The Security Deposit

So you have a new tenant, they pay a month’s deposit and you pop it in your regular current account. When they move out, you fix what they’ve broken, deduct the costs from the security deposit and pay back what’s left. Simple, right? Wrong!

The handling of security deposits is one of the most frequent sources of dispute between tenant and landlord, most often because the correct steps as set out by the Rental Housing Act were not followed.

Not all damage is physical

Traditionally, landlords have considered the security deposit to be reserved for physical damage to the property caused by the tenant during their occupation. But did you know that the Rental Housing Act allows it to be used for any damages or losses that were incurred – including unpaid rent and any outstanding fees?

How much is enough?

Although a security deposit of one month’s rent is the norm, RentMaster sometimes requires additional security deposit. This happens in the following examples where the tenant’s profiling shows additional risk:

  • The tenant does not meet affordability criteria: the monthly rental amount is more than 33% of her net salary;
  • The income is not secure: the tenant is either self-employed or earns a commission that varies from month to mont;h
  • There are minor issues with the tenant’s credit history
  • The tenant is over-exposed in terms of other retail credit commitments.

If the tenants cannot afford the deposit, often because they are required to put down the deposit on a new property while the previous deposit is still being held pending conclusion of the existing lease, they can apply for Deposit Assistance. This is offered by some financial institutions in the form of bridging loans and RentMaster can assist in applying for this where required.

Initial inspection

Before the tenant moves in the tenant and landlord or his mandated agent must inspect the property together to identify any defects or damage to the property. These need to be documented and signed by both parties. RentMaster supplies all the required documentation to facilitate this.

Don’t touch it!

Once the deposit has cleared into the landlord’s account, keys are handed over and the tenant is free to move in. The Rental Housing Act requires that the security deposit be kept in a separate interest-bearing account. Many landlords make the mistake of using funds from the security deposit during the tenant’s occupancy. This is not allowed, not even when the tenant has not paid rent or has damaged the property.

Exit inspection

Once a tenant has given notice, the landlord and the tenant must attend a site inspection together. The Act says it must occur in the last three days of occupancy. This is of course very difficult to do – the tenant has his hands full with packing and the landlord would like to inspect the property without any of the tenant’s possessions in the way. And so the site inspection often does not take place, which, according to the Act is deemed to be

“acknowledgement by the landlord that the dwelling is in a good and proper state of repair and the landlord will have no further claim against the tenant who must be refunded… the full deposit plus interest”.

The Act does however provide for the event where the owner attempts to hold the inspection but the tenant fails to attend.

“should the tenant fail to respond to the landlord’s request for an inspection… the landlord must on expiration of the lease. inspect the dwelling within seven days from such expiration in order to assess any damages or loss which occurred during the tenancy”

At RentMaster we make sure that both the initial entry inspection and the exit inspection do take place. Any damage to the property that can be shown to have been caused by the tenant that was not recorded during the initial statutory entry inspection, can be repaired and the costs deducted from the deposit. This does not include fair wear and tear or structural defects. (We will dedicate a future Nuts&Bolts article to the topic of maintenance and damages.)

When must the deposit be repaid?

If there were no damages to be repaired and there is no unpaid rent or outstanding fees, the deposit must be paid back within 7 days of the end of the lease. If there are damages, the property owner has fourteen days to repay. RentMaster will first pay the owner the costs of repairing the allowable repairs, then we will settle any unpaid rent, and finally we will settle any outstanding fees which can include municipal services, debt collection costs and amounts due to the agent as per the lease agreement.

What about the interest?

The tenant can expect to receive the same amount of interest that a 30-day savings account at the bank would accrue.

Is it legal for the tenant to use the deposit as the last month’s rent?

Absolutely not. The Act clearly specifies what the deposit is to be used for. Any tenant who does so risks being black-listed with the credit bureaux.

Is there an easier way?

Sure! Speak to RentMaster and we’ll guide you every step of the way.

Choosing the right tenant – your best time investment ever

In the first of a series about the nuts & bolts of successfully renting out your property, we look at why tenant profiling is so important and how to read between the lines of a tenant profile. We’ve all heard nightmare stories about delinquent tenants, but there are many steps you can take to mitigate against this risk. At Rentmaster we study all aspects of an applicant’s financial situation to build up a reliable picture of their suitability.

The first thing we look at is the applicant’s credit-worthiness. We do this by drawing a TPN credit report. TPN is a credit bureau that specialises in property rentals. The report will reveal the applicant’s payment history – has she paid her bills on time or does she habitually pay late? Perhaps she only makes part payments? Any judgements of debt against the applicant will also be included in the TPN report.

The next important issue is affordability. As a rule of thumb, the applicant’s payslip must show that she earns at least three times the rental amount. It is more difficult to determine affordability if the applicant is self-employed and therefore doesn’t have a regular income. In this case we like to dig a little deeper and we might ask for the company’s bank and financial accounts. Similarly, if an applicant earns commission we might ask for twelve months’ bank statements to build a better picture.

The report also contains her retail credit commitments – credit cards, vehicle finance, store cards, mobile phone accounts, unsecured loans  – any debt that she has to pay off on a monthly basis.

Step three is to compare the information from the credit report and the affordability test with the financial declaration on the application form. It is important that there is no contradictory information – if there is, we may request more information or, if we suspect that the applicant has been untruthful, reject the applicant.

Choosing the right tenant is one of the most important steps in the property rental game.

 

Properties that offer ‘walkability’ command a premium

The advent of the Gautrain has seen prices of apartments in the Rosebank area increase by at least 200% since 2010. This is in keeping with a global demand for properties that offer of “walkability” – the ability to get around without a car, says Berry Everitt, CEO of Chas Everitt International property group.

“Areas closest to the stations have also sprouted new shops, offices and recreational facilities,” said Everitt.

This trend is evident all along the Gautrain line. In Hatfield, Pretoria, the price of flats close to the Gautrain terminus has risen by an average of 33% since 2010. “And a the other end of the line in Johannesburg, flats close to the Gautrain terminus at Park Station, Braamfontein, have achieved an average price growth of 59% since 2010,” said Everitt.

“A large percentage of home buyers want to leave their car in the garage most of the time – or even live without a car – and are prepared to pay a premium to do so.”

Walkability offers many benefits, both to residents and neighbourhoods. For starters, taking regular, is a low-impact form of exercise that has been proven to offer great health benefits. Increased pedestrian volumes in a neighbourhood can also improve community safety and social integration. Local businesses also stand to benefit from increased passing foot traffic.

 

SA consumers resort to revolving credit to afford the basics

If the first six months of 2016 are anything to go by, property owners should ensure that they have done all their homework to secure their rental income. Like getting Rentmaster to take care of it all.

As South Africans are becoming increasingly indebted, a growing percentage of income goes to servicing that debt, thereby putting greater pressure on their ability to afford the basics like rent. This trend is confirmed by the alarming 12.3% increase in tenants who did not pay their rent between December 2015 and March 2016. *

Middle income South Africans are increasingly resorting to using credit cards and store cards to maintain their living standards. This is according to the TransUnion’s latest consumer credit index, an indicator of consumer credit health.

While the index is only marginally up from the first quarter of 2016 (47.1 as compared to 46.5), the year-on-year trend does not look rosy, dropping from 55 to 47 points — a 15% decrease. **

“What we’re seeing is that economic conditions, job losses, and inflation are really weighing down on consumers and their ability to pay their bills”, said Geoff Miller, TransUnion Africa’s regional president.

According to economist Russell Lamberti, “Middle- and lower-income households were most severely affected by deteriorating household credit health”. This trend is due to those households having more exposure to unsecured lending. “During challenging economic times these households often utilise revolving credit to augment their disposable income.”

*TPN Rental Monitor, Q1 2016

**The CCI is an indicator of consumer credit health that measures the ability of consumers to service existing credit obligations within the constraints of their monthly household budget. It is based on a 100-point scale, with 50.0 the break-even level between improvement and deterioration of credit health. Any number above 50 means that consumer credit health has improved over the past year.

It measured through:

  • Loan repayment records
  • Use of revolving credit
  • Estimated household cash flow
  • Relative cost of servicing outstanding debt

Worsening economic conditions impact on rental payments

There is now no doubt that the economic conditions have deteriorated to a point where we can expect an increasingly risky time ahead for the rental industry. The pointers are clear:

  • Non-, partial and late payment trends are all up according to the latest TPN Rental Monitor (ww.tpn.co.za)
  • Tenants in good standing are down 2.8%
  • New car sales are at an 8-year low and there has been a 20% increase in people that have fallen behind with their vehicle finance paymewnts.
  • The economy is shrinking in real terms and people are loosing their work
  • Interest rates will probably continue to climb for a while still

Why not shift these burdens and risks to RentMaster. We’ve been making sure investors receive their rent on the 1st working day for more than a decade. Guaranteed

RentMaster’s complete management solution for the monthly rental collection cycle offers peace of mind to owners and agents.

Proposed changes to the Rental Housing Act

Changes to the Rental Housing Act have been tabled in parliament by Minister of Human Settlements Connie September. It is one of the priority bills that must be passed into law before the May 2014 elections. It deals with several proposed changes, notably that all leases must be in writing, and addresses some of the much criticised deficiencies of the Rental Tribunals.

The Rental Housing Act is the foundation for the maintenance of good relations between owners and tenants, and the enforcements of their respective rights.

As the law currently stands, an oral or tacit agreement between a landlord and a tenant is valid and enforceable. The law does provide that the tenant must be provided with a written agreement if it is required. Oral and tacit agreements are often problematic as they require oral evidence if disputes end up in court, resulting in long waiting periods for court dates and increased legal fees, not to mention the wide margin for disagreement in the respective interpretation of such agreements. A related problem with the current dispensation is that often the written agreement lapses or is amended, but the renewals and/or changes are not recorded and the written agreement brought up to date, resulting in the same risks.

When the new law comes into effect, it places an explicit obligation on the landlord to produce a written agreement. Furthermore only written agreements will be recognized and be enforced by a tribunal or court – oral agreements will not be recognised. The minister will also be required to publish a proforma lease agreement in all official languages that will make it easier for parties to adapt it to their particular requirements while ensuring that the requirements of the Act are complied with.

Dr Sayed Iqbal Mohamed, Chairman of the Organisation of Civic Rights, whose publications at www.ocr.za served as a source to this article makes a further recommendation:

  • It would be prudent to include a mandatory clause that any change or alteration verbally made to the lease must be reduced to writing (non-variation clause) for such change or alteration to be valid.
  • In the event of a dispute, neither tenants nor the landlords can claim that he or she had agreed to certain changes verbally. In other words, this clause states that any variation to the lease agreement would be of no effect unless reduced to writing.
  • ‘The rule is that when a contract has once been reduced to writing, no evidence may be given of its terms except the document itself, nor may the contents of such document be contradicted, altered, added or varied by oral evidence.’

The Bill will also set out to enhance the effectiveness of the Rental Housing Tribunals by

  • Extending on their powers to further balance the rights, duties and obligations of tenants and landlords, specifically by granting powers of spoilation, interdicts and attachment. It must be noted that eviction orders were specifically excluded due to the s26 provision of the Constitution.
  • By imposing a duty on MEC to establish the required tribunals
  • Introducing an appeals process and the provision for a tribunal to withdraw or change their rulings.

Finally the Bill will set out the respective duties of landlords and tenants more clearly, address loopholes identified and generally address problems identified in the rental sector during the public participation process. It will expand on the definition of “unfair practices, which will be accompanied by Unfair Practices Regulations to be published shortly for public comment.

The realm of laws relating to residential rental property is a complex and evolving landscape, and any developments to offer improved and faster relief to aggrieved landlords and tenants are very welcome.

Parliament approves credit amnesty: Now what?

Despite very vocal opposition from the credit granters, parliament last week approved in principle a second debt amnesty programme for South Africa.  The aim is clear:  debtors who have paid back their debts must be removed from the black-lists. Period. While the intentions are noble, the devil remains in the detail. We will have to wait for the programme to be gazetted to find out which of the three ring-fence scenarios presented will actually be implemented.

Detractors of the amnesty point out that lessons learned from the previous amnesty in 2006 haven’t been heeded. Industry reports indicate that the majority of those who benefited from the first amnesty have again ended up in a debt trap of some sorts. They cynically point out that it is nothing but a political tactic in the run-up to the 2014 elections. Voters don’t bite the hand that feeds them, so to speak. The Business Day editorial sums this up nicely: “A blanket amnesty is a short-term, populist band-aid that will not solve the underlying problem — people are being granted loans they cannot afford to repay. “

As always there is the contrasting view and for a welcome change it’s not only the government that is putting forward the upside. Moneyweb’s Sipho Ncobo’s opinion is that the lenders’ reaction is an unnecessary uproar that has sparked pointless controversy, and is plain dishonest.  He writes about the “life sentence” of bad credit records, the nightmare of trying to have outdated information removed and the millions of people who struggle to get traction in the economy due to some historic issue way back when.

Trade and Industry Minister Davies says that this will force the lenders to do proper affordability tests and not just rely on “outdated and misleading” historic information kept by credit bureaux.

The National Credit Regulator (NCR) company secretary Lesiba Mashapa, also supports the amnesty: “We believe it is the right intervention.”   He points out that the regulator will soon publish affordability assessment guidelines, which when coupled with  payment profile information which will not be removed, will allow for the proper assessment of risk.

Overall the challenge remains to stamp out reckless lending and to boost economic activity by assisting an estimated 1.6-million consumers struggling to get loans, accommodation and jobs due to adverse historic credit records despite having repaid their debts.

Our view at RentMaster leans towards the positive responsible lending strategy. As the pioneer of guaranteed rental collection in South Africa, we have learned our own lessons over the last 10 years about how best to deal with people in financial distress, how to manage our own credit risk and how to work with our industry partners in building a knowledge base of good and bad behaviour.

While we do make use of credit scoring and historic default reports provided by the bureaux, this makes up a relatively small part of our robust tenant screening process. We place a lot of value in the tenants previous rent payment history kept in the widely-supported Tenant Profile Network, and then very thorough employment reference and affordability checking.

Deon Botha

rentmaster1decklogo

Founder and CEO

All is not well with residential property rentals

 

Residential property held for rental investment purposes faces some particular challenges in South Africa today:

  1. New legislation that offers tenants far-reaching rights at the expense of the owner’s rights:
    • Prevention of Illegal Eviction Act  that offers “illegal occupants” the right to ask the court for “just and equitable time to find alternative accommodation”. The Act does not define “illegal occupant” or “just and equitable”, leaving it up to the judge to interpret – and we’ve seen some weird and wonderful interpretations.
      (Download the Act)
    • Consumer Protection Act that does away with fixed-term lease agreements allowing the tenant to offer 20 working days notice of termination at any time.
      (Download the Act)
  2. Massive problems in South African courts resulting in delays and procedural complexities and inefficiencies in approaching the court for eviction orders or judgements for debt.
  3. Worsening economic conditions leaving consumers financially strained and often over-indebted, exacerbated by bad personal financial management often bordering on delinquency.
  4. Disarray in the regulatory structures that are responsible for good conduct and enforcement of service standards in the real estate industry.
    • The new national Dept. of Human Settlements is grappling with the crisis at the Estate Agency Affairs Board.
    • Delays in establishing the new Community Schemes Ombud Service.
    • The regional Rental Tribunals, where they have been established, are characterised by delays and then unenforceable findings that merely postpone resolution to the problems.

These realities have resulted in serious challenges facing property owners renting out their property. The role of the managing agent can no longer be “business as usual: fees but no guarantees”.

Deon Botha

rentmaster1decklogo

Founder and CEO