Ban on Letting Fees

[flyernzl]

I have been asked to appear on TVNZ Breakfast Show this coming Tuesday (Waitangi Day) to talk about Labour's plan to disallow letting fees.

Anyone one got any particularly insightful thoughts and/or opinions on this proposal that I can include at that time?

Barring any cancellation in favour of must-cover important developments (Hillary Barry chipping a fingernail, Jacinda announcing the colour she is going to paint the nursery walls) this is supposed to take place at 7.50am - no lie-in for me on the 6th!

[Nick G]

Don't you manage your own rentals tho? Why not get a PM in there?

[Nice]

Nick makes a good point, however I am sure you can represent the wider industry given the time constraints ?

The PM is off setting some of the costs of providing a service to the owner by charging this fee. If it is banned, more cost (but probably not the same amount) will go back to the owner, and this will be reflected in the rent, like any other cost of running the business.

Some PM companies also use this income to cover the cost of providing an after hours service to the prospective tenants. In times of demand as we are seeing in Wellington at the moment, imagine the cost and difficulty to the tenants if all viewings were conducted during normal business hours ? This is not a service to the owner at the moment but a clear benefit to the tenant.

Keeping these costs out of the rent means only those tenants on the move pay, not all tenants. This year in Wellington we have all seen much less movement in tenants, suggesting a much lower level of letting fees actually being paid.

[fuzzlevalve]

Surely main point is that the costs will be pushed to the landlords, who will increase rents to cover it. So end result is more cost to tenants through a weekly increase instead of one off charge? Achieves opposite of desired effect.

[Learning]

Putting the cat amongst the pigeons... why is the letting fee a weeks rent (plus GST or more) and not set amount? The work involved in setting up a $200/wk rental is practically the same as a $900+/wk rental. Rents have increased by silly amounts lately and by default so have letting fees.

Has the work involved in setting up a new tenancy changed at all in the last 12 months? No. So why does it cost the tenants $50 more now than it did 12 months ago?

[artemis]

The letting fee will not disappear. It will of course be added to the weekly rent if at all possible. It may not be possible if the rent can't realistically be raised. If there is a shortage of tenants in the price range, for example. Against that, not talking about a huge weekly increase even for more expensive places if there are multiple tenants.

What fuzzlevalve said is quite correct. Example - say $10 pw is added to the rent and is designed to cover the letting fee of $500. Tenants leave at the end of the year, the original fee is covered, and the next group pay the $10 pw. But if the tenants stay for 5 years, they are seriously out of pocket. The landlord does not know how long tenants will stay so has to make best efforts to recover the cost.

Prospective tenants can choose to apply only for properties with no letting fee, which is most private landlords. Still plenty of those around.

People who need help with accommodation costs can apply to WINZ for a grant or advance. Accommodation related reasons include accommodation, bond/tenancies and rent arrears. See Fig 4 at the below link, accommodation related is the largest dollar category at about $16million a quarter.

https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/benefit/latest-quarterly-results/hardship-assistance.html

Learning mentions a set amount. Could work, but how? Say there is a fixed fee of $300. A one bedroom rural cottage renting at $150pw might take a lot more work, and a lot more time, to let than say a 3 beddie renting at $900 pw in Newtown, Wellington that gets snapped up on day 1. In the first case, the PM works harder, has more expenses, and loses ongoing fees while it remains empty. And the reverse for the second case. This scenario might not come up in the interview but not a bad idea to have it in the back pocket in case.

There is a fiscal impact, though am not sure of the quantum. But the PM loses income so pays less income tax, or raises the weekly fee to put him/her back in the same position. The landlord gets more rental income so pays more income tax or expenses increase to pay the increased PM fee. Not a question for Breakfast TV but presumably The Treasury will require it to be covered. Along with the fiscal impact of ring fencing which will be significant.

I guess I am saying that the government has plucked a policy out of (shall we say) the air without thinking it through. When (if) the change goes to Select Committee I will be asking some of the above questions.

Meantime Peter, good luck, and I hope you get a fair hearing Tuesday.

[Bob Kane]

There seems to be a suggestion that if you ban letting fees then the rental/tenancy world will continue working without any changes.
That would be an example of getting something for nothing.
In the real world we can't get something for nothing.
If we ban letting fees then the rental world will change - and mostly likely result in a rent increase.
Is that what tenants would like?

Can those who want to ban letting fees look into the future and predict what the consequences might be?
And then comment if those consequences are good for tenants?

[Viking]

If rents are put up on a new tenancy then the bond also rises. Not by 1 week but by four if you are doing what you should and ask for 4 weeks. doesn't make the tenants life any easier but does give us a little more to keep at the end when we need it.
But never fear the real estate boys will be knocking on their door.
Twitty Phil will be finding out that messing around with their incomes will not be welcome.

Have no idea why the can't leave well alone and do something important like build some houses.

[Nick G]

Looking into the future shows me increased regulation on property managers, increased costs for property managers and no letting fees.

So higher rents.

[flyernzl]

Don't you manage your own rentals tho? Why not get a PM in there?

I would like to think that they want me because of my good looks and winning smile
(my wife thinks otherwise!)

.. why is the letting fee a weeks rent (plus GST or more) and not set amount? The work involved in setting up a $200/wk rental is practically the same as a $900+/wk rental. Rents have increased by silly amounts lately and by default so have letting fees.

There is an argument for that.
However, the practice is widespread - why does Trademe charge $109 to list a property where the rent is $250 but $169 for a property that rents for $450?
There is no reason apart from 'They Can'.

Has the work involved in setting up a new tenancy changed at all in the last 12 months? No. So why does it cost the tenants $50 more now than it did 12 months ago?

I would argue that the work load has actually increased - think of the inspection and documentation requirements that are now required around meth contamination and insulation. More paperwork = more time on the job. Not to mention more liability if they get it wrong.

Anyway, back to the point, my brief so far:

"Letting fees

Private landlords letting out their own property cannot charge a letting fee.
Letting agents (property managers) and solicitors are legally allowed to charge a letting fee to cover the costs of the time and effort involved.
In the current market, the letting fee is usually paid by the ingoing tenant. However, this is not always the case – when I first entered the residential rental market there was a glut of properties available to rent and tenants were hard to find, so at that time any letting fee was charged to the landlord.

Up until recently, the majority of private landlords who ran their rentals as a part-time business managed their own properties and found their own tenants. However, with the recent influx of Government-imposed requirements, demands and stipulations this has become much harder to do. Thus many more such landlords are now passing the management of their properties over to property managers. Thus letting fees charged by these managers have become much more obvious. Yet another case of Government interference in a market resulting in increased costs.

Property managers deserve and need to be paid for the work they do. If they are banned from charging A then they will charge B, and B will then get busy figuring out a way to pass the cost on to A. It’s a game of Whack-a-Mole. Throughout history, from the ancient Egyptians to the Communist regime in Russia, governments have tried to subvert the market. They have all failed, the market will always win - eventually. As it will in this case.

If this ban is bought in, given time all tenants – both those who move often and those who spend years in the one property – will pay the price in increased rental costs."

[Perry]

Be Wary of an Ambush

Have you (Peter) been provided with any guidelines as to questions?

The media do that for pre-arranged interviews with W'gton woodenheads.

Don't you manage your own rentals though? Why not get a PM in there?

Because this will be part of the LL-bashing campaign. With a bit of sensationalism thrown in, for good measure.

Such things do not (will not) proceed on the basis of logic, common sense, balance, or reasonableness.

Peter is being asked because it is not the PMs who are presently being stereotyped as avaricious, tax-cheating, rapacious pestilences upon society.

It's possible that one angle will take some precedence. Possibly even get hammered. It might go something like this:

Peter, the LL is getting most - if not all - of the benefit of the letting fee service from a PM.

So why should the tenant pay for a service being rendered to the LL?

After all, PMs don't charge tenants a percentage on top of the rent for their service.

No.

PM's charge the LL a percentage of the rent for managing the property.

I.e. the LL pays for the PM's services. Not the tenant.

And the irony of it all is that most PMs work out of REAs.

And when they list and sell a property, none of those fees are paid by the buyer.

They're paid by the property owner - the vendor.

So making tenants pay a letting fee is inconsistent, greedy and indefensible exploitation.

Most auctions now have an additional fee that's quaintly called a buyer's premium.

There are doubtless other instances where the receiver of the service pays something extra.

Put your thinking caps on.

[Perry]

Attack The Best Form of Defence?

If you think a modest residential letting fee is tough, try renting some business premises.

A business tenant pays most of the property owner's costs when renting commercial premises.

Those include legal expenses, body corp fees, rates and insurance, etc., something residential tenants do not have to pay.

In the final analysis, the answer is simple.

If you don't want to pay extra for your statutory holiday restaurant meal or coffee & muffin, find a place that has no surcharge.

If you don't want to pay a letting fee, find a residential rental that does not charge a letting fee.

If enough people are successful at doing that, then the practice of tenants paying letting fees will fade away, so as to attract tenants. That's just a basic law of business.

But there's a shortage of rentals, you say?

Do you think that's private LLs are causing that, too?

They have no control over immigration levels or the RMA impediments to increasing the housing supply.

This whole LL-bashing hysteria, driven by successive governments, is a smokescreen intended to cover up their own failings.

Have you been fooled, too?

[Glenn]

I did a count up of private versus Property manager adverts for Nelson recently. It is easy to tell which is which because those who have a permanent account with trademe have a different display picture to make room for a logo.
This indicated that 65% of Nelson rentals on TM were by property managers. My guess is that in fact the number would be higher than this because PM's are more able to let without advertising. So I think something like 75% would be closer. Some of the independents do not charge a letting fee but the majority of REA plus independents do.
I operated a system of charging the letting fee after the event and only if the tenancy was less than 12 months.
The tenancy adjudicators and some of the social agencies thought this was a fair and reasonable thing to do.
I still collected a lot of letting fees. Tenants for a lot of reasons move often and it is these high movers who cause a lot of the work. The people who create the work should be made to pay for that work regardless of the nice assumptions of the do gooders.

[SimonW]

Property managers deserve and need to be paid for the work they do. If they are banned from charging A then they will charge B, and B will then get busy figuring out a way to pass the cost on to A. "

Of course, under this scenario, the property manager wins twice:
They get the letting fee paid by the landlord upfront.
The landlord adds the cost of the letting fee to the weekly rent.
The property manager creams another 8% off the top of the rent increase for the life of the lease, as follows:

Let's say the letting fee was $500 + gst ($575)
Divide by 52 weeks = $11.06
x 8% = 88c
x 52 weeks = $45.76.

Of course, the landlord could raise the annual rent by $575 + the $45.76, but they would then have to account for the additional commission on that additional $45.76 ($3.66).... and so it goes on

An extra $45 to the manager doesn't sound like much, but over a few hundred properties I can imagine it adds up pretty quickly, especially in areas where rents are significantly more than $500 a week!

[Sharon]

The key question will be is the PM providing a service to the owner or tenant. Obviously its both but with a professional PM I would hope the tenant gets a better level of service. Many tenants benefit from a PM with a centralized office and help dealing with winz, bonds, completing applications, management of fibre installs and range of after hours incident & problems. These overheads and time come with expenses and under the restrictions of the RTA (key money) Property Management is a little strange in that some services provided cant be legally charged for. Cant think of too many other industries where that applies.