Validating Potential Tenants for Your Rental Properties
As a residential landlord, you need to be able to trust your tenants to pay their rent and to pay on time. It is likely you will be relying on their payments to enable you to pay your mortgage and so if your tenant falls into arrears you may go into arrears also and could end with the property being repossessed.
It is therefore important to vet any proposed tenant carefully. You need to check they have the means to pay the rent and establish as far as possible whether they have a good record as a tenant. It is impossible to be 100% of course, but there are steps that can be taken to reduce risk.
Buying a Property With a Sitting Tenant
If you are looking to buy a rental property then one of the best ways to protect yourself might be to look for a property that already has a sitting tenant, particularly if the tenant has been there for some time and the seller can confirm that he/she has a good record. It is unlikely that a person who has made a property their long term home will all of a sudden start to default, unless of course they have a change of financial circumstances, which can happen to anyone.
You should be careful to take what the seller says at face value however. He is obliged not to lie and you may be able to sue if he does, but nonetheless you should ask for a payment history, from the letting agent if one is involved, and do the usual credit checks.
Letting to Friends and Family
Letting to friends, family and people you know personally can be a good option as you should be able to vouch for them. If there are any problems, for example if they run into temporary financial difficulty or if something needs to be repaired by you, it could be easier to come to a mutually satisfactory arrangement.
Beware however of the potential strain that could be placed on your relationship your tenant default, leaving in the position of having to take legal action.
Obtain Proper References
If you are taking out insurance cover against legal expenses and a rent guarantee then your insurers will insist you obtain proper references, and even if you are not you should do this anyway. You should obtain employers references, references from a previous landlord or letting agent and credit references.
If you are obtaining an employer’s reference you should ask for it to be sent directly to you from the employer and not via the proposed tenant. Telephone the employer on receipt to check they actually sent it. You should be looking for details of the tenant’s salary, confirmation of how long they have worked there and if the contract is not permanent, the length of the contract. If the tenant has exaggerated his salary or if he is likely to become unemployed in the near future then alarm bells should ring.
You can only obtain this information from your tenant’s employer with his consent and you should not make an approach to an employer without consent.
Getting references from a former landlord will show you whether they have been reliable tenants in the past. Ask whether they generally made their payments on time, whether the landlord received any complaints about their conduct from neighbours or other third parties and whether they left any damage when they left.
A credit check with a credit reference agency is also advisable as is a bankruptcy search, a search of the Individual Insolvency Register maintained by the Insolvency Service and accessible online (this will reveal IVAs as well as bankruptcies) and county court searches. It is possible employ an agent to carry out these checks and although this is an extra cost, it may be beneficial in the long run.
Anti Money Laundering Checks
The Proceeds of Crime Act 2002 and Money Laundering Regulations place an obligation on all of us to take steps to avoid becoming unwitting accessories to acts of money laundering. Money laundering is the act of disguising the source of money which is the proceeds of criminal activity by putting to legitimate use, so if a criminal uses money acquired from, say, selling stolen goods, to pay you the rent then he may be money laundering. If you accept the money then you have assisted him and depending on what steps you have taken to validate the tenant you may have some culpability.
The law does not expect us to be detectives but it does expect that we should take reasonable precautions. If, looking at the tenant’s monthly salary as disclosed to you, it does not appear that he should be able to afford to pay the rent then ask yourself, where is the money coming from? At the other end of the spectrum, if the tenant appears quite affluent and your property is at the bottom end of the market, ask yourself why he has chosen to rent it.
You should if possible avoid accepting payments is cash and should insist that the money is paid from the tenant’s own bank account, though some common sense may need to be applied here, for example it may be acceptable for a spouse or parent to pay. If so however the payer should be subjected to the same checks as the tenant.
You should ask to see identification documents from your tenant. You should ask for a passport, photocard driver’s licence, national identity card or armed forces ID card and also some proof of their address such as a council tax bill, utility bill or bank statement. You should take copies of these documents and retain them.
Be Thorough But Be Efficient
Once a potential tenant has been found it’s important to process the formalities as quickly as possible. You want to start collecting rent and the tenant will want to move in. You don’t want to lose a tenant as a result of a delay. Nonetheless it is important to be thorough so make sure you know exactly what you need to do and how you are going to achieve it before looking for tenants.
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