Rent to Rent, Guaranteed Rent and Housing Benefit

Incredible though it may seem, many landlords entrusted to middlemen companies who said they would find them tenants and pay a guaranteed rent for a period of 3 or more years. Now, it seems, a few of these companies appears to have gone bust taking all the housing benefit rent money that had been paid over by the councils with them. Oh dear!

A good example was featured on the Channel 4 news recently and involved a company called London Housing Solutions.

We used to see many of these companies at property shows extolling what they offered to landlords. The pitch to landlords was usually along the lines of, “We will take away the hassle of finding and managing tenants for you and pay you a guaranteed rent for X number of years, whether the property is occupied or not, and we will even look after all the maintenance bills, so you don’t have to worry about anything”.

Sometimes the idea behind this is called “Rent to Rent” and it has attracted many entrepreneurs attracted to the private rented sector as a good place to make fast profits on the margins from the heady and deadly cocktail of time-stressed landlords and councils whose grasp of how the private rented sector works is weak.

So, how does it work?

Rent to Rent – How it Works

Step One
Well, first you need the kind of landlords who think that these kinds of middlemen companies are really offering a blue chip guarantee. Check!. Yep, there are lots of the gullible and / or time constrained types of landlords out there.
Step Two
Then the middleman company need access to lots of tenants on housing benefit. Check! Yep, there is no shortage of these in London and the councils are more than happy to supply lots of them to any agency or landlord who knocks on their door.
Step Three
The middleman company / agent will sign a contract with the landlord saying it will pay an, ahem, “guaranteed rent”. The landlord will sign a document saying the middleman company is his agent, which then allows the middleman to contact the council and get lots of folk on housing benefit in to the property. In all cases, the people waiting for homes are in “housing need”, and this is crucial because it then allows the council to pay the housing benefit direct to the agent.

Often, but not always, the middleman company will pack in as many people as possible into a property, often on single room rents, to maximise their income. They then profit on the margin between what they get in from the state and what they pay the landlord.

(Nothing illegal in a landlord doing this, of course. But it’s always a breach of the mortgage lenders terms and conditions to sublet in this way. Plus it will invalidate your insurance too. So, if you have a total loss, (say, if the property burns down), don’t expect your insurance company to pay out. They won’t!)

The council is just happy it has got some more people off their housing waiting list – and frankly often really does not care over much about the quality of the accommodation or even how many people live there, unless a complaint is made. (These days they may be too busy having their attention distracted trying to set up licensing schemes and such other nonsense!)

Of course, that is how it is supposed to work.

How the Model Fails

Where it all comes crashing down is either that the people behind the middlemen companies turn out to be fraudsters and one day skip to Brazil, or, as is more normally the case, the reality dawns on the middlemen “rent to rent” companies that the time and money costs of dealing with folk on housing benefit means there is actually no margin left in it for them, once they have paid the landlords.

Even with a linked maintenance company willing to do the usual letting agent trick of adding a hefty percentage to any repair bill, the model is still hard to make work. (Experienced folks know that there is a good reason why most landlords, commercial letting agents and some mortgage lenders do not deal with tenants who are on full housing benefit or house sharers / HMOs!).

When it all crashes we end up with landlords who have not been paid the “guaranteed” rent whilst councils say they paid the housing benefit to the middleman agency company in good faith. Cue much finger pointing and calls to legal teams. Meanwhile, the poor tenants face eviction (and they will, once again, end up on the councils housing waiting list). See footnote re possible legal avenues.

In one of the most recent examples of this, we know for a fact that many landlords in SE London had flagged up to their local councils their concerns about the middlemen companies, (e.g. they were not being paid) – but the councils are alleged to have continued to pay out the housing benefit to the agents.

Councils Have To Improve Understanding of the PRS

To make the whole thing work for the middlemen companies, requires local councils who refuse to hire in real expertise from people who understand the private rented sector. As councils are too often usually a little uncertain about how to connect with private landlords to get them onside to make their properties available via the councils’ own efforts, they are often forced to use the middlemen.

Some local councils have often tried to set up local letting agencies of their own, under their control to avoid the types of problems shown in the Channel 4 news item. Usually, they have failed because they simply will not engage experts who really understand the private rented sector or because they try to do it in-house.

This is like asking your GP to design and build a plane. Your GP may be a bright guy or lady but I’m not going to take a test flight on their aeroplanes.

Occasionally, at LettingFocus.com we work with far sighted councils who want to set up their own letting agency to manage such schemes – and do it properly.

Footnote: 1. Lawyers will be aware that where the middleman companies made representations that they were acting along with the consent or even guarantee of the councils, private landlords might have cause to look to the councils to make a claim for their losses. Cue much legal costs for the landlords though and don’t expect councils to admit responsibility readily.

2. Getting the tenants out will be a real problem, especially if the scam guaranteed rent company has not been yet declared bankrupt. (You will not have a contract with the tenants, so could be stuck with them forever, in the worst case).

 

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