What Really Happens During Tenant Referencing and Why Applications Don’t Always Pass

What Really Happens During Tenant Referencing and Why Applications Don’t Always Pass.

Welcome to this episode of The All Things Property Podcast, where the conversation focused on the all-important subject of tenant referencing. The discussion explored what referencing actually involves, looking closely at how suitability for a tenancy is assessed beyond just ticking boxes. Several points were raised, including affordability calculations, credit history checks, the value and reliability of landlord references, and the nuances for self-employed applicants. A key theme that emerged was the balance between thoroughness and speed in the referencing process, as well as the evolving role of technology and data protection. The episode also considered how landlord caution is increasing in response to changing legislation and whether current referencing practices are robust enough to meet the challenges of the modern rental market.

Chapters

00:00 Tenant reference checks explained

03:36 Understanding Tenant Credit Checks

06:51 Addressing undisclosed credit issues

09:55 Choosing the right referencing company

15:34 Landlords verifying tenant information

17:28 Wrapping up the episode

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Transcript

SPEAKER_00 0:00

Welcome to the All Things Property Podcast with me, Simon Bacon, and me Ian Saddler. And today here we're going to be talking about referencing. Excellent stuff, yes. What checks are done and why applicants fail. Welcome to the All Things Property Podcast with me, Simon Bacon of Preferential Properties. Every week, Ian Saddler and I will delve into All Things Property. We'll guide you through with friendly, no nonsense advice. So I guess from a tenant's point of view, referencing can feel, must feel like a hurdle. But from a landlord's point of view, it's one of the most important decisions that they make. So what does referencing actually involve?

SPEAKER_01 0:44

Assessing a client's suitability for a tenancy agreement financially? Pretty much financially. In simple terms, in.

SPEAKER_00 0:52

Yeah, that was simple. Was it? Okay. Less simple. Make it childlike. What does a reference actually involve?

SPEAKER_01 1:01

What are they checking? You didn't ask me that question, but I'll tell you the answer anyway. Okay, excellent. They're checking employment, salary status, credit search, financial liabilities, and a net serviceable income to be used for affordability of rent. Brilliant. That was more complicated than the first explanation.

SPEAKER_00 1:20

Yes, it was. So a multi-step process to assess risk, in your words. Yes. Yes. Okay. So yeah, affordability calculations. How how do they generally do that? Is it on an income? Is it on income multiples? What are they generally looking for?

SPEAKER_01 1:37

Well, my referencing company used income as a basis, a salary, and then try and gener generate a net disposable income, which is uh settle against the rent they're being referenced against. So for example, if the rent they're they're being referenced for is 800 and their affordability is classed as 1200, then they'd obviously well clear as that. If they're short of it, then they'd need a guarantor.

SPEAKER_00 2:02

Craikey, which referencing company do you use? I just thought it was based on a uh multiple of their income. They don't go into anything else, do they? Yeah, they do. Do they? Yeah. Of course, the referencing we use don't. Well, the standards that we use, you know, for those of you that uh perhaps aren't sure about it, is generally um I've got to think now, it's generally uh 30 times the monthly rent. Sorry, and that's it. That's it. Yeah. You need to change your reference company much. Absolutely not, it's a brilliant referencing company. So, but ultimately what this is saying is that referencing companies, anybody who does referencing for uh tenants, it's an affordability criteria. They're looking to make sure that the amount of rent or the amount of income that someone is earning um meets a criteria to make it affordable. And it's you know, that's the right thing to do, isn't it? It would be very miss of us to uh let properties to tenants that can't afford it. What about credit scores? Uh, this is one that often we get asked, are they getting a full credit history or or just uh they're getting the accredited of a Vista or a credit karma score, aren't they?

SPEAKER_01 3:20

And it's um I don't think it will bar them from passing the references.

SPEAKER_00 3:26

That only will do that is it won't affect their credit score though, will it? No.

SPEAKER_01 3:29

It's not like applying for a bank loan or a credit card. But if they've got adverse credit history, then uh that will prevent attempts from going forward.

SPEAKER_00 3:37

It's a it's a credit score, so they're looking at their credit score to see whether or not um, you know, in a nutshell they are credit responsible rather than anything else. But they do pick up on county court judgments, um, IVAs, money debt orders, all that sort of stuff. All of that will come out on a on a credit score. But what tenants have to understand or have to realise is it's not affecting their credit score, it won't show as um you know, like they were taking out a loan or a mortgage. What about previous landlord references? References to to referencing companies look for that? Oh, previous or current landlord references, yeah. Oh, they don't. Mine do. They're not. There are a number of again, ours does, and there are a number of referencing companies that don't bother to get a current landlord. That's fundamental, surely. Um well, is it is it why tell me why not? Well, if you I'm I'm just gonna put this out there if you are a landlord and you have a tenant who is not paying their rent or is not looking after the property, bye. And that ten you get a reference request from a referencing company saying, has your tenant paid their rent on time? Have they looked after the property? Would you relate to that tenant again?

SPEAKER_01 5:12

What are they going to say? What are they they want the tenant out of the property?

SPEAKER_00 5:17

So that's not every situation, is it? No, I'm not saying it is, but if you are a landlord in that position and you wanted the tenant out, and you wanted the tenant out, it's a possibility you go to arrive request. What are you going to do?

SPEAKER_01 5:31

The likelihood is a small percentage, or some of them would tell fibs.

SPEAKER_00 5:37

And that's why some referencing companies don't rely on a current landlord's reference, because some will say it it actually isn't worth the paper that it's written on. Now that's contentious, I know, and I'm not saying it's right or it's wrong, and we do take out um previous landlords or current landlords' references, but it it's what's it worth? Yes, absolutely. I think it's better done than not done though. Yes, me too. So what are the common reasons applications fail? What if again, you've got a history here in of you've been in the game a long, long time. Tell me an example of perhaps why a tenant may fail a reference.

SPEAKER_01 6:27

Well, I don't think you need years of experience in the business to work that one out. Uh well, adverse credit history is a biggie. Lack of affordability, isn't it? Um it's generally that, isn't it? Yeah, more so I think um right to rent checks need to be done, and if you've got uh people that can't provide that information, that's a reason not to go forward with them.

SPEAKER_00 6:51

Yeah, and I think you know, it it is what we some of the reasons that we find is that um so the credit referencing or the credit agency, the referencing company will come back to sell, you know, this person has an IVA or this person has a county court judgment, certainly a county court judgment, and you go to the ten sale, you know, you haven't disclosed this county court judgment on your application form, and often the stock answer will be, well, I didn't know that I had one.

SPEAKER_01 7:20

Which might be true, but it's still a red flag, isn't it?

SPEAKER_00 7:22

Yeah, no, absolutely. Um so that's often why why tenants will fail. And I always think, you know, be up front, and really tenants should know their credit history, they should know their credit score.

SPEAKER_01 7:36

People know generally if they've got a counter court judgment against them.

SPEAKER_00 7:39

You would hope so, wouldn't you? Yeah. Um some of the more complex issues, self-employed, how does how does that work?

SPEAKER_01 7:48

Do you do more checks on those or I think as long as you can provide a maximum of three years accounts and and justifying your income or copies of your self-assessment tax returns? That's probably enough.

SPEAKER_00 8:00

Yeah, no, agreed. Um so what else is there? What what are the more complex for them? Complex income cases, or generally speaking, is the employment generally generally all right?

SPEAKER_01 8:14

Do they take into account bonuses or they do they do if uh depends on what contract the the employees on, if they're on a short-term contract or a zero hours contract, um, then they might need to guarantor in that case.

SPEAKER_00 8:29

Yeah, well, zero hours contracts, they can't, the referencing company will often not be able to pass an on affordability because it is a zero-hour contract, but yeah, that again is is is a challenge. Um guarantor-backed applications, we've talked about that in our previous episode. So that's thank what would you say again, just to reiterate what you say on guarantor-backed applications.

SPEAKER_01 8:55

They need to be aware of their obligations, um, but they're like a co-tenant, really.

SPEAKER_00 9:00

Yeah, okay. Speed or thoroughness, what's what's the best one when doing referencing? Thoroughness. Closely followed by speed. Yeah. Yeah, there is a if you find that a referencing is taking a long time to progress, does that raise flag for the thing?

SPEAKER_01 9:20

No, not really. Um it's normally the HR departments that can't be contacted to justify salaries. Yeah.

SPEAKER_00 9:29

Okay. What about data protection and consent? What do you what do you do anything about that?

SPEAKER_01 9:34

Yeah, the tenant has to sign a form allowing that data to be presented to the agent. Okay, and have you got a have you got a form for that? That they said.

SPEAKER_00 9:47

Do they?

SPEAKER_01 9:47

Okay. It's on this on the list of documents on the reference process. You can download if you want to. Excellent. Well done. You need to change the reference company.

SPEAKER_00 9:55

No, our referencing company's brilliant. Really good. And we've tried, I have to be honest, we've tried loads over the years that I've been doing it, and um, you know, there is I have found there is a real disparity. Some are very much computer-based, the computer says no. Um whereas I prefer a mix of the computer and the you know, the personal say maybe. Yeah, yeah. So that we can actually look at it and and make some make some judgments on that. Why does good referencing prevent problems later, would you say?

SPEAKER_01 10:37

I think an a an agent has to has an absolute obligation to get passable references on a tensie. If they're taking rent indemnity policies, they have to have that. Um but if you have put a tenant into a property and they haven't got documentation of a past reference, then you leave yourself liable and open to being sued by your landlord for negligence.

SPEAKER_00 11:02

Where do you think referencing is going to go over the next, I don't know, five years? What do you think the changes might be?

SPEAKER_01 11:12

Any bit? I can't think of many. I mean it's changed dramatically since the old days, isn't it? When you used to get letters through the post from landlord to honor an employee? I know.

SPEAKER_00 11:23

But do you think that the advent of uh social media changes things? In what way? Okay, so I've had an instance whereby um someone's applied for a property and as part of a a process we've looked at their social media.

SPEAKER_01 11:50

Really?

SPEAKER_00 11:50

Yeah. Why? And you've seen stuff on social media in terms of um just just some red flags came up and social behaviour, you mean? Yeah, just well not antisocial behaviour. Not an invasion of privacy. Behavior that maybe might impact a tendency. So if you know, for example, that you're letting out property in um an environment that is predominantly older people, and you have a younger person who applies, and you go onto their social media and you know, you're looking at it going, oh wow, okay, quite active socially, or do you think that that will change in time or not? Sounds like it's only changing. No, no, we've we've never that's never happened in terms of we've never rejected somebody because of social media. But do you think that referencing companies will start to remain identify that?

SPEAKER_01 12:51

No, I think they'll remain isolated from that. Do you think they should be? Yes, I do. You think they should look at social media? No, no, no, I don't. Oh, okay. They should remain isolated.

SPEAKER_00 13:00

Do you think there are landlords that would go, well, no, there's stuff out there, so I'd like to know who they are and start to do their own research? I don't get my landlords that involved. If the landlord's looking after properties themselves, so they're employing you to do a let-only service, okay. Do you think, you know, should a landlord just rely on us or or is it right that the landlord should supplement it?

SPEAKER_01 13:31

I think there's I think the reference supplement it. I don't think they should supplement it unless they've got a specific reason or a specific red flag. I think it's sort of the current referencing criteria pretty much adequate.

SPEAKER_00 13:44

In my humble opinion. Well, I think yeah, I think that's interesting because you know, self-employed is is a really good one in terms of um, you know, if somebody is a business owner, then there's lots of information out there that landlords can access. We could access, anyone could access.

SPEAKER_01 14:06

Legal do you feel that's right morally and legally to do that? Obligatory, maybe, obligation to a landlord or moral obligation to a landlord, but do you think it's a process that would get passed as an acceptable criteria?

SPEAKER_00 14:20

Well, you know, interesting question, isn't it? So imagine that you are renting a property to somebody who is self-employed and they put down their company and their company accounts, and you know, it's only been going for maybe a couple of years. Is it have you ever looked at that person, looked at that reference, thought, oh, I wonder what the companies that they do gone on to company's house, looked at it, and thought, oh they're a member, you know, they're a director of X number of companies, or well actually the company that they say they're they're a director of ha hasn't submitted any accounts, you know, is is in breach of companies house, or you know, uh there are flags that are being raised. Do you not see that as, you know, at what point should it be that you really are doing everything you can to Well, you answered your own question by giving consistent, persistent examples of ways of furthering the reference process, aren't you?

SPEAKER_01 15:28

But do you are you saying you use those anyway? Or only when you have a an urge to do it?

SPEAKER_00 15:34

No, there are occasions when you know, if a referencing company is saying, oh, it's taking us long, we haven't managed to get verification of this particular company, that you can do you can do checks yourself. And I I guess from my perspective, you know, it's good good referencing is it's not about looking to reject tenants, it's about the setting the tenancy up to succeed. And the more information you have at the outset, uh doesn't that help you make the right decision? And I because I think the the big again, one of the big uh implications that we are seeing through the Renters Rights Act is uh I'm finding that landlords are uh are being a little bit more cautious in in securing trying to secure the best tenant they can do. I think that's been one of the implications of the act is that um you know landlords are feeling a little bit more, I really want to make sure this is the right person because I don't have any way of going, oh, it's not really working for me, so I can have a you know uh an easy route out of this tendency.

SPEAKER_01 17:02

I don't think anything now I think if you don't consider you need to do a rigorous examination on referencing at from point one, it doesn't matter what you do afterwards, you that has to be a guarantee. I don't I don't think they would think what if they they would presume that if referencing is passed and you've got paperwork that says so, you have to assume it's gonna be a reasonable practice.

SPEAKER_00 17:28

Interesting point. Not sure what anyone else's point would be on whether referencing should be more robust or or not. But obviously, if you have got a question, we're going to put a poll out after this one. So, you know, would welcome your thoughts. See if we can't influence the the way in which referencing is done. So thank you very much for listening to this episode. Thanks for tuning in to this week's episode of the All Things Property Podcast. If you found this episode useful, don't forget to subscribe, like and share. These things really help us reach the people who need to hear this advice. See you next week.