Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
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Tenant Referencing comes in many guises but in this article I am going to focus on how landlords can outsource a major piece of due diligence and pass the risks of tenants failing to pay rent onto an insurance company by purchasing Rent Guarantee Insurance “RGI”.
The concept itself is very simple. The insurer performs checks on the tenant which allows them to establish that rent is affordable and is likely to be paid. The insurance company then insure against the risks to the landlord in the event of non-payment on the part of the tenant. This is what happens if the tenant stops paying rent if you have purchased an RGI policy and followed the correct procedures:-
Until very recently this type of insurance cover was only available to purchase via letting agents offering full management packages. It is now available for landlords to purchase directly.
There are two types of cover.
The insurance company will appoint an agent to complete ‘due diligence’ on its behalf. This will include:-
This form of referencing takes up to seven days and whilst the effort up front is relatively cumbersome the insurance companies have found that their risks are substantially reduced.
This cover is slightly more expensive but the advantage is that it can be arranged in an instant. The only ‘due diligence’ undertaken on behalf of the insurance company is a credit reference and a credit score. The overall cost is higher as the increased risk to the insurance company warrants a higher premium than the savings made as a result of not fully referencing.
Many landlords who are totally reliant upon their rental income to fund their mortgages and/or their lifestyles find these types of policies invaluable. Availability of cover, without having to employ the services of a letting agent, is improving all the time and the cost of cover due to increased competition has now fallen to affordable levels. An entire package can cost less than £100 per property with some providers.
If an insurance company feels that is is going to be at risk it will decline cover. This can severely restrict the market of potential tenants and increase the risks of rental void periods. Typical reasons for a decline in cover are:-
Some providers will overlook the status of the tenants if a home owning guarantor is prepared to guarantee rent payments. In this scenario the guarantor will have to be referenced too, as if they were the tenant. An additional contract would need to be entered into by the guarantor.
Tenancy agreements and guarantor contracts are typically provided by the provider of the referencing and RGI cover. Customising them could invalidate cover.
Most, but not all providers of RGI cover, charge for referencing each tenant and/or guarantor. Usually the costs of referencing is a relatively small portion of the cost of cover. Do check how much referencing costs as some companies charge for the full package whether cover is declined or not.
The above is not the be all and end all of the ‘due diligence’ you should undertake before agreeing to let your property. If a tenant causes damage to your property an RGI policy will not cover the costs of any repairs. Below is a list of some of the other things I strongly recommend you do as part of your ‘due diligence’
I always recommend people to ask lots of questions, read all of our newsletters and to join a landlords association. Whether you own and rent out just one property or a huge portfolio you are bound by the same laws.
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