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Frequently Asked Questions and 
Answers To Your Rent Collections Concerns 

Questions and Answers

My tenant has not paid his rent? What do I do now?

The first thing you need to do is to find out why your tenant has not paid the rent.  If the reason is some temporary problem that sounds as if it might be resolved, and the tenant has not made a habit of this, then it might be best to make some sort of arrangement to get the rent paid, perhaps by doubling up the next monthís rent, splitting it into installments, or anything else you can live with.  Make sure that specific payments will be made on specific dates in specific amounts, and that the agreement is in writing and signed by everyone who is on the rental agreement.  The agreement should say something to the effect that if the payments in it are not made on time, you can proceed to all of your legal remedies.  Never draw up a promissory note or IOU for the unpaid rent.  These may be construed as converting the rent to an unsecured obligation to pay money.  If you cannot reach such an agreement, or if the reason for non-payment looks non-repairable, or if you simply cannot reach the tenant, then you need to begin the eviction process specified for nonpayment of rent situations in your state.  You should do this at an early opportunity.  You can always stop, but you will never get back the time you waste in delay.

How do I establish a tried and proven rent collection policy and procedure?

There is only one.  The tried and proven rent collection policy is that the tenant pays the rent on the day it is due, in the amount and in the form specified by the rental agreement.  You have to decide, in advance of renting the property out, how, when, where, and in what form you want the rent to be paid and put it in your contract.  That is the policy.  If, for some reason, the policy is not followed, then go through the steps we set out in answer to the first question.  As to what, exactly, the specific components of that policy might be, that will vary with the circumstances of each individual landlord, his past dealings with other tenants, and the individual circumstances and financial condition of the tenant.  Most rent collection problems do not arise because the collection policy is bad, but because it is not followed.  So follow and enforce any policy you decide upon.

How much time should I give the tenant to pay the rent?

How much time you give the tenant is how much time you choose to give.  It is customary to collect the rent in advance, for each month, on or about the first of the month.  There is nothing stopping you collecting the rent at the end of the month, or the middle of the month if you want to do so, and are comfortable with it, but most landlords would not be.  An agreement specifying the rent is due on the first, late on the second, and that a late fee kicks in on the fifth would not be a bad policy to adopt.  Whatever time frame you choose, however, it must be clearly specified in the rental agreement, then enforced.  If this time frame is violated, then every additional day you wait for the tenant to pay increases your rent loss, so you should move quickly in line with our answer to the first question above.

When should I start the eviction process?

Once the rent is in default you need to start the eviction process as soon as you can, in line with the suggestions we have made in answer to the first question above.  You may, if you wish, attempt some sort of repayment plan with the tenant, but keep in mind that if you do so, you risk an even larger rent loss as time goes by.  If your tenant is otherwise a good tenant and has a satisfactory history with you, and you are satisfied that the problem is temporary, then you might want to take this risk.  You donít want to write off an otherwise good tenant because of what is likely a unique piece of bad luck.  Just remember that it is a risk.  In most cases, however, it is a bad bargain and you need to bite the bullet, evict, and find a tenant who can pay as agreed.

What is the best way to collect rent?
 


The best way to collect rent is the way that works best.  This is not a smart-alecky answer, but is the unvarnished truth.  Your rent collection routine should be that which results in the highest proportion of prompt payments that translate into actual cash in your bank account in the least possible time, in your specific case.  There is no single best policy.  Your system should take into account at least the following factors.

∑        Ease of payment.  Paying rent is not fun, at least not for your tenants.  Do not further encourage procrastination by throwing unnecessary obstacles in the way of timely payment.  Demanding payment by certified funds, at a remote physical location instead of by mail, and the like, make payment a big chore in addition to a financial burden.  Do not hesitate to insist on such payment conditions, but only if you have reason to demand it, such as a history of late payment, a bad credit history, etc.  Naturally, the check that accompanies the move-in at lease initiation should be certified, as should any payment while the tenant is in default or under other circumstances when security of payment is of overriding concern.

∑        Ease of receipt.  Make it as easy as possible for the rent to get into your account.  Have as few stages in the transfer process with as few intermediaries as are necessary.  This is another balancing act.  A rent payment to a large multi-unit owner may need to spend a week going through several departments before the owner is even cognizant the payment has been received, and this may be necessary.  A landlord with a few units may be able to grab the checks, make out the deposit slips, write out receipts, mail them, update the ledgers and journals, do the filing, and get it all done in an hour.  But he may not want to, and prefer to let a property manager do that for him, and receive a nice, compact statement, and his net proceeds after commission, on the 20th of the month.

∑        Uniformity.  The more units you have, the more advantages there are to insisting on uniform methods of payment.  Exceptions cost time and foster mistakes on your part.  Balance this against the potential benefits of a little flexibility, especially if you only have a few units.  One thing that people like about living in small, individually owned buildings is not that they have to deal with a smaller bureaucracy, but that they do not have to deal with a bureaucracy at all.  Try not to be a small bureaucracy.

∑        Security of cash flow.  Consider the possibility that your rent may be converted by someone else.  This is especially possible if you have an agent or employee collect it for you.  If you do, try hard to set up a collection method that will require collusion before theft can take place.  Requiring collusion can deter theft by making it riskier.  You will need to sacrifice a bit of convenience and speed to do this, but that is all right just as long as you do not become paranoid about it.  It is an important thing, but not the only one, and you will never eliminate all risk.  If you think you are vulnerable, talk to a CPA about internal controls.

∑        Generation of a reliable record.  Whatever collection method you choose, make sure that a reliable record of rent payment is generated.  Never allow yourself to be put in a position of being unable to verify how much has been paid, and when, to the penny.  On the other hand, there is no need to have a record keeping tail that wags the rent collection dog.  There are many computer and paper based accounting systems that can give you what you need without being cumbersome.  If you engage a rent collection agency you can rely on their records and be content with your monthly statement.  Just make sure their records and, ideally, an account representative, will be available if you need to go to court to prove non-payment of rent.

∑        Timely notification of non-payment or late payment.  Whatever your rent collection scheme, something should happen that alerts you when timely payment has not occurred, so that you can get on it right away.  This is not much of a problem when the checks are mailed to you; they are in the mailbox or not.  But if you have them delivered to a resident manager, or collected by debit of the tenantís bank account, or some other indirect way, make sure you get a timely notification. 

∑        Cost-efficiency of the collection method.  Rule of thumb: the cost of your rent collection system should be less than the amount of rent you collect.  Just kidding.  A rent collection scheme, like a nuclear arsenal, is a pure expense.  They both exist to ensure something that in an ideal world would happen automatically.  The rent collection scheme helps assure prompt payment, just as the nuclear arsenal helps assure peace.  Neither would be required in a perfect world.  In that the world is not perfect, both are necessary, but that does not mean that either should be costlier than they need to be.

All of these factors will play a significant role in any rent collection scheme, and there is no single correct balance among them.  You will readily see that there is an inherent conflict between many of them.  For example, you could, if you were dominated by making your collection method as secure as possible at the expense of everything else, demand that each tenant literally place currency in your hand each month.  Security would be almost perfect, uniformity would be guaranteed, and notification of non-payment would be not only timely but instant.  The penalty is that it would destroy things like ease of payment, since the tenant would have to go to the bank to get the currency and be present when you show up to receive it; ease of collection, since you would physically have to be present to collect; generation of a reliable record, since there would be no source document such as a cancelled check underlying the receipt to verify its accuracy; and cost efficiency, since this method of collection would consume a great deal of your valuable time.

The best collection method is simply that which provides you the most comfortable balance among all factors.

How do I stop my tenants from paying the rent late?  

As a first principle, accept the fact that you cannot stop your tenant from paying the rent late.  The decision to pay, and when, is in the hands of your tenant.  Not even the Mafia can achieve 100% timely collection rates, and they have methods of collection not generally available to landlords, despite some myths.  There are a few things you can do to influence your tenantís decision effectively, however.  The keys are to make it less painful to pay the rent on time than otherwise, to make it as convenient as possible to pay the rent, and to include a provision in your rental agreement for a late charge to make you whole if the rent is tardy.

As to the first key, we have long recommended that you include a provision that a certain number of late payments within a specified period of time will, in your sole discretion, constitute a breach of the lease.  For example, two late payments in any six month period might be the standard, or, perhaps three late payments in the same period.  Others recommend a provision that merely says that ďhabitualĒ late payment of rent constitutes a breach.  We like the first because it is an easily graspable measurement and lets the tenant know exactly what to expect, but still gives you a clear option to terminate the lease and evict if you believe late payment will be repeated or not to declare a breach in the event you are satisfied that whatever problem exists is temporary.  This is your choice, but in any event, the idea that having a one or two year lease will not insulate him from consequences of late payments due to negligence will have a profound impact on the sane tenantís decision to pay.

Making payment as convenient as is prudent minimizes the inclination to procrastinate.  There are a lot of things you can do to make payment convenient, and sometimes automatic, such as direct transfers of rent to your account, installation of a drop box in your multi-unit building, providing stamped, pre-addressed envelopes for mailing the rent in, etc.  See the better ones in our article on guaranteed ways to collect your rent.

Making yourself whole is essential if all else fails and your tenant is still late.  When rent is late, it costs you something, although you may not be able to predict what it will be ahead of time, or even determine exactly what it was after the late pay has occurred.  Your rental agreement should always, in the absence of a law against it, include a provision for a late charge if the rent is not paid on time.  This charge should be a reasonable estimate of what a late payment would cost you.  It is NOT a ďpenaltyĒ designed to punish the tenant or to deter late payment, although, in reality, it inevitably does both as a side effect, which is good because it will also influence his decision on when to pay.  Penalties are universally frowned upon in the law, and in many cases are unenforceable.  Make your late charge reasonable.  Amounts equaling 5% to 10% of the rent installment are generally upheld without too much scrutiny.

Consult our article on understanding your rental agreement for more information on lease provisions that can improve your chances of collection and help insulate you from loss if a late payment occurs.  

What if my tenant gives me a check that bounces?  

First, you should always have a provision in your rental agreement for compensation in the event of a bounced check.  This provision is designed to reimburse you for charges you will incur for negotiating such an instrument.  It should equal the amount your bank will charge you for the bounced check, plus whatever bookkeeping costs are involved in dealing with it.  THIS IS NOT A LATE CHARGE.  It is in addition to the late charge, for reasons set out below.  Unlike the late charge, you can determine with a good deal of precision what a bounced check will cost you.  Make the determination and use that amount, regardless of what percentage of the rent it is.  Do not, under any circumstances, try to make it some sort of a penalty or ever refer to it as one.

Second, despite common misconception, tender and acceptance of a check does not constitute payment of the underlying obligation, the rent.  It only suspends the obligation until the check is presented to the tenantís bank and either paid or dishonored.  If the check is paid, the underlying obligation is discharged.  If it is dishonored, not only does the original obligation continue to exist, but a separate obligation to pay the check arises, although you can only collect one of the two. 

This has a couple of consequences.  Because the underlying obligation, rent, continues to exist, if the check is not made good before the due date plus the grace period, if any, then the tenant is subject to the late charge in your lease.  In addition, the tenant will have to pay the bounced check charges in your lease.  Even if your lease does not provide for bounced check charges, the obligation to pay damages for a bounced check, and perhaps even a statutory penalty, exists and you may be permitted to set this obligation off against a security deposit refund when the tenant moves out.  In any event, you have a right to evict for non-payment of rent, you have a right to a late charge if the rent is not in your hands before it is late, and you have a right to the bounced check charge if your lease calls for it or to damages for tendering a bogus check if your lease does not.  

What if my tenant gives me a check that bounces?  

First, you should always have a provision in your rental agreement for compensation in the event of a bounced check.  This provision is designed to reimburse you for charges you will incur for negotiating such an instrument.  It should equal the amount your bank will charge you for the bounced check, plus whatever bookkeeping costs are involved in dealing with it.  THIS IS NOT A LATE CHARGE.  It is in addition to the late charge, for reasons set out below.  Unlike the late charge, you can determine with a good deal of precision what a bounced check will cost you.  Make the determination and use that amount, regardless of what percentage of the rent it is.  Do not, under any circumstances, try to make it some sort of a penalty or ever refer to it as one.

Second, despite common misconception, tender and acceptance of a check does not constitute payment of the underlying obligation, the rent.  It only suspends the obligation until the check is presented to the tenantís bank and either paid or dishonored.  If the check is paid, the underlying obligation is discharged.  If it is dishonored, not only does the original obligation continue to exist, but a separate obligation to pay the check arises, although you can only collect one of the two. 

This has a couple of consequences.  Because the underlying obligation, rent, continues to exist, if the check is not made good before the due date plus the grace period, if any, then the tenant is subject to the late charge in your lease.  In addition, the tenant will have to pay the bounced check charges in your lease.  Even if your lease does not provide for bounced check charges, the obligation to pay damages for a bounced check, and perhaps even a statutory penalty, exists and you may be permitted to set this obligation off against a security deposit refund when the tenant moves out.  In any event, you have a right to evict for non-payment of rent, you have a right to a late charge if the rent is not in your hands before it is late, and you have a right to the bounced check charge if your lease calls for it or to damages for tendering a bogus check if your lease does not.  

But what if my tenant doesnít pay the late charge and the bounced check charge?  


In the absence of a law in your jurisdiction to the contrary, you have just as much right to evict for non-payment of a late charge as you do for non-payment of rent.  It is a breach of the rental agreement.  If you feel strongly enough about it, you can initiate eviction proceedings if the tenant refuses to pay.  You can use the same legal remedies to collect late charges as you would use for any other debt in the event you do not want to evict or the tenant has moved out, such as suing him in small claims court.

Bounced check charges are a little trickier.  If your rental agreement has a bounced check provision, as we recommend, you can treat them exactly as you would treat late charges.  If your rental agreement does not have such a clause, then you are left to general legal remedies.  You could sue in small claims court for your actual out of pocket loss.  Be sure to check for laws that might permit you to collect additional penalty damages.  Some states have them.  You might also elect to set the charges off against a security deposit refund, if any, when the tenant moves if the amount is small.  We do not recommend that you set the charges off against the security deposit unless your lease provides for them.  If not, whether you can do so is highly problematical.  The security deposit is generally intended to secure faithful performance of the lease obligations.  If there is no lease obligation requiring the payment of check charges, then, at least arguably, and we think the argument is pretty persuasive, there is no reason to resort to the deposit as the obligation to reimburse for your bank charges is extraneous to the lease.  Setting off against the deposit refund is a different thing.  A deposit refund is not a security deposit, and, unless your state prohibits it, you would act under the general principal of set off of liquidated cross-obligations.  

Should I insist that all my tenants pay in certified funds?  

You can, and you would increase your safety in doing so, but you should only restrict the method of payment by an appropriate provision in your lease or house rules.  Remember, too, that there is a down side to this sort of thing.  Increasing the inconvenience of rent payment increases the likelihood of procrastination.  In our experience bounced rent checks are fairly rare.  So, on the theory that having the rent on time is better than having the rent plus a late charge late, consider that the cure may be worse than the disease.  Of course, if you have reason to believe that your tenantís checks are untrustworthy, the opposite may be true.  This is a judgment you will have to make.  

Should I offer premiums or prizes for prompt rent payments?  

Some authors have recommended the use of devices like prizes for a certain number of months of timely rent payments and even small discounts off of the contract rent if it is paid ahead of time.  This is not a moral issue and you can use such devices if you want to do so.  The writer doubts, however, the motivating effect of such devices when compared to a well written late charge provision, alert management, and some of the other things discussed on this page.  The prospect of winning a cute key chain if he makes 12 timely rent payments will be a trifling consideration alongside the prospect of being evicted for non-payment of rent, or having to pay $50 extra if the rent is late.  If you want to make your tenants happy and emotionally disposed to get their rent in on time, have contests and promotions and do other things to make them like you, but do it to promote good will without connecting them to rent payment.  Do not imagine they will make a late payer timely.

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