I read a headline recently from a respected insurance provider that there are 2.2 million landlord-tenant disputes filed in U.S. courts each year, which got me thinking that that’s a whole lot of time and money lost to deal with residents who default or dispute lease obligations. Take a look at the math using widely distributed industry cost estimates, assuming that only half of all disputes require eviction and turnover:
- 4 staff hours @ $25/hr. start to finish per dispute of any kind = $100 x 2.2 million disputes = $220 million in staff cost
- Average (low-end) cost per per eviction and turnover @$3,000/incident x 50% of disputes = $3.3 billion in expense
- Those costs added together total: $3.520 billion total annual industry cost
Let’s be generous and cut the number of disputes that result in eviction and turnover in half again and we still end up with a giant bite out of bottom line profitability across the industry of over $1.5 billion in lost revenue as a result of moving in renters who don’t work out. Reminds me of HR Block commercial during the Super Bowl that told America to “Take Back Your Billion!
No surprise: back-end, front-end and in between, property companies have a huge incentive to do whatever they can to properly screen applicants and to put as many tools in place as possible to help those residents be successful throughout the tenure of their leases. How good are the tools in place?
Screening
Tenant screening is the first line of defense and has become increasingly sophisticated, but the data is only as good as how it’s used.
Conditional Acceptance Terms
A second bite at the apple to weed out potential non-performing residents. After all, traditional thinking is that extra cash deposits will cover any risk if the resident doesn’t work out. The focus in this scenario is on recovery. New options in the marketplace provide residents with tools to better manage their payroll in order to make sure that rent is paid on time. These options focus on improving performance throughout the tenure of a lease versus trying to recoup losses when a resident falls into arrears or defaults with the costs outlined above.
Lease Guarantors
Another safeguard often accepted as a hedge against payment default is a guarantor. Despite the extra time needed to check that the individual guarantor is up to snuff, finding someone who will ‘stand up’ for an applicant can be difficult. In high-end markets, new guarantor services are willing to ‘buy the risk’ of a loan to an applicant with fees that go into double digits; no problem for a seven figure applicant who just never built a credit score, but somewhat predatory for the little guy living paycheck to paycheck in need of financial help.
Automated Payments Options
Providing a menu of automated payment options has become a smart strategy for communities that recognize the value of virtually removing the resident from the payment process. As a hedge against payment default, however, not all payment plans are alike, and almost all plans require that the resident have some involvement in making sure funds are available when rent is due from their bank or debit account, for example. Newer options in the marketplace provide a form of rent savings directly from payroll throughout the entire month before rent is due. This provides residents with better money management support and communities with the assurance of knowing funds for rent will be put aside from residents’ employers before they can be spent on other expenses.
What combination of safeguards works for your communities?