Pro-active Tenant Procedures

By Coert Coetzee

In August, for the first time in a long while I had a non-paying tenant in one of my units, and the handling of the matter by the parties involved was unsatisfactory. It made me think, and made me realise that taking pro-active action is vital. Let me first give you a little bit of background about the problem.

The problem happened in a town where I still use one of my old letting agents because Treoc Property Manager doesn’t have a branch there. The tenant did not pay, and the letting agent requested the managing agent of the complex’s body corporate to cut off the electricity supply. The managing agent refused because he said they do not want to get involved in disputes between owners and tenants. When I heard about this I immediately contacted the managing agents and told them that I did not want to cut off the power to put pressure on the tenant, but rather to limit further costs for unpaid electricity, and if they refused to cut off the power supply then I was giving them official notice that I would not be responsible for any further electricity accounts. I confirmed this with them in writing, and also pointed out that if they fulfilled my request I would indemnify them against any possible claim for damages instituted by the tenant.

The managing agents cut off the power supply that very day and confirmed this to me in writing. They also informed the tenant in writing that the power had been cut off by order of the owner and that it would only be switched on again with permission from the owner. A few days later the tenant paid his rental, and I think he will think very carefully before refusing to pay again.

In the end the result was satisfactory, in the sense that the rental had been paid, but the procedure of collecting it was not satisfactory. There was now also a big question mark hanging over the pre-screening of tenants, and so I decided to replace my previous verbal instructions to my letting agents with written instructions.

Prevention is better than cure, and so it is important that tenants are carefully screened. My letting agents have all kinds of screening methods, and that's great, but I have two criteria in this regard that are not at all negotiable: checking the credit record, and establishing a good prior rental history.

Research

What I am going to share now with you is controversial and untested. The only reason I am sharing it with you is to throw a stone in the bush and get your opinion on it. My advice is not to use the material unless you got proper legal advice about it first.

We have people from all walks of life amongst our Platinum Members, like seasoned investors, attorneys, letting agents etc. I want to call on all of you to help me with research on how far we can go to manage non paying tenants. If you do not have the knowledge yourself, but you know somebody who does, please forward the documents I am going to share with you to them for an opinion and share it with us.

I have drawn up a simple contract called the Letting Agent Guarantee that can be used on its own or as an addendum to the agreement between you and your letting agent. In this contract we agree on the screening steps that will be taken, and that the agent will keep written proof of these on file. We also agree that if problems arise with the tenant and the agent cannot provide the agreed-upon proof of screening, the agent will be held personally liable for any losses suffered by the owner. An example of this Letting Agent Guarantee is available to Platinum Members on the Members Forum of my website. I placed it on the Forum, because then it is easy to comment where we can all see the comments.

I have also instituted a new procedure for all new tenants on my portfolios. Part of the above-mentioned agreement with the letting agent is that they will apply this procedure meticulously to all new tenants and keep proof of it on file. This procedure is revolutionary and although some aspects may already be being applied to a greater or lesser degree, the formalisation thereof is certainly a first in South Africa. But before I get to that I would like to give you a bit of background.

Over the years I have spoken to many attorneys about what one can do to persuade non-paying tenants to pay. The conclusion drawn from these conversations is that we cannot do much legally. Almost any action that I have suggested to them has been slated as illegal. Fair enough, I accept this, but please keep in mind that not paying rent is also illegal. So if I have to fight illegal actions with illegal actions, then that's just how it must be. The proverb says "two wrongs never make a right", but with tenants it works rather differently.

I recently read that property owners in England act very severely against non-paying tenants. If the rent has not been paid by the third of the month, they simply carry the tenant's furniture out onto the pavement and cover it with a tarpaulin. When he gets there that night, the new tenant may have already moved in. As the English say, "It is unlawful, but it is not illegal." Apparently you can't be arrested for this, but the court will most likely force you to reinstate the tenant's occupation. That's fine, but the court also has to protect the new tenant who has already moved in, and it may take a long time to get him out. Whatever the case, the English rely on the fact that the tenant will not start a drawn-out and expensive civil court case. This is the gamble you take when you do these things, but statistics show that the odds are on our side.

I have decided to eliminate as much of the risk held by unorthodox methods as possible, by agreeing beforehand with the tenant about the methods that will be used, and getting his permission to use them. I have set up a Tenant Guarantee as an addendum to the standard rental contract that explains step-by-step what will happen if the rent has not been paid by the third of the month. The power will be cut off, the furniture will be removed, the locks will be changed, and so on. If my tenant gives permission for this beforehand, then how can it be illegal? If the applicant refuses to sign the document, it shows me that he’s not planning to be a good payer, and so he is immediately disqualified. I would rather have a house standing empty than put in a tenant who is not 100% right. The TREOC Tenant Guarantee also makes provision for me to hold the tenant personally liable for any losses that I may suffer, and it states that the tenant indemnifies me against liability for any losses that he may suffer.

Platinum members can find my proposed TREOC Letting Agent Guarantee and the proposed TREOC Tenant Guarantee on new threads with the same names under the category, “Property Management” on the Members Forum of my website www.treoc.com. Remember to log in first. I know a lot of people are going to ask whether these two guarantees are legal and will stand up in court. I don't know and this is the reason for this research, but whatever the outcome of the research, I would rather have them in place than nothing. Maybe, just maybe, these two guarantees will sway the common law in my favour.

My apologies to my Non-Platinum readers for not sharing the content of the proposed guarantees with you, but it are just too sensitive. You have to understand the TREOC Way first and all Platinum Members do.

Growth in house prices

This week ABSA and Standard Bank released their latest year on year house price growth for September 2007. They use different systems and I am not going into the detail of that because the average investor is only interested in the bottom line. According to ABSA house prices for residential went up with 14.2 % and according to Standard Bank it is only 5.7%. Our members should firstly keep in mind that this is a general average and not the growth on TREOC Type Properties which will be a lot better.

However, let’s focus on the worst one of the two namely Standard Bank’s 5.7%. As you can imagine the economists and journalists are going to use the most sensational one and due to their lack of knowledge and negative nature they make all kinds of wild assumptions. According to one of these articles this week, money in the bank at 10% interest beats a property investment’s returns. Can you believe this! I wish they can make it compulsory for journalists and economists to attend my seminar before they send such wild assumptions out into the world.

I think all journalist and economist are supposed to know the OPM principle. Savvy property investors always buy with the banks money and always use tenants to help pay the bank. This is called OPM or Other People’s Money. Our actual investment is only the shortfall on the monthly income account due to the fact that the rent is not enough for bond repayments and running cost. I ran Standard Bank’s figures through the TREOC Investor Software and it shows clearly that on a worst case scenario of 5.7% growth the net return on investment will be more than 30% per annum.

On ABSA’s figure of 14.2% we can expect a return of 155% per annum!

Our type of property normally outperforms the market by six percentage points. Thus on 20% growth our return is still a magnificent 240%. This is what we call gearing.

AMS

I received questions and marketing material from our members about a money scheme called AMS. One of the directors is a certain Mr Nico Coetzee. This company used my name in their material without my permission.

Please take note that I have nothing to do with them and I definitely do not endorse their products. Mr Coetzee is also not related to me.

Happy House Hunting!