For the first time in twenty-five years, I have resigned from a consultancy assignment without finishing it. I was asked by a council to help them to prepare a business plan to set up their own letting agency. I had reservations about taking the job from the outset but I had no other clients in the area so there was no conflict of interest and I thought it would be an interesting project to work on. I could not have been more wrong.
The problems started within ten minutes. The starting point for any business plan is a vision statement that sets out clearly what the objective of the business is and where it will be in one, two or five years time. This needs to be clear and measureable. A typical vision statement might read “Our vision is to set up a new division and generate £1 million of turnover and £200,000 of profit by the calendar year 2020”.
Unfortunately, the council team were not happy with this approach. They did not want to make a profit, they just wanted to break even and they wanted the success of the business to be measured by the quality of service that they gave rather than by its turnover. We spent the entire morning discussing variations of “We want to set up a business that offers outstanding levels of service to all its users”. I kept asking how they would measure this and how they would know when they had succeeded but my advice was ignored.
After lunch, we moved on to other aspects of the business plan and things quickly got worse. The first subject we discussed was fee levels. They felt that they could charge lower fees than other agents because they did not have to make a profit for their shareholders. I let this point go but we then moved on to how the new agency would treat tenants.
A commercial letting agent has a clear ethical duty to achieve the highest rent for his client, the landlord, who is paying the fees and to act in their best interests throughout the whole tenancy. This might include managing repairs in a cost effective manner, negotiating a rent increase if the tenant renews the tenancy, giving notice if the landlord thinks that they can get a better tenant and acting in the landlord’s interest during any deposit dispute.
The council team seemed to be uncomfortable with every one of these duties. They wanted to encourage their landlords to rent at a fair market rent, not the highest rent possible, and were horrified when I told them about how letting agents often use open houses as a tool to get tenants to compete with each other. They vetoed my suggestion that all tenancy agreements should include an automatic rent increase every year and they were appalled at the thought that some landlords might want to give a tenant notice in order to replace them with a new tenant at a higher rent.
I kept pointing out that the landlord was paying the fees and that in return, they had a right to expect that their agent would act in their best interests, not the best of interests of their tenants, but this concept seemed to be incomprehensible to them. I asked them how they would sell the benefits of their service to a potential landlord on a valuation appointment but they seemed to think that cheaper fees and a good service would overcome all these ethical concerns over whose side they were on.
We then moved on to how they would publicise their service. Their plan was to do this mostly via a council newsletter and by writing directly to known landlords in the area. I had suspicions that this marketing campaign would end up being subsidised by local rate payers but I kept these to myself.
Finally, we discussed a rough budget for the new business. They did not want to consider purchasing an existing letting business and we calculated that a cold start with the staffing levels that they felt to be necessary would cost at least £500,000. I pointed out that this would have to be paid back from the profits that they were not planning to make.
Altogether, it was one of the most frustrating days that I have ever spent. I could not see how their business could ever produce a satisfactory result. All I could see was huge financial losses and insurmountable conflicts of interest.
I wrote to tell them this the following day and advised them to abandon the project. I really hope that they take my advice.
Councils undoubtedly have a role to play in regulating rogue landlords and rogue letting agents. However, they have no role to play as letting agents and the other councils who are thinking of going down this route should think again.
Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years.