Buy-To-Let Risk Management – Investigating the Nuances of the Agent/Tenant Relationship

Buy-To-Let Risk Management – Investigating the Nuances of the Agent/Tenant Relationship

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Given that the sky-rocketing cost of electricity in South Africa, compounded by increases in other costs related to property ownership, including municipal services such as water, refuse removal and sanitation, buy-to-let property owners must manage the growing risk they face with regard to utility costs.

Legally the owner of a property is responsible for the payment of utilities, including water and electricity consumption. The risk, of course, for buy-to-let investors is that the tenant does not pay the utilities bill, leaving the investor liable for the account. And the risk of late payment or non-payment of utilities is dramatically increased as utility costs escalate – increasing the possibility of tenants running up water and electricity accounts they cannot pay.

Disputes, late payments and non-payments of utilities pose a significant risk and a cash flow burden on the property owner. Fortunately there are ways to mitigate this risk.

The agreement
The starting point to managing this risk is to formally stipulate the responsibility of the tenant with regard to utilities costs in the lease agreement. A specific deposit for utilities should also be collected.

However, it is recommended that a separate agreement is entered into between the property owner and the tenant for the supply of water and electricity to the premises. The agreement must be clear in stipulating the payment arrangements and a pro-active approach to immediately address arrear amounts is essential.

Rental management
If a responsible rental agent is appointed to manage the tenant and the property, utilities payments should not be a risk. Usually there is no cost, or only a small charge, for managing these accounts, since most professional rental agents prefer to take control of this aspect to protect the owner and the tenant.

Rental agents will provide statements to the owner and the tenants, collect the amounts outstanding and ensure that all utility accounts are settled correctly and in time, to prevent a disruption of the supply. Investors must clearly communicate the instruction to manage these accounts to the rental manager and retain proof in writing.

Rental guarantee
Certain rental insurance or rental guarantee products offer an option to include utility payments. This means the property owner is assured of receiving the full utility payment on time, regardless of whether or not the tenant has paid. The product provider will then take proactive measures to collect the outstanding amount from the tenant, but the owner’s cash flow will not be impacted by the late or non-payment of the utility account.

Prepaid meters
Prepaid meters for water and electricity are another solution to consider. The latest state-of-the art prepaid meters, which record all consumption, can be recharged via the Internet or SMS. It completely removes the responsibility from the owner and the management agent, while tenants can monitor their usage, eradicating the possibility of unexpectedly high accounts. This ultimately eliminates the risk of disputes, late payments and non-payments.
Whichever solution is selected, property owners must not lose sight of the fact that they remain ultimately responsible for the payment of the utilities accounts for the property. It is all about managing the risk, and where this management role is delegated to a third party, it is important to clearly stipulate in writing exactly how the delegated control will exercised to minimise the risk.

By Gert van Staden

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