TENANT DEPOSITS- ARE THEY REALLY WORTH THE EFFORT?

by Angela McLachlan, Director of Letfirst

Deposits concern me. I understand them and why they are used. I also recognise they are designed  to protect landlords and letting agents from the costs of damage at the end of a tenancy. The reason for my concern is that discussions and debates about deposits seem to provoke angry reactions with both sides citing anecdote as evidence and proof of each other’s negligence and dishonesty.  

For any innocent walking into the midst of the ding-dong, one could be forgiven for thinking that landlords and tenants were on opposing sides of a war zone.  In actual fact, most landlords and tenants get on quite well. They have the odd disagreement, but overall, they are generally quite a peaceable bunch quietly getting on with their lives, with tenants paying the rent and landlords fixing the washing machine.

There are of course, exceptions to the rule. The small percentage of landlords who deliberately evade regulation and legislation are not representative of the thousands of landlords offering good quality properties to people from all walks of life.  Likewise, the small percentage of tenants who wilfully or neglectfully damage their property are in no way representative of tenant behaviour.

So why is the issue of the deposit fused with such distrust? The recent introduction of the Tenancy Deposit Scheme in Scotland aims to diffuse some of the problems of deposit management by arbitrating in the event of a dispute. This is good news, particularly for tenants with landlords who would seek to withhold more than necessary. But, coming back to my earlier point, most landlords and tenants have good relationships and haven't, and probably never will need arbitration to sort out a disagreement over a deposit.

The bigger question is whether deposits actually act as a deterrent to the minority who behave badly? I would say no. The minority of bad landlords are under the radar anyway so poor practice in all areas of tenancy management will continue, with or without a deposit.  And the minority of tenants who have no respect for the property probably won't pay their rent in the last couple of months of their tenancy because they know they have no chance of getting their deposit back. So, in  the few cases where a deposit may actually be useful, a landlord has no real chance of recovery.

Is the deposit therefore more of a ritualistic transaction which offers no real benefit to anyone?

Are deposits not simply a waste of time and furthermore actually act as a barrier to letting?

It was such questions that led to the creation of Letfirst.

On average, a deposit and one month's rent in advance costs around £1000 - £1500, which is a lot of money, particularly these days when people have less income than before and less access to credit. This led to questions around how many people were actually denied access to a private let who could afford the monthly rent, but simply couldn't raise money to cover the up-front costs? 

This figure was not possible to quantify, but intuitively we knew it was high and we anticipated this number could only rise given the combined effects of the economic downturn and changes within the housing market. With mortgages nigh on impossible to secure and social housing in short supply, private renting was going to become a far more attractive, and in some cases the only option for people looking to find a home.

It was against this backdrop that Letfirst was launched and we began to persuade landlords round to our view.  We had no expectation that any landlord would simply agree with us and it would be fair to say that our position was met with some scepticism. We recognised that in order to win confidence we had to put our money where our mouth was and share the financial risks - real or perceived - associated with the absence of a deposit.

Letfirst achieved this by offering landlords Guaranteed Rent, so, should the worst case scenario arise and a  tenant does damage the property, then the landlord won't have to absorb the total costs associated with these types of situations.  No business is ever risk free, but by turning the issue of deposit management on its head, we were able to have a more pragmatic discussion around risk management in the lettings business.

The upshot? Letfirst has been operating for just over 3 years and in that time have secured homes for nearly 1000 people in Edinburgh alone and we are now operating in Midlothian and East Lothian. Letfirst properties are not vacant for long due to high demand from a previously untapped customer base. This is good news for landlords, who, let's not forget, are as affected by the economic downturn as anyone else. Mortgages, council tax and utility bills still need to be paid on vacant properties, so the key objective, for landlords as well as tenants is to secure a tenancy.

Which brings me back to where I started. Deposits bother me - but is holding out for a deposit the best way forward, particularly when it's a toothless tiger anyway?

For more information on how Letfirst find the perfect match between people and property, you can visit the website here.