With increased financial pressure on everyone in the current economic climate, landlords need to be vigilant as to how they vet and process potential tenants - to avoid the risk of future defaults. Managing tenant risk has therefore become crucial. As with all risks, tenant risk is best managed upfront and I would recommend the following steps to do so.
1. Do a thorough credit, reference and FICA check
It starts with doing a thorough credit check on prospective tenants and a reference check with their previous landlords. A credit check gives you insight into how they manage their financial affairs and a reference check with their previous landlords help you find out if they maintained the property in good condition, respected any house rules that were in place and paid their rent on time.
Landlords and tenants might not be aware that estate agents are legally obliged to obtain proof of their identity and proof of address according to the Financial Intelligence Centre Act, commonly referred to as FICA. Your agent will require sight of all original documents or, alternatively, certified copies. Another vital aspect of a rental is when providing original identity documents, these will need to be seen in the presence of the document holder.
2. Confirm income earning with current employer
The next step is an income reference check with their current employer. It is important to confirm the prospective tenant’s employment status as well as their income. As a general rule, the monthly rental should be more or less 30% of the tenant’s gross income.
Unfortunately, in the current economic environment, many people have wound up with black marks on their credit records sometimes through no real fault of their own. When people lose their jobs, it’s difficult to pay the bills, so finding tenants with perfect credit records may not always be that easy. But there are ways to limit your risk if you find you need to accept a tenant with a questionable credit history.
Firstly, take a larger deposit if the tenant has any marks against his name on his credit record. Secondly, ask for more than one month’s rent in advance and, thirdly, negotiate a shorter term lease, with an option to extend, preferably an initial period of six months. That way, over the six month period, you can assess the tenant yourself and determine whether you’d like to extend the lease or not.
Of course, not everyone can afford a large deposit and more rent upfront, but holding out for a tenant whose references check out is often the right strategy.
3. Pre- and post-site inspection
Prior to the tenant moving in, landlords would be advised to have a full-site inspection done, which would consist of a full report on the status of the property as well as photos to confirm these facts. It is also recommended that a follow-up site inspection is done when the tenant vacates at the end of the lease period, prior to refunding the deposit. Site inspections can also be done midway through the lease if the landlord has concerns about the tenant’s status.
Remember that eviction is a lengthy and costly process. You could lose months of rental income, not to mention thousands of rands in legal fees if it comes to having to effect an eviction.
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