whether additional checks need to be performed.
If possible, ask to meet with your prospective tenant in their current home. This provides you will an excellent opportunity to see how they look after the property they’re living in right now. It may not always be possible or practical but it’s an extra check that will hopefully help put any niggling worries to bed.
5. Protect your investment
Finding the right tenant is the most effective way that you can protect your property but there are many other ways that will help you look after your investment.
Tenancy Deposit Protection (TDP)
The three government authorised Tenancy Deposit Protection schemes you can choose from in England and Wales are:
Note: There are alternative TDP schemes available if you live in Scotland or Northern Ireland.
To begin with, deposit protection schemes seem to solely benefit the tenant but there are lots of advantages for landlords too.
To give you a sense of financial security, it’s recommended that you request a deposit from your tenant. This should make certain that you won’t lose out financially if your tenant damages your property or takes something that belongs to you.
Landlord insurance
Although landlord insurance isn’t a legal requirement it’s probably one of the easiest ways to protect yourself as a landlord. Its unlikely that you can rely on standard home insurance to provide you with the cover you need, so make sure you check your cover is suitable for landlords.
Hopefully, you'll never need to use it, but the peace of mind of having it in place is invaluable.
The types of cover that your landlord insurance normally provides includes:
- Buildings and landlords’ contents insurance (it is your tenants’ responsible to insure their possessions).
- Loss of rent so that your income is protected if your tenants have to move out following an insured event such as a flood or fire.
- The cost of alternative accommodation.
Optional covers such as accidental damage insurance and legal expenses can be added to your policy if needed.
If you’re looking for flexible landlord insurance to protect your property, then you can get a quick and easy online quote right now. It could take just minutes to get the cover you need to protect your rental property.
To provide this service we work with Arthur J. Gallagher Insurance Brokers Limited, one of the UK’s largest insurance brokers.
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