Putting Value into Property Management

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Are you using this simple technique to filter out undesirable tenants?

14th February 2013
Why it’s important that your prospective tenant pays four weeks bond and two weeks rent in advance, in cash.

Discover why it’s important that your prospective tenant pays four weeks bond and two weeks rent in advance, in cash.

The atmosphere in the board room is tense. While the conversation’s flowing, the stakes are high for both people sat in the room: the employer, and the job applicant.

The job applicant will say whatever he can to get the job; while the employer knows that she needs to suss out the applicant as thoroughly as possible. Making an employment mistake would not reflect well on her; she has her eye on a promotion herself.

Most of us have been in this stressful position

Chances are you know what it’s like to apply for a job – or you may even have experience of recruiting employees. But no matter how nerve-wracking interviews may be, at the end of the day, it’s just a job. The applicant has more job interviews lined up; and the employer has the means to deal with recruitment mistakes if this arises. Recruitment mistakes might cost the company, but the personal cost to the manager in the boardroom is limited. The stakes aren’t nearly as high as with letting a property.

There are no formal interviews when you let a property

In the property letting process there’s no formal interview, yet the landlord has a crucial decision to make when choosing to let a property to an applicant. After all, choosing the wrong applicant could cause all manner of issues: from damaged property, missed rental payments, complaints from the neighbours, and all sorts of other things that could cause him sleepless nights and financial worries.

So how do you choose the right applicant?

Other than checking the property applicant’s references and creditworthiness, and of course your own gut feeling about them, how else can you tell if they’re likely to be a quality tenant or not? It’s not as if you can force them to undertake psychometric testing, like many employers do!

In the property letting process, it can be the small things that are the biggest giveaway. And what’s proven to be the most revealing filter of all is whether a tenant can come up with the entire bond and rent in advance… in cash.

Money talks

The ability for someone to lay their hands on cash at short notice says that they are solvent and have financial means. After all, anyone can whip out a credit card or a cheque book, but in our 25 years of experience of property management, cash payments are the acid test. And it’s vital that the entire amount is paid in cash.

How much cash should you ask for?

Usually a bond consists of a payment equivalent to four weeks of rent, and the tenant also needs to pre-pay the first two weeks of rent: a total of six weeks worth of rental payments. And that’s what a Property Manager who’s focused on getting the best possible tenant will ask for. However, not all Property Managers do this.

Some Property Managers don’t ask for this full amount upfront

Some Property Managers only require a tenant to pay one week of rent and the letting fee at the time of signing the Tenancy Agreement. The balance of the bond and rent in advance is paid to the Property Manager on the day that the tenant picks up the keys and moves into the property.

This practice isn’t acceptable, as it’s not acting in the property owner’s best interest. Why? Well, the Property Manager gets their letting fee paid right at the start – yet the property owner is expected to wait perhaps another three weeks or longer till the balance of rent and bond are paid for! It is of concern that some property managers actually allow the tenant to pay the bond off over a number of weeks or months, following the start of the new tenancy.

Why it’s risky to delay these payments

Delaying the rent and bond payment is risky, as it’s not unheard of for tenants to default on Day One of the new tenancy. This happens when they’ve found somewhere better/cheaper/nicer to live, or simply their short-term priorities have changed. Yet this is far less likely to happen if they’ve committed six weeks’ rent upfront.

With just one week’s rent in advance paid and with no bond at the bond centre, the only recourse for the property owner is to pursue the tenant through the Tenancy Tribunal for the two weeks’ rent in advance that would be owing on default. And if the tenant caused any damage on Day One, there wouldn’t be any bond available to offset against repair costs. Under the RTA (Residential Tenancies Act), a maximum of four weeks’ bond can be collected by the landlord.

Experienced property owners treat the tenancy application process like a job application

Property owners with some experience under their belt not only insist on the entire bond (i.e. four weeks) and two weeks’ rent to be paid up-front in cash, they also realise that finding a tenant is a bit like recruiting an employee. Part of the application process is the tenant demonstrating that they can meet the requirements of the tenancy. And that includes the very important requirement of being able to afford the tenancy. This is a bit like the employer satisfying herself that the prospective employee will actually be able to do the job.

Example: if your property’s worth $400,000, the rent for it may (as an example) be $400 per week. Two weeks’ rent in advance plus four weeks’ bond makes the total amount to be pre-paid $2,400. If a potential tenant can’t come up with $2,400 in exchange for a $400,000 property, then perhaps they aren’t the best applicant?

Summary

You should be using the tenant application process as a screening process to filter out undesirable tenants. Be sure to insist on a cash payment upfront for two weeks’ rent and four weeks’ worth of rent as bond.

 


 

Next Step:

Discover how to find out if a Property Manager is acting in your best interests (or not) with our Free Report, “Why Some Property Management Ends In Disaster”. Get your copy now!