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Jun 15
0

Tenant risk: 5 metrics to consider

By | Evictions, Lease Agreement, Tenants

Spotting high-risk tenants

At Eviction Lawyers South Africa, we help property owners and landlords manage their tenant relationships. Eviction should be a last resort. Avoiding the need for eviction starts with tenant selection. As this article from BizCommunity explains, there are certain risks to look out for. If you can avoid letting your property to high-risk tenants, you are in for a much smoother ride.
Reprinted from BizCommunity – 2021-06-07
According to the results from the annual PayProp State of the Rental Industry survey, over 50% of participants said finding good tenants in the current market is their biggest challenge.
tenant risk

Image source: www.pexels.com

“In the coming months, it will be even more important for rental agents to be able to distinguish a low-risk tenant from a high-risk one, thereby better serving the needs of their customers,” says PayProp head of data analytics Johette Smuts.

In a recent follow-up report, the quarterly PayProp Rental Index for Q1 2021, the company uses credit metrics to identify and analyse different tenant risk levels to further help agents be more informed when choosing prospective tenants. As Smuts says, “In a market where everyone is struggling to find good tenants, it pays to know what to look for!”

Smuts says that minimum-risk tenants represented almost 40% of the credit checks done through PayProp in Q1 2021 – slightly higher even than in Q1 2020. More than 60% of tenants fall into the combined minimum- and low-risk categories, while only a quarter were labelled as high-risk. “While this seems counterintuitive, it could be that high-risk tenants fall out of the vetting process even before a credit check is done.”

1. Income

Smuts explains that minimum-risk tenants tend to have higher incomes than those in other categories, and by quite a margin. “In Q1, this group had an average monthly net income of close to R42,000 – almost R8,000 higher than low-risk tenants, and more than R15,000 more than high-risk tenants.

2. CPA and NLR accounts

Tenants across all risk categories have between 9 and 11 Credit Provider Association (CPA) accounts and National Loan Register (NLR) accounts.

Smuts says there is a fundamental difference between the two, with CPA accounts regarded as ‘good’ debt and NLR credit as ‘bad’ debt on credit checks. “You can expect a prospective tenant to have several CPA accounts, including things like insurance, mobile phone contracts, retail stores and vehicle finance,” she says.

“NLR accounts, on the other hand, are the ones you don’t want to see on a credit check. These include short-term loans from micro-lenders, usually with very high interest rates. A higher number of bad debt accounts can be indicative of a prospective tenant having needed additional funds to make it through the month or not qualifying for credit from other providers, both of which are warning signs.”

3. Major delinquencies

Unsurprisingly, high-risk tenants had more major delinquencies against them than other groups, at 41% of the tenant survey base compared to 25% of medium-risk tenants. A major delinquency can include various types of negative entries on an applicant’s credit record, such as judgements, notices, adverse accounts, etc. Less than 1% of minimum-risk tenants had a major delinquency against their name.

4. Debt

Riskier tenants tend to have a higher debt-to-income ratio than lower-risk ones, meaning they spend a higher percentage of their monthly income on debt repayments each month.

High-risk tenants both have a higher debt-to-income ratio (on average 47% in Q1) and spend smaller amounts on their debt repayments. The average high-risk tenant spent just over R12,500 a month on debt and other financial obligations, compared to minimum risk tenants, who spent almost R15,000 a month on repaying a lower average debt burden faster (25% of their income).

5. Credit score

Since tenants are placed into risk categories based on their credit score, minimum-risk tenants have higher (better) average credit scores than higher-risk tenants. The difference between the two is almost 100 points (690 vs 592).

Smuts says that in this time of economic difficulty, exacerbated by Covid-19 and tenants exiting the market, agents are well advised to have robust tenant selection partnerships in place.

SD Law is a law firm in Cape Town and Johannesburg with specialist eviction lawyers. If you are seeking an eviction, advise on drawing up a lease agreement, or help with troublesome tenants, we can advise you on how to act in the best interests of everyone involved. Contact Cape Town attorney Simon Dippenaar on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Jan 14
1

Evictions under the “adjusted” Alert Level 3 rules

By | COVID 19, Eviction news, Evictions, Lease Agreement, Rent

What is permitted under Level 3 rules?

There’s a strong sense of déjà vu in the country at the moment. If it weren’t for the weather, you might think it was July all over again. Despite high compliance with mask wearing and other COVID-19 prevention measures, we’re in the middle of a devastating second wave, partly due to a variant of the virus that does not appear to cause more severe illness but is considerably more contagious. So the government has had to rewind the Disaster Management Act back to Alert Level 3 (adjusted). Sale of alcohol is banned once again, and beaches and other public spaces are closed. What are the implications for landlords and tenants? Are evictions still permitted, as they were under Alert Level 1?

Alert Level 3 evictions – protection from eviction

Although the Level 3 regulations have been adjusted, certain core conditions remain. According to Section 37 (1) of the Disaster Management Act regulations for Alert Level 3, “A person may not be evicted from his or her land or home or have his or her place of residence demolished for the duration of the national state of disaster unless a competent court has granted an order authorising the eviction or demolition.”

Landlords may apply for an eviction order

However, the protection from eviction only extends to the execution of the eviction order. A landlord may still make application to the court for an eviction, which may be suspended or “stayed” until after the national state of disaster is lifted, or such time as the rules allow.

Furthermore, the court may allow an eviction if it is of the opinion that it is not just or equitable to suspend or stay the order. This might occur if, for example, an occupier is causing harm to others or there is a threat to life, or if the party applying for the order has taken reasonable steps in good faith to make alternative arrangements with all affected persons.

Commercial ubuntu

However, the regulations go to some lengths to stress the importance of fair practice by landlords…what we have called “commercial ubuntu”. The Act considers it unfair practice for a landlord to terminate services without:

  • Providing the tenant with reasonable notice and an opportunity to make representations
  • Making the necessary arrangements to reach an agreement regarding alternative payment arrangements, where applicable
  • Making arrangements for the ongoing provision of basic services
  • Waiving any penalties for the late payment of rental where the default is caused by the disaster, regardless of what form the penalty takes (e.g. a landlord cannot disguise it as an “administrative charge”)
  • Engaging reasonably and in good faith to make arrangements to cater for the extenuating circumstances of the disaster

This last point applies to both landlords and tenants. Government has called on all parties to engage with one another and keep the lines of communication open. This is the basis of commercial ubuntu.

Both parties may be impacted by the lockdown in its various guises. Tenants may have suffered loss of income and find it hard to pay rent. But landlords too may have bond payments to make that are affected by non-payment of rent. The rights and circumstances of all parties are equally important.

Landlords, tenants, lawyers and agents alike must all exercise social responsibility and compassion in the enforcement of lease conditions.

Don’t ignore problems

If your current situation is giving you cause for concern, don’t wait until the national disaster is over to take action. However bleak things may seem, there is always something that can be done. Talking to someone is the first step. If you don’t feel you can talk to the other party, talk to your lawyer or agent. At SD Law, we’ve been helping landlords and tenants negotiate leases and all manner of rental property matters for nearly 10 years. We can draw on our past experience to help you resolve your current issue. The sooner you take the first steps, the easier it is to find a solution.

Contact us today

Whether you are tenant or landlord, if you have questions or concerns about your existing lease agreement or the Alert Level 3 rules, contact Cape Town law firm SD Law for a confidential discussion. We will explain your rights and responsibilities and help you act with commercial ubuntu. Contact Simon now on 086 099 5146 or email him on info@sdlaw.co.za.

Further reading:

Jan 12
0

Landlords likely to have stricter credit and rental checks after Covid-19 financial impact

By | COVID 19, Lease Agreement, Rental deposit
Rental market likely to see stricter credit checks

Landlords are advised to use their judgement and approach each situation on a case-by-case basis. (iStock)

Reprinted from Fin24, by Carin Smith – 2021-01-11

  • Most South Africans rent the property where they stay
  • Many are now also without jobs or have experienced a drastic reduction in income due to the pandemic
  • Landlords are likely to apply increasingly strict credit and rental record checks

South Africa’s rental market is likely to show only very minimal growth – if any – due to the current combination of high vacancy rates and economic pressures on tenants, according to Gerhard Kotzé, managing director of the RealNet estate agency group.

In his view, most landlords and rental agents are likely to apply increasingly strict credit and rental record checks. Deposit requirements are also likely to rise.

“A very large number of quality tenants have become home buyers in 2020 due to the lower interest rates, and on top of that landlords have had to contend with extensive non-payment issues due to the economic effects of Covid-19 pandemic and lockdown, so they are already very cautious when it come to new tenants,” says Kotzé.

“And unfortunately, a large number of those who are likely to be looking for rental properties now are people who already have some financial problems. So, there will be a need to be even more careful.”

Alternatively, says Kotzé, many rental property owners will probably just decide to sell off their portfolios now, so astute investors who have the means to buy quickly should look out for the “bargain” flats and townhouses that will come on to their local markets as a result.

Grant Smee of Only Realty says even in the best circumstances, securing reliable tenants is tricky, but the pandemic has added an extra layer of complexity into the mix.

He says data shows most South Africans rent rather than own the property where they stay. Many are now without jobs or have experienced a drastic reduction in income, leaving them suddenly unable to afford rent.

“This shift gives rise to a situation in which tenants hold more power than before and has led to an increase in short-term rental agreements being signed. In addition, tenants are calling the shots in terms of deposit amounts and various other conditions which leave landlords feeling vulnerable,” says Smee.

Recent statistics from the Tenant Profile Network (TPN) indicate that 60.74% of tenants paid their rent on time during the last quarter of 2020, while 9% of all tenants are not paying rent at all. “Long-term rentals provide financial security for landlords, and in the past agreements were generally set up to protect the interests of both parties equally.

However, today, tenants may have more say in compromises when it comes to issues such as deposit payments too.

“In a market with excess rental stock, landlords may be more amenable to reduced deposits and short-term rentals in order to stand out from the crowd,” says Smee.

“Landlords looking to take advantage of the demand for the short-term letting market, need to ensure their property provides excellent value and a unique offering. Here factors such as location, price, quality and overall experience can ensure that they stand out from other competing units.”

Challenges for Landlords

Smee says landlords were largely unprepared for tenants being unable to pay during lockdown, leaving many of them without access to an open line of credit. Very few landlords have rent default insurance and payment holidays are now up.

“While tenants are certainly more able to demand compromise, and landlords are beholden to new pressures such as short-term rental agreements, it’s unlikely that tenants will be able to ‘strongarm’ landlords into drastically one-sided agreements,” says Smee.

Landlords are still considered to hold most of the negotiating power and retain the ability to write terms and conditions into leases which are favourable to them. On the other hand, landlords feeling the pressure to retain good tenants or adjust to the difficult current market may see fit to compromise and offer lower deposits and short-term rental agreements to remain competitive.”

Smee suggests that the current situation in the rental market requires agreeing on a middle ground, where both parties consider the other’s circumstances. This could include tenants paying an available rent, and landlords being more flexible by offering short-term rentals, deposit utilisation or rental deferment.  Landlords are advised to use their judgement and approach each situation on a case-by-case basis.

Links added by SD Law

Do you have questions about your lease agreement or rental deposit?

Whether you are tenant or landlord, if you have questions or concerns about your existing lease agreement or security deposit, contact Cape Town law firm SD Law for a confidential discussion. We will explain your rights and responsibilities to ensure a worry-free tenancy. Contact Simon now on 086 099 5146 or email him on info@sdlaw.co.za.

Further reading: