Do I really need references for my prospective tenant?
“I know an honest person when I see one. Getting a professional tenant reference is just a waste of money.”
Unfortunately these sentiments are no longer true. There are some very plausible people who make a profession out of ‘scamming’ unsuspecting landlords. They are polite, well turned out, appear well educated and to have good jobs. Unfortunately once in, these ‘professional’ tenants can make your life hell.
So follow these basic steps if you want to avoid being saddled with the ‘tenants from hell’.
There are five steps that you can take to vet your prospective tenants. The first three are essential. The others you may wish to undertake depending on time and resources. They are as follows:
1. Credit referencing.
Referencing agencies are also used by letting agents. They carry out checks on the prospective tenant’s credit worthiness and authenticate their personal details. These agencies normally offer various levels of service. You should at least opt for the basic package which will check the following:
- Electoral roll to verify current and previous address
- County Court Judgements (CCJ), bankruptcy and any court based voluntary financial arrangements to ascertain any poor credit history
- An affordability check to ensure that the tenant is likely to afford the rent on their stated earnings
- Validate the bank address and sort code given by status to ensure it is legitimate
- Check submitted details against stored data on file
This type of financial check is available online for between £12-25 and once the enquiry form is submitted the results can be e-mailed back to you immediately.
The most important information to come out of these checks is whether the applicant tenant has a CCJ. If they have this is bad news as it means that in the past a creditor has had to take them to court because of non payment. Often you will find that individuals are serial debtors and have a number of judgements against them. The general rule is ‘don’t touch them with a barge pole’ as 99% of them will be bad news.
The other essential information that should come out of the information is that this should verify the address of the tenant and this should help you confirm their story and details.
Often the reference agency will provide a score of the tenants’ suitability. The score tallies with a suggested course of action. Say anything above 1000 would suggest that the tenants are a low risk. Between 1000-750 the tenant may represent a moderate risk of default. Below 750 a high risk and strongly advise not having them.
These scores are useful supplementary guidance but I would caution of interpreting them too literally. There may be some categories of tenant where this system is inappropriate. For instance students may score very badly because they have a limited credit history and/or they move address frequently.
In these cases where it is hard to verify the credit background of your prospective tenant or they have a low score, consider using a guarantor if you are still keen to take them on. Don’t use referencing in isolation; instead consider them with other sources of information to build up a picture of your tenants risk profile.
Finally, the verification process should involve an ID check. ID fraud is becoming an increasing problem. You therefore need to verify that your prospective tenants are who they say they are. Get them to show you some ID with a photo such as a passport or European style driving licence so that you can see their name and an identifying picture.
2. Employers reference
This should simply confirm the employment status of the tenant. Are they employed where they say they are? Importantly are they on a full time contract or is their temporary contract just about to finish, casting doubt on their ability to pay the rent in the future. It should also give you their salary which is useful in assessing the tenant’s ability to pay.
You can calculate their affordability of the rent in relation to their salary by multiplying the monthly rent by 30. This gives an indication of the minimum salary that would support this level of rent. For example, a monthly rent of £1000 multiplied by 30 equals £30,000. If the applicant annual salary is £20,000, then you should start to question how they are going to afford the rent without sub-letting. Whilst the outcome of this shouldn’t be taken as ‘gospel’, again it gives a useful guide.
3. Bank reference
These references are likely to be the most difficult and time consuming to obtain. In order to get one you will first need written authorisation from your prospective tenant to allow the bank to respond. The bank will then charge you a fee for their services, which at best is likely to be very vague. They will probably respond with uncommittal wording such as “we see no reason why the tenant will not be able the meet the rent”.
This is hardly a thumping endorsement and probably means the tenant has no money in their account, but if we give them a huge overdraft in theory they could pay rent for a few months. Given all the effort and time involved and that the enquiry is only about a prospective tenant, my advice would be don’t bother.
Instead a much better solution is to simply get your prospective tenant to let you have their last 6 months bank statements. Sounds intrusive – well not really you are only trying to establish that the tenant can afford to pay the rent they say than can.
These statements provide an invaluable insight into the financial position of your potential tenant. Are they paid what they say they are? What are their regular outgoings, will they really be able to make their rent payments. Do they have any worrying habits, such as a gambling problem which could ultimately cause them to default on their rent. If they refuse then maybe they have something to hide, most good tenants won’t even question it. All this information helps to build that risk profile we talked about earlier.
4. Landlords reference
Where the applicant is currently living in rented accommodation it is useful to obtain a reference from their landlord. I would suggest that you ask the following questions:
- How long has the applicant been a tenant of yours?
- What is / was the rent paid?
- Was the rent paid in full and on time each month?
- Were there any periods where the rent was in arrears? Is the rent currently in arrears?
- Has the applicant cared properly for the property and its’ contents
- Would you accept the applicant as a tenant again?
The landlords reference, given that many landlords are private individuals is one reference that can be easily falsified by the prospective tenant. All they need to do is to give a friend’s details instead. If you are suspicious or want to make very sure, phone this person up. You should be able to tell quickly if the details are genuine.
The other things about landlord references is that if a landlord has a bad tenant, there is a big incentive for them to give a misleading reference just to get rid of them. Given that as a prospective landlord; one of your primary concerns about a tenant is will they keep up to date with their rent. This is why getting the tenant to produce their bank account statements is so useful. One glance of these statements should be able to help you verify that they are indeed paying their rent each month.
On the same topic I would draw your attention to the dilemma faced by many letting agents in seeking references. I recently had a letter requesting a reference for a tenant of mine. The wording of this request was so vague that effectively it was all but meaningless. A letting agent on a ‘finders fee’ is primarily concerned with getting a tenant. They will therefore not always be looking too hard to find problems.
Finally, there are an increasing number of prospective tenants who were previously home owners having elected to sell up & rent. In their situation a current landlord’s reference will not be possible. In this situation you should request copies of their last 6 months mortgage statements as evidence that they were not behind with their mortgage payments. If they refuse, maybe they are trying to hide something.
5. Personal reference
If a landlords’ reference is sometimes a bit tenuous then a personal reference is not worth the paper it is printed on. Don’t even bother with this.
Ultimately, in deciding whether to take on a tenant you must ask yourself ‘how risk adverse am I?’ This needs to be considered against the commercial needs to get a paying tenant. If you have positive results from the first three types of check; it is fair to say that these tenants represent a fair risk to most landlords. Research undertaken by the Residential Landlords Association shows that where no tenant checks are undertaken; landlords are 7 times as likely to end up taking court proceedings. In short – make sure you do it.
Before you get paranoid; you should remember that most prospective tenants are perfectly decent law abiding people who will occupy your property, pay rent and leave the property at the end of the tenancy as they found it. What you are trying to insure is that you filter out the small proportion of ‘scammers’ who will ultimately move on and find a landlord that is less prepared and less organised than you.
For a referencing service recommended by Which the consumer organisation