Successful Rent Collection Center
Collection Tips & Techniques- Some Secrets for Collecting Money

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 One)

Just 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 damages.

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If 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.

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The single 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.

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While the 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.

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We often 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.  Springstreet 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.

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If you have a tenant who has skipped out on his lease owing you rent, Webgator 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.

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Most 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.  It 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 Center.”

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There are 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.  Browse our Info Center and Bookstore.  We have articles and books that will help you learn how to do this.

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Don’t 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.  We 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.

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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 mailing address.

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We 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.

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At the 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.

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Pay 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.

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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?

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So you 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.

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If 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.

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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.

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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.

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LONG COLLECTION RELATED TIPS

1. Rent to Qualified Tenants with Excellent Rent Histories

Attracting, Qualifying, Verifying and Accepting Only the Best Prospective Tenants and Requiring the First Month’s Rent and Deposit Payment in Certified Funds

Prospective 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.

When the 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

Accepting 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).

TIP 1: If you have a rental office you should have a “No Cash Policy” sign hanging where everyone can see, including prospective tenants.

TIP 2: 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

Include a 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."

TIP: As 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 Collection Policy

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 successful.

FULL 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.

WHERE 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.

METHOD 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.

WHEN 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.

GRACE 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.

BOUNCED 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.

CONSEQUENCES 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 rental operation.

TIP 1: 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.

TIP 2: 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 Collection Questions;

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;

1. 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?"

2. 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.

3. 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.

4. WHAT WILL BE THE METHOD OF PAYMENT? Demand if appropriate that the late rent be paid in certified funds only.

5. 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.

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