It’s a common misconception that property managers are also debt collectors, specifically as it relates to tenants who default on their rent and any other amounts owed to their landlord. While some management companies do perform a limited range of debt collections, it usually doesn’t last much past the termination of the tenancy.
What do Property Managers Collect on?
Generally, a property manager’s main duty is to collect rent, late fees, and to enforce any other financial obligations of the tenant on behalf of the landlord. If a tenant is late on rent, the manager should actively work to get the tenant to pay the rent. That may mean a process, or series of processes, including phone calls, emails, letters, and other steps that eventually end with evictions. This is a common practice and most managers include these things in their range of “full-service” offerings. They also should enforce payment of late fees, repair costs for damages or repairs if the tenant is responsible for them, and for any other fines or fees, such as tenant-responsible HOA (Home Owner’s Association) fines or city or county code violation fines. If any of these things are the owner’s fault or responsibility, the owner should pay, but if they are the tenant’s fault, the tenant should pay and the property manager should enforce collection of the payment.
What happens when the tenant doesn’t pay?
Most experienced property managers have written policy that you can request a copy of, or that may be included in your lease to address such a common occurrence. One effective practice is to pay the “oldest charge first” from any income received from the tenant. So this means, if the tenant has a late fee in February, but they don’t include it by the time they eventually pay the rent, the late fee will carry over into March. So when the tenant makes his/her March rent payment, the property manager applies any funds received to the “oldest charge”, which is the unpaid late fee for February. Unfortunately for the tenant, now part of the March rent is unpaid, subsequently creating a second late fee. Our policy at Management 1 Tri-Cities is to apply a late fee for “any portion of rent that is unpaid”, so no matter when a late fee is collected, if it results in rent shortage, it will also trigger an additional late fee for the second month, and so on until the tenant finally gets with the program. This is not a sneaky practice and we do give all tenants clear and well defined information, not to mention it’s outlined in our lease, it may happen that tenants end up with a series of recurring late fees due to simply not paying just one late fee. We generally let this continue until the tenant is behind on more than one-half of one months’ rent, at which point we would recommend to the owner to file for eviction.
Bringing the tenant current
It’s our primary goal to have each and every tenant current on their balance owed. However, some tenants can be difficult no matter what tactics or measures are used. We go to great lengths to find an acceptable solution to every tenant’s late payment issues, but there is always someone who fights against compliance. That’s where enforcement comes in. If the tenant accrues a significant amount of late fees, or according to the way we perform our accounting, it’s actually considered “unpaid rent”, we strongly encourage the owner to file for eviction after a certain period of time.
What about Evictions?
Well, first evictions are never pleasant, and certainly always our last resort. When it comes time to recommend eviction, the tenant has been given just about every chance possible to get caught up. But if he or she doesn’t bring their account current, we take the proper steps to make sure the lease is enforced and the non-paying tenant is removed. This isn’t always easy on the owner and can put the property manager in between “a rock and a hard place”, caught between enforcing the lease with the tenant, enforcement of late fee payment, and by trying to protect the owner’s investment in the rental property. It does happen that some owners ask us to waive the late fees instead of evicting the tenant because (1) the owner pays for the eviction up-front, and (2) by evicting the tenant, it’s probably going to cause somewhere between 30 to 90 days of no rental income being produced by the property. Although our policy is to divide the late fee 50/50 between the owner and our management company, we are unable to waive our portion of any tenant’s late fees under “most” circumstances. This is primarily due to the excessive time and energy it takes to enforce and chase unpaid rents and late fees and the strain on labor in our office. Late fees, by nature, are purposed for three reasons: (1) penalize the tenant for not paying on time; (2) provide some compensatory income to the owner for the delay in receiving their rent; and (3) to compensate the property manager for the additional work we put into the enforcement process. If an owner wishes to waive their half of a tenant’s late fees, we are glad to comply with it, but we generally don’t waive the portion owed to the management company.
What happens after the eviction?
If successful in court (which we almost always are), the owner is issued a judgment for possession of the home and also a money judgment for the unpaid monies owed by the tenant. As for direct compensation, the owner is really only limited to collect from cash “on hand” which is usually just the tenant’s security deposit. Now, as a matter of general practice, most property management companies charge a security deposit equal to one month’s rent and simple math will tell you that by the time it takes to evict the tenant who owes at least half of one month’s rent, the security deposit is usually consumed in lost rent alone, well before the eviction is ever completed. Unfortunately, this doesn’t take into account any of the cleanup or repairs that may often be required in the rental property once the owner’s (or property manager’s) possession is restored. It’s not a pleasant experience for anyone, but surely most owners who go through an eviction lose a fair amount of money in the process.
So then what?
Well, once the tenant is out and the security deposit is consumed, it’s the owner’s responsibility to pay the out-of-pocket costs to restore the home to rentable condition and to wait the necessary time to place a new tenant in the property. Some property management companies will continue sending letters attempting to collect on the tenant for approximately 30 days after the eviction, but this is almost always fruitless and results in nothing but additional costs and time wasted. As the holder of a judgment against the evicted tenant, the owner can choose to attempt collections him/herself, or to hire a collections agency. From years of experience, I know that most collections agencies follow a series of prescribed steps, which usually doesn’t produce any income, and just ends up with the judgment on the tenant’s credit record. As many have heard the expression, a money judgment “is only worth the price of the paper it’s printed on”.
What is the best solution?
Unfortunately, for most owners, the best solution is to chock it up to a bad experience and let it go as water under the bridge. We at Management 1 Tri-Cities Realty & Property Management have a different solution to this problem and have had much better success rates than most collections agencies, and nearly all owners who attempt to collect on their own. As a subsidiary of our Management 1, we actually own our own collections agency, Crown Debt Recovery Solutions, but it doesn’t operate the way typical collections agencies do. For more information on our unique method of collecting unpaid property management debts, look for our next blog article where we go into detail on how our company, Crown Debt Recovery Solutions, can help recover some or all of your lost property management rental income.