Tough Economy Makes Tenant Debt Tough, but Not Impossible, to Collect

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.

Collection agencies are reporting that they are receiving many more files than two years ago.  The average amount of debt in these files has also increased.  Relaxed rental standards, coupled with the high unemployment rate, have put collection agencies in a tough spot.

The American Collectors Association reports that the collection industry debt recovery rate is down 30-40% over last year.  Angi Pusateri, National Sales Manager for RentDebt Automated Collections, confirmed that her company is experiencing a similar decline in debt recovery.  However, RentDebt Automated is weathering the storm well and has added employees in the last year at their offices, which are located in Nashville, Tennessee and Dallas, Texas.

Jeff Cronrod, the President of Rent Recovery Service, a national collection agency specializing in the collection of tenant debt, estimates that nearly 40% of the debtors his company is trying to collect from are unemployed.  “It is not that these debtors do not care about the debt or their credit. They simply have no means to pay the bill,” Cronrod explained.

Saul Wertzer, President of Rent Recover Solutions in Atlanta, Georgia (not to be confused with Cronrod’s Rent Recovery Service), told me that his company has also seen an increase, not only in the number of collection files, but also an increase in the average amount of each file.  I have heard this from every company I have spoken with, in every corner of the country.  Wertzer went on to say that it is important for landlords and property managers to think long-term about debt they are owed by previous tenants.  Over time a good percentage of tenant debt is collectible.

If your collection agency has served you well in the past, stick with them, even though recent recoveries may have dropped.  Trust me, every agency is experiencing a tough time collecting debt.  Don’t jump ship and hire another agency, because eventually the economy will improve and many of these tenants who owe previous landlords will get back on their feet.  When they do, they will work to clean up their credit and pay their debt. But don’t wait until then to do something about it.  Now is the time to make sure the debt you are owed is reported to all three major credit bureaus. Whether your collection agency reports the debt or you report it via an automated service, make sure every dollar you are owed is reported.

Doing so will greatly increase the odds that you will get paid the debt your previous tenant owes you.

Email me your tenant screening and tenant debt questions.

Bill Gray

www.thelandlorddoctor.com

www.theinformedlandlord.com

Copyright 2009 – Click here to reprint/re-post

Tenant Debt & Screening Forum www.theinformedlandlord.com

End of Year Housekeeping – Old Tenant Debt

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.

Take the time to do some end-of-the-year housekeeping.  Start by separating old tenant files which have no balance due from the ones that owe.  One by one, go through the files with balances to make sure each contains a signed lease; then, make a breakdown of what is owed.

There are three different options to select from when collecting your lost profit.   Each has its pros and cons.

1. Got to court and sue the previous tenant for the balance owed.  This option can be expensive and time consuming, but with the proper outcome, it can be an effective way to collect tenant debt.
2. Hire a collection agency that specializes in collecting tenant debt.  If you do not have an agency, spend an hour online and find one.  If you don’t know what to look for in an agency, read my blog article on how to hire a collection agency to collect tenant debt. “How do I Hire a Collection Agency to Collect my Tenant Debt?”
3. Report the debt to the three major credit bureaus, Experian, Equifax and TransUnion, as a collection account.  The ding on your previous tenant’s credit report should remain there for seven years after they move out.  There are several online resources for reporting tenant debt to the credit bureaus.  It’s worth your time and effort to research them.

Too often, I hear landlords advising other landlords to forget any debt they are owed and move on because it is not collectible.  From experience, I can tell you this is not true.  While all of it may not be collectible, a percentage of it is, maybe not immediately, but over time, you can recoup some of your profit.

There’s only one way to ensure that you won’t collect any of the debt, and that’s to do nothing, storing the files away and resigning yourself to accept the loss.   Trust me when I tell you that doing nothing will cost you profit.

Email me with your tenant screening and tenant debt questions.

Bill. Gray

The Landlord Doctor

www.thelandlorddoctor.com

www.theinformed.com

Bill@thelandlorddoctor.com

Copyright 2009

Are Landlords Increasing Occupancy: Or Are They Increasing Tenant Debt?

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.

I explained to her that not only had the new policy cost the property money in bad debt, the policy had also made the debt less collectible. As the amount each debtor owes increases, so do the odds that they will never pay. The amount becomes so high that many debtors will simply throw up their hands and live with the debt, rather than come up with a plan to pay it.

I understand that these are very trying times and difficult decisions must be made; but please make decisions with your eyes wide open and with an understanding of what the subsequent consequences could be.

Contact me with your tenant debt and screening issues.

Bill Gray

http://www.thelandlorddoctor.com

Bill@thelandlorddoctor.com

Copyright 2009

Landlords Who do Not Screen are Shooting Themselves in the Foot

Of the 20 to 30 emails I receive per day from landlords with tenants who owe them money, 5 or 6 are from landlords who did not screen their tenants before they rented to them and are now upset that the tenant burned them.  I shake my head when I read these requests for help.

For whatever reason, the landlord rented to someone who “looked okay” and then got upset when the tenant burned them.  Would these landlords buy a used car sight unseen?  Or show up at a dog shelter and say, “give me any dog, I don’t need to see it or know anything about it.”?  Of course they wouldn’t.  As absurd as this sounds, it is basically how they run their rental business.

When a Tenant is Behind in Rent, When Should You Call it Quits?

Today I reviewed over eighty tenant debt accounts and noted that the average balance due is significantly higher than a year ago. With the exception of the most expensive areas (such as California, New York City, and the northeast), the average amount of tenant debt is normally between $2500 and $3000.

I separated all accounts over $4000 and took a hard look at them to determine why there were so many high balances.  The answer was that landlords allowed tenants to go month after month paying little or no rent, before they were eventually evicted or the tenant skipped out. This is obviously a sign of the times.

I assume landlords are allowing tenants to live in their units for three to four months without paying rent for one of two reasons:

Landlords Should Consider Settling Tenant Debt

Some of my most uncomfortable moments have come when talking to landlords about considering settlement offers.  Often, the landlord is so emotional about the debt he or she is owed that settling is not an option.

After 12 years of reviewing tenant debt accounts, I can tell you with certainty that landlords who seriously consider settlement offers recover much more money than landlords who don’t.

If a previous tenant makes a settlement offer, he or she is looking to resolve the debt for some reason right now.  Maybe he is trying to rent another place to live, or trying to obtain a mortgage or another loan. For whatever reason, he is motivated to pay you.  If you ignore the offer, he may find another way to rent or get a mortgage or loan without paying you.  This may be your only opportunity to collect even part of what you are owed.

My Previous Tenants Were Roommates – Who Owes Me the Money?

In most cases they both owe you.  First of all, each individual over the age of 18 should have signed the lease.  If this is not your policy, change your policy today.  There are several important reasons for requiring all adults to sign the lease, but for this article we are speaking simply to who owes you money.

Assuming your previous tenants moved more than 30 days ago, you should now report each of them to all three major credit bureaus – Experian, Equifax and TransUnion.  My article, “Tenant Moved Out – Left You Holding the Bag” explains how to determine how much, if anything, you are owed.

What Documents are Required for a Collection Agency to Attempt to Collect Past Due Rent?

My experience has been that an agency may not take over a debt before the 31st day after move out. Different agencies require various documents. Have these documents organized and available:  Signed lease, rental application, move out statement documenting all charges, and any supporting documents such as receipts. See my other posts for more details.

For more details, see my post:   Tenant Moved Out – Left You Holding the Bag

If I can help, contact me at Bill@thelandlorddoctor.com

Thanks for the question and good luck.
Bill Gray

www.thelandlorddoctor.com

www.theinfomedlandlord.com

Copyright 2009

How do I Hire a Collection Agency to Collect my Tenant Debt?

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

Evicted Tenants – Will they ever pay you?

Are you certain your old tenant won’t pay his or her bill?  Landlords tell me several times a week there is no way their previous tenant will ever pay what they owe.  As I said in a previous post, if you have a crystal ball that tells you he won’t pay you what he owes, why didn’t you use that magical crystal ball before he became a tenant?

The truth is nobody knows whether the balance will be paid or not. The one way you can make sure not to get paid is by putting his file in the drawer and leaving it there.

Think about it.  Your tenant moved out with the knowledge that you were owed money. The renter might not have known how much, but most likely understood it was some amount.  After moving, the former tenant either hoped you would not go after the debt, or did not think you could.