Why banks don’t want to become landlords - David Alexander

A bank recently came in for a bit of stick from a group of private tenants in Edinburgh after the latter received eviction notices due to their landlord effectively going bust.

David Alexander Head of DJ alexander

Because the landlord had defaulted on mortgage payments the bank called in the loan and then began the process of selling off the properties, which led tenants to complain they had not given sufficient time to make alternative accommodation arrangements.

I do not wish to get involved in the veracity of such claims; all I will say is that in the wake of the financial crash of 2008, we were engaged in a number of administrations which affected residential rental schemes and on those occasions the lenders responded reasonably and sympathetically to the plight of tenants, often going way beyond what they were legally required to do.

In the most recent case, however, one of the main complaints seemed to focus on the bank not being prepared to offer continuity of tenancy. “Given that the bank own the properties why can it not simply just take over the tenancies and allow us to remain in our homes?” they asked.

A reasonable enough question, one would have thought. After all, the bank was sitting on appreciating capital assets which were producing regular rental income from what appeared to be a group of responsible tenants who looked after their respective properties and paid their bills on time. So what was not to like?

The answer, almost certainly, is that the administration and financial outlay that goes with setting up a rental scheme, might have quickly turned this “earner” for the bank into a liability (at least for the short- to medium-term) when what it wanted to do was cut its loses.

Landlord registration, certification and compliance all cost money and are areas which a bank or other lender might not wish to get involved. After all, their expertise is in analysing and deciding on the risk presented by mortgage applicants who wish to become landlords; that does not mean that a bank would necessarily be a good landlord.

This story does have a wider message, which is that whether it’s a bank or a private individual, government regulation means setting up as a bona fide landlord involves a financial outlay, which of course later impacts on the rental necessary to provide an acceptable return. And that outlay is not a one-off either. This is not to criticise the need for regulation or the principle of payments (although one can always argue with the actual fees set by the authorities, of course); it is simply a statement of fact.

This, therefore, is something to think about for those close to the Scottish Government who seem to be of the opinion that there is still more scope to tighten the screw on landlords in Scotland. They already have to jump through several hoops before taking in a penny in rent – another one might just be one hoop too many.

As for those unfortunate tenants in Edinburgh, examples like this have become less common since 2008, before which banks were often authors of their own misfortune as a result of poor-diligence lending to landlords. However the sad fact remains that a tenant – no matter how responsible – is still at risk (however slight) of losing their home should the landlord default on his or her mortgage payment.

MORE mortgage travail – this time from down South.

Having secured a home loan in principle, an individual viewed a flat in London, part of a development by a reputable householder, liked what he saw and put down a hefty deposit. Unfortunately he did so without checking first with the lender who deemed the property too small for lending purposes. The housebuilder – as is within its contractual right – has refused to return the deposit. Negotiations may lead to some of the money being returned but the frustrated buyer is still likely to be substantially out of pocket.

The lesson is that no matter how good a risk an individual appears to be, the mortgage lender may still decline to advance the agreed sum if it has concerns about dimensions, title, access or other factors related to the property in question. So it’s vital that buyers make sure they are secure on both flanks before putting down a penny in advance of a sale.

David Alexander is managing director of DJ Alexander