Learn from professional rent collectors and other smart
landlords the best ways to collect all of the rent. Learn how to handle
difficult tenants and unusual situations.
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COLLECTION RELATED TIPS
(Long Collection Related Tips After Short
because you are a small landlord with only a couple of rental units does
not mean that you do not have to comply with fair credit laws. Even
if you have only one unit, if you rely on outside sources of information
to make decisions about whom you will accept as a tenant, you need to
comply with the Federal Fair Credit Reporting Act. Take the time now
to read our articles on the subject, which you will find in the Info
Center under Tenant Screening. They will show you how to reject
applicants so that you don't get into trouble with the FTC. Failure
to comply with the law can subject you to civil penalties and punitive
high energy costs are eroding your margin, you may be tempted to give your
tenants a notice of rent increase to cover them, but this may not be the
best solution. Rent increases are a notorious source of tenant
unrest and their anger will be directed squarely at you. Instead of
a rent increase, why not give a notice of “energy surcharge.” If
your biggest headache is the cost of heating oil for your building, for
example, consider giving a notice of change of terms of tenancy effective,
say December 1 and expiring March 31, in an amount sufficient to defray
the increased energy cost. The notice could include an explanation
giving the high cost of fuel as the reason, deflecting anger from you to
the energy company you deal with. The fact that it expires after the
winter and the rent goes back to normal would show your good faith.
The notice itself would be just like any other notice of change of terms
of tenancy, such as a rent increase, and delivered the same way. It
should contain the phrase “this surcharge shall constitute additional
rent for the premises,” so you can enforce it in the event of failure to
pay. Of course, this option is not available if you are locked into
a fixed term lease or if you are subject to rent control.
most important constant in life is change. It does not just afflict
you, your tenants’ lives change too. Information is of value only
if it is current. One of the elements is to see to it that the
information your tenant gave on his rental application is still valid.
Once a year, maybe every six months, you should ask your tenants if any
information on their applications has changed, and if it has, have them
update the form. The time to do this is before problems arise.
Since you are in a continuing credit relationship with your tenants it
only makes sense to see to it your information is current so that your
decisions are based on fact. A major reason why many landlords end
up with large bad debts is that they make decisions and take action on the
basis of information that may be several years out of date. Our
eForms section offers a choice of several good application forms.
justification of a rent increased is based largely on market forces, there
are some other factors that should enter into the equation. Indeed,
some leases, almost always commercial, peg annual rent increases during
the term of the lease to the CPI (Consumer
Price Index). This index can be used to trace the increase or
decrease in cost of representative commodities sold at retail and is
compiled by the Bureau of Labor Statistics. You can find the
Consumer price index by going to the BLS, scroll down to the “Data”
section, then select the data you need.
advise that you research your competition when making decisions that
affect your property. Decisions like raising rent, adding amenities,
and the like, will make sense only if made in light of market forces.
The question is, who is the competition? There is a web site you can
go to in order to find out.
allows you to determine who is competing with you within your own or other
zip codes, and the advanced search engine lets you set the search
parameters you desire. At the search engine, which is on the home
page on the left, select “search by address,” then enter the city,
state, and zip. You can then refine your search by putting in
parameters such as number of bedrooms, rent, etc.
have a tenant who has skipped out on his lease owing you rent,
is where to start trying to find him. This site contains links
to dozens of public record databases that can help you locate the fleeing
debtor before you resort to an investigator. It can also be used as
a first step in tenant screening and for entertainment, just to snoop
around for information on celebrities and people in the news.
long-term commercial leases include an annual rent adjustment tied to the
Consumer Price Index. The problem is that for the last ten years or
so the CPI increase has not accurately reflected increased costs of
ownership of commercial property. Leases that have this tie in are
shortchanging the landlord.
is time to consider an alternative, and this article suggests some.
See this and other brief tips in our new feature, “Our
Top Internet Picks,” in the “Info
only two times when a landlord really gets into trouble. One is when
he feels sorry for his tenant, and the other is when he is in a hurry.
It is all right to give your tenant a break when he has a legitimate
problem, but only if you have verified that it is a true and likely
non-recurring problem, and the way you cut him slack makes economic sense
from your point of view. Take the time needed to screen your
prospects, inform yourself of the condition of your rentals and arrange
for necessary maintenance, and otherwise manage your properties. Are
you really short of time? In that case, engage a reputable property
management firm to do this for you. Keep your mind in firm control
of your heart, and take your time and enforce your standards. This
will keep you out of most of the trouble you are likely to get into.
We have articles and books that will help you learn how to do this.
let fear of fair housing suits intimidate you into accepting unqualified
applicants. Fair housing laws do not require that you accept
applicants who do not meet your minimum income and credit standards,
propose to move excessive numbers of people into the rental unit, or
demand that you make unreasonable accommodations to their disabilities
simply because they fall into some “protected class.” Most fear
results from ignorance so dispel your fear by becoming knowledgeable about
your state and local fair housing laws and the federal statutes. It
is not as hard as you might think. Check the articles in the Info
Center and contact your local human rights commission for any literature
they may have.
now offer an on-line course in the new Learning Center for only $29.99
that will help you deal in this area with confidence.
If you are
looking for a former tenant who owes you back rent or money for damage to
your rental unit, here is a way to find his new address. Send a
demand letter to the last known address you have for the tenant, even if
it is the unit you just evicted him from or he just moved out of. On
the face of the envelope, conspicuously mark the words “Address
Correction Requested” or “Address Service Requested.” Then add
50 cents in addition to regular postage. The USPS will search their
records if they have a new address on the individual not only will they
forward the letter, they will also send you a post card with his new
strongly advocate that landlords keep their rent at or as near market
levels as possible. This means staying on top of things and getting
out your annual rent increases out promptly. In California, however,
rents have been spiraling upward at unusually high rates, reflecting the
increasing price of real estate generally. This has led several
property owner associations and real estate commentators to advocate that
landlords give 60 days notice of their rent increases rather than the 30
days mandated by state law. Gov. Davis has just signed a bill into
law requiring 60 days notice on rent increases in excess of 10% for over
the previous 12 months. Actually, giving 60 days notice is not a bad
idea. It gives the tenant extra time to do two things. First,
he can look around and see that your rent increase is not excessive and
merely reflects what the market is doing. Second, he will have time
to revise his life style and gear up to pay the increase. We do not
suggest having the increase take effect 30 days later than it otherwise
would have done. We suggest giving the notice 30 days sooner than
you would have done otherwise.
beginning of each year, I make copies of the rent checks received from my
tenants and keep them in their lease file for future reference. I make
note of any name/telephone number change as well as bank change. If I ever
have to get a judgment against the tenant, this banking information is
very useful for my collection efforts.
Wallace S. Gibson CPM*PPM
GIBSON MANAGEMENT GROUP, Ltd.
attention to what is written on your rent checks beyond the payee, amount,
and signature. In most states, monthly rents in a month to month
tenancy situation are considered separate debts. This is different
from the monthly rental payments in fixed term leases, which are
considered installments of the total rent for the term. Debtors are
generally permitted to direct payment to a specific debt if they owe more
than one. Read the memo line on the check. This is where
payment may be directed. If you are on a month to month, and a
tenant gives you a check specifying “June rent” on the memo line, be
sure you credit it to June rent. Do similarly if the tenant directs
payment with a separate note or letter. Do not credit it to a past
missed rental installment or to a late charge unless you are certain your
state law allows this. Misdirected payments can invalidate eviction
notices for non-payment of rent or other contractual obligations.
Do not sleep on your rights. If
your tenant is not paying rent, do not let him go on, month after month,
even if he makes partial payments, creating a growing balance of
outstanding rent. Since rent is about the last thing people stop
paying, the chance of your ever collecting it, or collecting it in a
reasonable time, is pretty small, even if you ultimately get a judgment
for it. Even in a slow rental market, you are better off with a
vacancy than with an occupied unit with a non-paying tenant. That
non-paying tenant puts a heavy crimp in your style if you try to show the
unit to such prospective tenants as may be out there, and they will
probably be shy of committing to a rental unit that will not be ready for
near immediate occupancy. Which would you rather have, an occupied
apartment that generates no rent and will probably necessitate an
eviction, or an unoccupied apartment that generates no rent but is ready
for immediate occupancy?
have a prospect who has a good record with his previous landlords, takes
care of the apartments he rents, but has a few blemishes on his credit
record that might disqualify him? Do not overlook the possibility of
getting a solvent relative or friend to co-sign for him and guarantee
payment. You should not have the co-signer sign up on the rental
agreement, as he may become a tenant. Instead, use our co-signer
form. This should provide you with just the security you need and
you may end up with a jewel of a tenant.
you must terminate your tenant’s tenancy on a 30-day notice without
cause, wait until the tenant has paid the rent for the month. That
way you will minimize your rent loss.
Make your life easier
and rent collection more certain by insisting that one check and one check
only is submitted for the full amount of the rent. In a roommate
situation, make it clear that each roommate is responsible for the entire
rent each month. Require one payment of the full amount by the due
date. Never accept separate checks from separate tenants. Not
only will this make administration easier, it will prevent one tenant from
successfully contending he can remain in a $1000 apartment because he
offered his $333 share. Additionally, don’t accept any checks from any
one other than the tenant.
Your deadbeat tenant
does not have to get off free. If he skips on the rent, and you
charge it off, you can submit a form 1099 to the IRS showing the debt
forgiveness as miscellaneous income. He will be taxed on it and can
deal with their collectors.
COLLECTION RELATED TIPS
1. Rent to Qualified Tenants with Excellent
Attracting, Qualifying, Verifying and
Accepting Only the Best Prospective Tenants and Requiring the First
Month’s Rent and Deposit Payment in Certified Funds
tenants come in many flavors and apply at your rental property with a
history of excellent, good, poor, or bad payment habits. You should start
with well thought out written rental standards for each of the properties
you own or manage. Such standards must include setting the rent rates and
maximum number of occupants, allowing or disallowing pets and waterbeds,
setting tenant income, asset, employment, and landlord reference criteria,
etc. The two most important prompt payment qualifiers are: 1. The tenant's
ability to pay the rent, and, 2. Verifiable landlord references. The
prospect must not only have a strong ability to pay rent by way of a
verifiable good paying job or business, but he must also have established
a good rent payment history with present and past landlords. An up to date
consumer credit report, which should always be obtained, usually does not
include residential rent payments, although it usually includes eviction
judgments. You will also find out how he pays other creditors (there could
be a tenant who has a sterling rent payment history and a lousy bill
paying habit, but he is the exception, not the rule). With respect to
landlord references, going through the motions of calling present and past
landlord references won't suffice. Thorough verification of the
information the tenant provides including the prospect's rent payment
record with present and past landlords is crucial to paving the way for
regular, prompt, and full rent payment while the prospect is your tenant.
decision has been made to rent to the prospect, some landlords accept
personal checks for the first month’s rent and security deposit. Only
several days later, and after the tenant has taken possession, does the
landlord sometimes discover that the new tenant's check has bounced.
Successful landlords have learned to require that the first payment always
be a cashier's check, or other certified funds. Although a money order,
certified, or cashier's check can be stopped, rarely will a tenant with
the funds to buy them and then play games. Depending upon your particular
property and rent collection policy, you may continue to have the tenant
pay in this guaranteed form. Currency is not recommended as a routine way
of collecting rent payments. You must designate specific methods of
payment in your lease or rental agreement. An example of this kind of
clause is: "All payments arising out of this contract, including, but
not limited to rent, shall be made in certified funds (money order,
certified or cashier's check) only; currency, checks and other forms of
payment will not be accepted." This may be added to the end of the
rent paragraph if there is room (have each and every tenant initial it) or
in an addendum.
2. Successfully Adopt and
Implement a “No Cash” Policy
Eliminating Mysterious “Cash”
Disappearance, Robbery and Theft of Rent Payments
currency for regular rent payments is a bad idea in almost every
situation. Cash--it's too liquid and does not leave a paper trail in the
event of its disappearance. Ever experienced the manager who said, “I
got busy and tossed the cash in the desk drawer (knowing it was not
“procedure”), and when I went back, it was gone?” By adopting a no
cash policy you will eliminate the risk of robbery, employee theft and
keep undesirable tenants who may be involved in illegal business
activities, such as drugs and the underground economy.
If a lot of
your tenants pay by cash now and use the "I can't afford to buy money
orders" excuse, you may want to consider going to one or two of your
local convenience or liquor stores and making an arrangement with the
store owner that if any of your tenants come in to purchase money orders
(for rent only) you will reimburse the store owner for the nominal cost.
If he obtains enough business from the increased store traffic he may
waive these charges. Inform, by way of serving a legally sufficient
notice, all of your tenants of your new "NO CASH" policy and
that it won't cost them a dime to have their cash converted to a money
order - it's now FREE. You may also consider allowing your tenants who
prefer paying by cash to deduct the cost of money orders or certified
checks ($3.00 to $10.00) from the rent. You should be able to find
the rules for changing the terms of a tenancy in force in your state in
our Landlord Law Center at (http://www.landlord.com/legalmain.htm).
If you have a rental office you should have a “No Cash Policy” sign
hanging where everyone can see, including prospective tenants.
Depending upon the situation, you may want to include a clause in your
rental or lease agreement informing tenants of your no cash policy. The
language would be “Landlord nor any of his agents will accept cash for
Rent or any other payments due under this agreement.”
3. When and How to Use a Co-signor
Using the Co-signor Safety Net and
Tenant Credit Builder
How many fewer cars would actually be
on the road if the person driving had to qualify on his own to buy it? We
don't know the answer to this question, but are willing to bet it is a
lot. Experienced sales persons know that the end user is not always fully
qualified for the financing he will need to acquire the car, boat, home,
or other big-ticket item he desires. There is no reason not to put their
experience to work for you. Rent is a big-ticket item, too.
There is no
reason to worry about the fully qualified tenant who can cover rent easily
out of his income and tender a substantial security deposit, but this is
not true for borderline prospects (mostly the young and those who do not
have a credit record or multiple landlord references) who are generally
more vulnerable to a bit of bad luck and more likely to fall behind
because of it. For these tenants, a qualified relative or close friend may
be willing to guarantee the rent payments. If this is so, then you will
have two incomes and at least one set of substantial assets to resort to
if the worst happens. Qualified co-signers should have an excellent credit
report, income, and assets (including home ownership). Don't forget
employers as co-signers as well (see number 16 below).
To set up a
co-signer arrangement, you must first pre-qualify the co-signer as you
would any other prospective tenant. Have him fill-out an “Application to
Rent” (one may be obtained at (www.landlord.com/landforms_main.htm).
Next prepare a co-signer agreement (see “Forms” section). Such an
agreement must be in writing and signed by the co-signer, or
“guarantor,” as he is referred to in law. This agreement should be
separate from the rental agreement itself, so as to avoid the pitfall of
making the co-signer a tenant, and specify exactly what the co-signer is
obligated to pay, whether the landlord must resort to the tenant for
payment first, whether any form of notice must be given to the co-signer
in the event of default in rent, that rent may be increased without
automatically voiding the co-signer agreement, and that the consideration
for the guarantee is the acceptance of the tenant as a resident. Don't let
the tenant or co-signer at the last moment (right before keys are handed
over) slip in a time limit on their guarantee of, say, six or nine months.
Make the period of the guarantee the entire term of the tenancy. On the
other hand, no one is willing to guarantee the debts of another in
perpetuity, so if the guarantee must be for a limited time, make it for as
long as you can. Get and include a provision in the rental agreement that
failure to provide a new guarantee on expiration of the first may, without
more, constitute sufficient reason for non-renewal or termination of
tenancy. See the form of agreement titled "Co-signer Agreement,"
below which you may use when the need arises.
TIP: Try to
negotiate a clause in the rental agreement and co-signer agreement that
allows you to charge the co-signer's bankcard for full payment in the
event of default.
4. Make Your Rent Payment
Clause Go Noticed
Using the Lease or Rental Agreement and
Any Follow up Letter to Get a Psychological Edge on the New Tenant
statement in your rental and co-signer agreements that late rent payments
may be reported to the three major credit-reporting agencies. The
possibility that a derogatory credit item might be reported may keep both
the tenant and the co-signer on their toes throughout the tenancy and
increase the chances that rent is paid timely. An example of such a
statement is, "In the event of failure to pay rent as agreed herein,
landlord, in his sole discretion, may report the same to such credit
reporting agencies as he deems appropriate."
part of your new move-in procedure, include a simple one page statement
describing your rent collection policy. It is that important (see the
Forms section “Rent Collection Policy and Procedure”).
5. Establish and Enforce Your Rent
Establishing and Enforcing Your Rent
Collection Policy and Procedures
You need a
firm and consistent rent collection policy to ensure prompt rent payment.
This is as important as establishing sound screening standards and
policies. The policy must be simple, easily understood, and uniformly
enforced. In fact, teaching your tenant this policy starts when he is only
a prospect. Explain your no-nonsense rent policy early in the screening
process: "Rent is due on the first and late if received after that
date," or "Rent is due on the first and you will have to pay a
late charge if received after the 3rd of the month." You need to let
the new tenant know that rent comes first and before any other bills. He
must understand that late payment is costly to you and that the cost will
be passed on to him. By doing this you impress on the tenant's mind that
you are fair but not a push over. Fortunately, most tenants pay their rent
timely, however, you still must rigorously enforce your rent collection
policy so that soon to be borderline tenants don't take advantage of you
down the road.
Here are some
items that must be addressed if your rent collection policy is to be
PAYMENT: Establish the amount of rent that is due and that this is the
amount that must be paid. Partial payments are not acceptable, constitute
a breach of the agreement, and require pre-arrangement with management if
they are to be accepted at all.
PAYMENT MADE: Set out the exact place at which the payment is to be
made, then make sure it is available to the tenant. If payment is by mail,
supply the tenant with at least 13 or 14 stamped, self addressed envelopes
with which to mail the checks. If payment is to be at the office, make
sure someone is there at times working people are likely to stop by to pay
their rent. Install a door slot at the manager’s office if there
isn’t one there now if the manager does not want to work late.
OF PAYMENT: There being so many ways to retire a debt, you must
specify one. Do so in the rental agreement and at the first meeting with
the prospective tenant. If you wish to exclude some methods, such as cash,
then do so. If you wish to restrict to one method, such as certified
funds, then do so. Make it crystal clear. See item number 25 below for a
sample rental agreement clause.
PAYMENT DUE: The first of the month is the commonly selected due date
for rent payment. You can select any date you wish. Make sure the tenant
understands that rent is due on that date, not any other.
PERIOD: If you decide to have a grace period, impress upon the tenant
that a grace period is designed to account for holidays, mail transit, and
things that are not in the control of the parties. The grace period is not
a margin the tenant can use to put off the rent payment. Never allow any
grace period to exceed five (5) days from the due date.
OR RETURNED CHECK CHARGES: Make sure the tenant understands that if he
is allowed to pay by check or automatic deduction of rent by his bank, he
is responsible not only for his own actions in tendering the payment or
ensuring sufficient funds are on deposit, but also for what his bank does.
The bounced or returned check charge applies if the check is dishonored,
regardless of whether the blame is his or his banks. Set it to cover the
actual cost to you, including your own bank's charges, unless a local law
places a limit on what you can charge. Also, impress on the tenant that
this is in addition to the late charge that will accrue for late payment.
The moral: a minor error can be expensive for everyone; pay by certified
funds or make timely bank deposits.
OF DEFAULT: The tenant must understand that rent payment, from the
landlord's viewpoint, is the core of the rental agreement. Your policy
should specify, and the tenant should know, that if a satisfactory
arrangement for late payment is not made by the expiration of the first
day rent is due or by expiration of the grace period, a termination notice
will follow. If satisfactory arrangements are not made in response to
that, eviction proceedings will be initiated. Then, if necessary, initiate
them. After starting an eviction, you can still, if you want, negotiate
acceptance of rent, late charges and legal expenses later. (You will, of
course, learn thoroughly the remedies provided in your state.) It is
needless to say that your tenants can expect of you the same faithful
performance of your responsibilities to them, such as doing necessary
maintenance, so they can appreciate the overall fairness of your entire
Acting quickly and in a businesslike manner is crucial to any successful
rent collection policy. Most tenants live paycheck to paycheck and if you
let the rent payment go two, three, or four weeks, the chance of putting
the tenant back on track is poor, so start early. Pick up the phone or
otherwise make contact with the tenant as soon as rent is late.
When your tenant starts paying late, he is probably having financial
problems he does not want you to know about. You can only evaluate the
risk to your position with information. Now is the time to update the
tenant's file. Verify employment. If the tenant is self employed request
an update of the same information that was obtained when you rented to him
(latest tax return, banking information, etc.). Having him fill out a new
rental application is a good idea. If he has given the authority to obtain
a credit report, or you have the right to obtain one under the Fair Credit
Reporting Act, one should be obtained. A copy of the relevant portion of
that act can be found at www4.lawcornell.edu/uscode/unframed/15/1681b.html.
The act states in part "any consumer reporting agency may furnish a
consumer report under the following circumstances and no other... (F)
otherwise has a legitimate business need for the information - (I) in
connection with a business transaction that is initiated by the consumer
(ii) to review an account to determine whether the consumer continues to
meet the terms of the account."
6. Try the Rent Collection Questions
that Really Work
Significantly Improving Your Chance
at Collecting All of the Rent;
Ask these “Golden” Rent
When you make
contact with the late paying tenant here are the five golden questions you
must ask him to ensure your best odds of collecting all of the rent;
WHEN WILL YOU PAY YOUR RENT? You must pin the tenant down to the exact
day, precise date and specific time, for example, "Thursday, April 6,
2002 at 5:30 P.M., is that correct?"
WHERE WILL YOU PAY YOUR RENT? Confirm the location providing
directions, if necessary, or tell him you will pick the rent up at his
employer's office or his residence.
WHAT IS THE EXACT AMOUNT OF RENT YOU WILL PAY? Repeat the amount. If
it is less than the full amount of rent ask why. Either accept it with the
warning that you are starting an eviction or set up another appointment
for payment of the balance as soon as possible.
WHAT WILL BE THE METHOD OF PAYMENT? Demand if appropriate that the
late rent be paid in certified funds only.
WHAT IS THE SOURCE OF THE RENT PAYMENT? Sometimes tenants don't have
the money and just try to placate you by giving an answer they think you
will like. You will throw them a bit of a curve when you ask about the
source of their rent payment. The absence of a ready, credible answer will
help you judge whether the answers to the other four questions were true.
For the complete booklet,