Residential rental sector regulation is driving changes in the way landlords pay for managed rental services, suggests new research by PayProp. Andre van Rooyen, Head of Sales at PayProp says that there have been substantial changes in how agents bill landlords to cover the cost of providing a managed rental service.
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“Residential rentals are becoming more regulated and more professional,” says Van Rooyen. “Inspections are a legal requirement and give both landlords and tenants vital protection, and the government has also proposed making affordability checks mandatory. Critically, they also help to prevent some of the most common – and costly – disputes between landlords and tenants.”
“But they also create long and costly administrative processes for rental agents. By charging for these services, agents can cover their costs while also keeping their fee structures transparent instead of rolling everything into their commission.”
Covering the costs of compliance
The costs of regulatory compliance can be found throughout the tenancy.
Incoming and outgoing inspections are mandated under the Rental Housing Act and must be attended by both the landlord and the tenant. Without compliant inspections at the start and end of the tenancy, the tenant cannot be charged for damage caused to the property during the tenancy. Even if fully compliant inspections are carried out, the landlord may still need to be able to provide evidence of the damage caused if the tenant tries to dispute it.
“Inspecting properties is time-consuming and involves substantial administrative work,” says Van Rooyen. “Properties need to be photographed from top to bottom with timestamps and detailed notes, and those records need to be stored securely. But it’s also of immense value to the landlord as it ensures that their investments are kept in good condition, and for the tenant they ensure that any proposed deductions from the deposit are well-evidenced.”
Most agencies will also charge the tenant an application fee when they apply to rent the property, as well as an initial lease fee once their application is accepted. This covers the cost of tenant vetting through credit scoring and other means, ensuring that the tenant can comfortably afford the property and avoiding long and expensive eviction proceedings later in the lease.
It also helps towards the cost of deposit protection. While landlords aren’t required to take a deposit, it gives them some protection against costs caused by the tenant. However, deposits must be kept in an interest-bearing account for the benefit of the tenant. Furthermore, agencies will often insure their deposit books so that landlords and tenants are always protected – but this comes at a significant cost on a large deposit book.
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Adding up the bill
The latest PayProp State of the Rental Industry survey looked into the amounts that agents are charging for inspections, lease setup and other essential services.
According to the State of the Rental Industry Survey, most inspection fees fall into the R500 - R749 range – around 5 to 8% of the average monthly rent. And those agents charging fees tend to charge the tenant, especially when it comes to outgoing inspections.
78.6% of respondents said they charge prospective tenants a fee to apply for their rental properties, an increase of just under 10% from last year’s report. Van Rooyen says the amounts in question are typically quite low, and have fallen since last year – possibly because agencies introducing application fees for the first time are starting with a low amountl. The results show that 50.5% of application fees are R499 or less – less than two days of rent payments at the average rental amount.
89.7% of agencies also charge tenants an initial lease fee to cover the legal and administrative costs of setting up a lease. These fees are most commonly between R750 and R999 and have actually fallen from R1000 - R1249 in last year's results.
Minimising costs with the use of technology
“Monthly admin fees, application fees and inspection fees are helping agencies cover the cost of compliance, and in addition, their growing use of technology has helped them deliver services more efficiently,” says van Rooyen. “Agencies benefiting from tech-enabled efficiencies are able to minimise the cost of compliance-driven services, while offering a better service to landlords and tenants.”
But many others have failed to recoup their costs. According to the State of the Rental Industry Survey, large percentages of agencies carry out inspections for free despite the high cost of carrying them out properly. Reflecting this billing shortfall, commission – still the main source of income for managed rentals – has remained very stable, with around two thirds of agencies charging 10% of the monthly rent.
Van Rooyen says the clear benefits of high-value agency services to landlord and tenants justify well-specified charges for inspection, lease initiation and monthly administration.
- Agencies using tech to streamline inspections are producing more thorough inspection reports that can hold up if challenged by tenants.
- Tenant vetting has evolved beyond simple credit scoring, allowing agents and tenants to place safer tenants who pay their rent more reliably.
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But perhaps the biggest has been in payment processing. Whereas landlords once expected to receive their rent a week after it arrived, agencies using automated reconciliation systems to process payments compliantly can now pay the landlord on the same day – helping them to more easily pay for their own expenses.
“Technologically advanced rental agencies are delivering amazing value for the services they provide,” says Van Rooyen. “Landlords and tenants alike benefit from faster and more convenient payments, thorough inspections and vetting, and a smoother landlord-tenant relationship mediated by expert agents. As more agencies move towards transparent pricing of inspections, application processing and other services, it’s important for all parties to the rental agreement to weigh up those costs against the real value they receive.”
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