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The difference between the application fee, security deposit and ongoing management fees

When people set out to become landlords for the first time, they often have idealistic views about property rental being an easy way to make money.

Once they start looking into the detail, though, they find that there are lots of important rules to follow, legal obligations, technical terminology and a fair bit of work to do! It’s why a lot of people choose to hire a letting agent, so they can push the majority of the hard work and responsibility onto them.

One area that causes a lot of confusion is the financial side, particularly when it comes to fees and deposits, so let us explain the difference…

Application Fee

The application fee is a sum of money that a tenant pays to a landlord or letting agent to reserve a rental property before they sign a tenancy agreement. It’s normally non-refundable if the tenant then decides they don’t want to take the property. 

This fee helps confirm that the prospective tenant is serious about renting this specific property and that they aren’t reserving a number of different flats or houses to hedge their bets. A surprising number of people never follow up on their promise to ‘come and do the paperwork tomorrow'.

TIP: Having an application fee policy is also a good way to avoid receiving applications from people with bad credit history or rating. For example, if the individual has a CCJ, they’ll automatically fail referencing and won’t get their application fee back.

Once the letting agent or landlord has received this application fee and the completed application forms, supporting documents and proof of identity, the property is put on hold and there are no more viewings.

After that, three things can happen:

- You (as landlord) accept the offer

- You reject the offer (usually because a reference or credit check has caused concern)

- The tenant changes their mind and pulls out, losing their deposit

Not all self-managing landlords request an application fee, but most agencies do to help safeguard the landlord from a drawn out application process and to cover the agent’s time for processing the paperwork.

BE AWARE: The Government is set to ban application fees in the near future after finding them ‘unfair’.   

Security deposits

Security deposits are an essential part of a tenancy. All tenants must pay a deposit to protect the landlord against damage or if the tenant unexpectedly decides to move out before the contract ends.

The security deposit must be held in a formal protection scheme to support the tenant’s rights. There are three approved schemes in the UK - one example is the Deposit Protection Scheme (DPS). If a landlord fails to register the deposit they can be fined by the Property Ombudsman, which could be three times the value of the deposit.

As the landlord or agent, you must tell the tenant where the deposit is held. You can find out more about what’s required on the Government’s website.

Agency fees

Usually, when landlords work with agents it’s in one of two ways.

- The first is let only, where the agency helps find tenants and manages property viewings, but does not complete any referencing or paperwork.

- The second is full management, where on top of the marketing and viewings, the agency manages the full letting and management of the property on an ongoing basis, which involves collecting monthly rental payments, communicating with the tenants, carrying out inspections, organising repairs, amongst other things.

Both services are delivered in exchange for fees. It’s a legal requirement today that letting agents are transparent about their fees, so they should be visible.

There are many different services available, so the costs can mount up. Make sure you know what you’re paying for, and if anything isn’t clear, ask!

Here at Progressive Lets we’re upfront about all of our agency costs and provide a more inclusive service as standard, which is covered by our annual property management fee. Unlike a lot of agencies, we do not charge to manage evictions: our landlords only pay the court costs.