Top ten reasons to reference your tenants
Finding the perfect tenant can be a difficult task for Letting Agents and Landlords, once you have secured potential tenants for the property it can be tempting to go ahead with the agreement without taking the time to go through the referencing process.
In our experience as an online estate agent saving time by not referencing tenants often causes serious problems later down the line, therefore we strongly recommend obtaining full referencing on all tenants before signing the tenancy agreement. Most tenants will fully expect to go through some kind of referencing process so don’t be concerned that your request will be off putting.
The main references to be conducted are:
- Credit Check
- Employment Reference
- Previous Landlord History
Although you may be able to carry out some of these checks personally we always advise you employ a specialised referencing company or ask your estate agent to provide these references for you to guarantee accuracy. Fees vary as do service levels so it’s a good idea to shop around, be sure to check if your agent charges the tenant an administration fee as well.
Ideally all three references should be carried out as together they will provide a comprehensive report enabling you to make the most informed decision.
The main reasons a landlord should reference their tenants are:
It is essential that a landlord knows if the prospective tenant can afford to rent the property. Professional referencing will establish whether or not the tenant can afford to meet the rental payments. Each company will have its own specific criteria to calculate affordability but the standard calculation is a ratio of 2.5. This means that the tenant’s gross salary must be a minimum of 2.5 times their share of the rent in order for them to be deemed able to afford. With this in mind it is vital you let your referencing company know how the rent will be split if you are letting to two or more tenants.
2. Genuine Employment
Unfortunately a small minority of tenants will attempt to provide a false employment reference. The employment reference is key to the referencing process and must be accurate, a referencing company will fully verify that the employment details given by your prospective tenant are correct; this is a vital step you may have difficulty with if you attempt to conduct your referencing personally.
3. Employment Contract
Your referencing needs to cover the length of the employment contract, anything less than the length of your tenancy agreement may leave you at risk. With this in mind if your existing tenants wish to renew at the end of the tenancy it is worth re-referencing for this information.
4. Paying Rent on Time
All landlords want to receive their rental payment on time. Referencing of previous landlords helps build a picture of reliability. Any issues such as rent arrears will be flagged during the referencing process and brought to your attention.
5. Destruction of Property
No landlord wants to go through deposit disputes at the end of a tenancy due to property damage. Conducting a previous landlord reference will enable you to see if your prospective tenant has ever left a property in a poor condition or had their deposit withheld due to destruction or damages.
6. CCJ’s and Bankruptcy
Put simply a CCJ or County Court Judgement is issued when an individual fails to pay money they owe. Your referencing company will check the register of judgements where most CCJ’s are logged for a period of 6 years, even if a CCJ is now satisfied it will normally show up for your information. As a landlord it is important for you to know if your tenant is or has been in rent arrears, has a CCJ against them or has ever been declared bankrupt.
7. Identity Confirmation
Ensuring your tenant is who they claim to be is an important part of the referencing process, especially when money laundering is a concern. The law expects landlords to take reasonable precautions to prevent money laundering; use your common sense and ask yourself questions like – if the referencing process has shown a prospective tenant to be wealthy and your property is at the lower end of the market why have they decided to rent it? Wherever possible cash payments should be avoided and a copy of a photographic ID such as a passport should be taken.
8. Rental Guarantee Insurance
An increasing number of landlords are choosing to protect themselves against potential financial losses by purchasing a rental guarantee policy from a specialist provider. The majority of suppliers will require tenants to be fully referenced before they offer a policy.
9. Self Employment
If your potential tenant is self employed the referencing process will be slightly different. The majority of referencing companies will be able to deal with self employed tenants but the process can take a little longer depending on the responsiveness of the tenant’s accountant. If your prospective tenant is self employed a character reference may be requested.
If your prospective tenant has been declined it may be an option to opt for a guarantor. Guarantors should be fully referenced to ensure they are suitable and must sign a guarantor form in order for you to claim from them should the tenant default on the rental payments.
Agents and Landlords should keep in mind that the majority of prospective tenants will be good tenants who pay their rent on time and keep the property in a good condition. By carrying out comprehensive referencing you can help minimise the risk, making sure you know your tenant has a reliable history and positive financial position. If this is not the case you will be made aware and will then be able to move on to source tenants who will ultimately be more suitable for your property.
Written by Sarah Male, Urban Sales and Lettings