Bill Gray's Blog

A credit report is basically a report card of how a particular person pays their bills. Why are monthly rent payments not reflected as a trade line on the credit report? I as well as many others, have felt for years that rent payments should be included on the credit report, just as mortgage payments are. If a tenant pays the rent on time every month, they should be awarded credit for paying their obligations. On the other hand, a tenant who does not pay their rent, or pays late, should be dinged on their credit, as they are if they pay a credit card late or skip the payment.

This month Experian announced that it has acquired RentBureau of Atlanta, Georgia.  This acquisition may finally make it possible for rent payments to be accurately reflected on the credit report. RentBureau is the nation’s largest consumer-reporting agency specific to the multi-family industry. RentBureau provides landlords and property managers a way to report rent payment history.  Click here for the press release

Imagine being forced to write a check to a previous tenant who still owes you money.  This is a very real possibility if you fail to comply with the law after the tenant moves out. With the amounts and occurrences of tenant debt rising, having to pay a previous tenant who still owes you money only adds insult to injury.

 

In most states, landlords and property managers are required to notify their tenant if they do not intend to refund the tenants deposit after they move out. States vary in the required timeframe and method of notification, but most do require it. This notification is referred to in various terms such as SODA (Statement of Deposit Account), Deposit Disposition, Final Account Statement, etc.  Some states require the notice be sent via certified mail, while others accept First Class mail notification.  I advise landlords to mail this notice via Certified Mail, whether the state requires it or not.  Sending it Certified Mail provides you with a receipt proving you mailed it and complied with the law.

There are many reasons why you shouldn’t allow a tenant to pay rent late, but the legal implications must always be at the top of the list. Unfortunately, by being the nice guy, or gal, and accepting late rent payments, you might be establishing grounds for a Fair Housing lawsuit.  Last year, I sat in on a seminar given by Milwaukee landlord-tenant attorney Tristan Pettit, where I learned that case law has been established that says you cannot accept late payments from one tenant and not accept late payments from another.

 

The Fair Housing Act makes it illegal to “set different terms, conditions, or privileges for sale or rental.”  By accepting late payments from one tenant and not another, you may be violating the law.

The way in which you explain, or don’t explain pet deposits can cost you profit.  If landlords could spend just one day as a professional collector attempting to collect tenant debt, one of the top objections they would hear from previous tenants is about pets and pet deposits.

 

“The urine spots on the carpet are covered by my pet deposit” is one example of a tenant either intentionally or unintentionally misunderstanding the pet deposit.  Many pet deposits are non-refundable.  If this is not fully explained at lease signing, most likely the tenant will believe that the pet deposit is no different than the standard deposit he placed on the rental unit.

The downturn in the economy has caused many landlords to lower their credit requirements for new tenants. Of course, lowering credit requirements increases financial risk.  Renting to a tenant with little or poor credit increases the likelihood that the tenant will at some point leave owing the landlord money. 

 

This change in rental criteria is understandable, considering the need to keep all units rented.  But know that when you lower your standards and in turn incur debt, this debt will be tougher to collect than if you had rented to a tenant with good or great credit.  If you use a collection agency to collect the debt, you should also lower your expectations about how much you feel they should collect.

  While the end of the year is a very busy time of the year for most of us on a personal level, it is usually a slow period for landlords.  Many of us spend this time working on our taxes, cleaning out our desk drawers and preparing for the New Year.

 

One often overlooked piece of housekeeping that impacts your profit is old tenant files which still have balances due. All too often, landlords simply file them away and forget them. By storing these files without taking any action, you are literally throwing money away. You may think it’s impossible—that you’ll never see a dime of the monies owed, but some percentage of the debt you are owed is collectible.  It may not be collectible today, but over the next seven years, some of that money most likely will be paid.

 

The poor economy has caused landlords and property managers to take drastic measures to lease units and keep them occupied. Some of the measures are understandable, considering the circumstances, but others make absolutely no sense at all.

This week I reviewed approximately 80 files from previous tenants who left a large residential property in Sarasota, Florida, owing money. I sat with the manager and discussed how the residential housing market has been turned on its ear, and in some ways seems to be in a downward spiral. I noted that not only had the number of debtor accounts more than doubled, the amount of the average debt had increased by at least a third.

The manager explained that the property had tried to increase its occupancy by allowing tenants to try and work out payment arrangements. As I looked at her over this mountain of files, I asked her, "How did that work out for you?" She understood my sarcasm and explained that the owners of the property had pressured her to do something to keep their residency rates up. She agreed that allowing tenants to pay late had only delayed the inevitable and increased the amount of bad debt the property must now write off.

I would argue that in such cases, if closely analyzed, the cost is actually even higher. The tenants she allowed to get behind on rent grew accustomed to management's tolerance. When she finally drew the line and required payment, she was then often forced to file eviction proceedings before these tenants would leave the property. The cost of filing these evictions must be added to the lost rent and damages, etc. What if she had evicted the tenant after the very first month the rent was not paid and found a new tenant that did pay the rent on time? I realize this question is easy to ask in hindsight, but it is a question that should be asked when these kinds of management changes are considered.

Handing my tenant debt immediately to a collection agency is not my first preference.  Myself, I would first report the debt to Experian, Equifax and TransUnion, and let the ding on the debtor’s credit report work a few months before I gave it to an agency that will charge me a hefty commission.

Collecting tenant debt is much different than collecting other debts, such as credit card debt.  A collection agency represents you and your business, and you could be taken to court should they violate the law.  And, just as important as any legal matters, is how well they will collect your debt. 

I have worked in the industry for 12 years and would like to believe that most collection agencies work hard, ethically and within the law.  But, as in most industries, there are those agencies that I consider to be renegades.  They operate outside the law, or right on the edge. Unfortunately, these companies get all of the press, thus making all agencies look bad.

A vital part of tenant screening requires more than learning about applicants, their employment and credit history—it’s learning everything you can about their previous rental history. Yes, former landlords who have rented to this tenant before have a wealth of information which should be weighed carefully before you approve an application.

Think about it. For six months or six years, former landlords have received or not received payments from your applicant. They know how the tenant left the property and about any complaints made when they leased it.  Their file and recollection can provide you with more insight than you’ll find by calling employers or ordering a credit report.

Start with the end in mind and weed out any applicants who might not treat your property with a gentle, kind, and caring hand. Was their former landlord impressed with the condition and cleanliness of the property when the tenant moved out?  Or were they overwhelmed and disappointed with the lack of attention and personal consideration they showed by leaving the unit a mess?