I frequently hear frustrated landlords complain that “I’ll never see that money, so why even bother trying to go after a tenant who owes me?”
Sometimes that is true, but not always. It is almost always worthwhile to make an attempt to collect what is owed to you. By following the simple steps and procedures outlined below you can begin to reduce the amount of money that tenants owe you and ensure that your business becomes even more profitable.
The best way to get nothing is to do nothing
The only way to guarantee that you won’t get anything is to do nothing. Far too many landlords throw up their hands and assume that nothing can be done. That is far from the truth. Here are some simple steps that you can use to start making money on collections.
Use a good application
One of the most common myths out there about collections is that all you need is a name and a social security number in order to do collections. While important, that is far from all of the information that you need.
However going to a tenant while you are in the middle of a dispute about money and asking them for their date of birth, email address, emergency contacts, employers name, Driver’s License number, or what bank they use—that isn’t going to go over very well.
That is why you should ask for that information up front. Most of the time you won’t need at all as part of the initial screening, but it is important to have in case you need to take the tenant to collections. It is critical to debt collection efforts to have enough information about the tenant to find them, and their assets, should they become delinquent. All applicants must be fully screened including credit, criminal history, employment, previous landlord, and previous address history.
Moreover, it is essential that you keep that information up to date. That is why landlords increasingly require tenants to make “Renewal Applications” each time they sign a new lease with them (you can use the same application form). This allows you to update key information and also to verify that the tenant still qualifies for the property.
Do through tenant screening
Not only is tenant screening helpful and necessary as part of the qualification process for tenants applying to rent, it gives you a wealth of information about the applicant, including their banking and credit card information, their previous addresses, and in some cases even their employment information.
Use a good lease
The Utah Apartment Association lease was specifically designed by attorneys who regularly (and successfully) collect from delinquent tenants. There are several provisions in the lease that can help protect you, including language that can make the tenants cover the cost of using a collection company and a clause that allows you to do background checks and searches on them at any time.
If you are not using the UAA lease, you should take a look at it. You’ll be impressed with the protections that it offers to you.
Select a collection company
You can save yourself lots of time and stress if you shop for an collection company before you need them. That way you can set up your account with them at your leisure and you fully understand their practices and policies in advance.
It also is important for you to decide if you will use a Collection Agency or a Collection Attorney (and in many cases it pays to have access to both choices for different circumstances).
Collections Agencies generally operate through the credit reporting system and work on a “pay-when-you-get-paid” model where they take on the account for little or no charge and then take out their hefty fee as the money is being collected. They usually only require that you submit to them a bill for the services rendered along with some documentation, and then they put that information on the tenant’s credit report. This is usually the easiest and best route to go if you worry that the tenant really doesn't have the money to pay you.
Collection’s Attorneys operate through the legal system where they get a judgment against the tenant and then use that judgement to garnish wages or bank accounts. They are usually much more aggressive and effective—when there is actually money to get. Most of them operate on a model where you pay them in advance for their services, and then they also get a cut of whatever they collect.
Send the tenant a bill
Once you have a tenant who owes you money move out, the first step to taking them to collections is to send them a bill. Generally this is done by sending them a letter that outlines the cost of the damages they did and the amount of unpaid rent and fees that they still owe you. You then would give them a credit for their deposit, a bottom line amount that they owe you, and an invitation to contact you to pay the amount due or work out a payment plan—or else.
This step is key because it sometimes is all you need to do. If the collections companies' first step is going to be sending a threatening letter, why not do that yourself and see if it works? Best case scenario you save yourself a fee, and worst case scenario you only wasted a stamp.
Establish a “Pipeline”
It takes a while to do collections. That is why the best practice is to establish a “pipeline” where you consistently get revenue from collections by putting cases into the pipe on one end and getting revenue out on the other. It will take a while to get this established as a source of regular income, but once it is up and going you will regularly be getting money so long as you regularly submit cases for collection.
The average rental collection case takes three years. This is because a tenant who doesn’t pay rent or their other bills is typically experiencing a financial crisis, like a medical injury or job loss. While there will always be those who don’t recover, for many just a few months can make all of the difference in re-establishing their financial health.
Some collection agencies tell you they can’t collect old debt or charge you more if the trail isn’t fresh. This is because usually the lowest hanging fruit is from debtors who get scared when they get the notice and pay immediately when approached by the collector. The company still gets it’s hefty fee even in these easy circumstances, for little very effort — typically just a letter or phone call—and that is their business model.
On the other hand reputable collection agencies will continue to pursue your debt indefinitely, or until the statute of limitations runs out, which can be many years after the default. Some of the better agencies are still collecting debt from the 1990’s.
So, be patient and put tenants who owe you money into the “pipeline” mentioned above. You never know when that deadbeat tenant who stiffed you for a few hundred dollars in damage and rent will decide it’s time to shape up in order to buy a house or get a job that requires they have a decent credit score, or maybe even mature enough that their conscience starts to bother them. And when that happens they will pay you what they owe you.
Avoiding Collections is much easier than doing Collections
You can’t get blood from turnips, so don’t rent to turnips! Don’t rent to people who have extremely poor credit, or who have a history of using things without paying for them. Anybody who has been in this business long enough will begin to notice that there are usually clear and distinct signs up front that a tenant is going to be one of “those tenants” that end up owing you a lot of money at the end. Pay attention and make sure that if you do take a risk that you are well aware of what you are doing.
Another important way to avoid going to collections is ensuring that you get a large enough security deposit. One shocking statistic is that almost half of landlords in the Western United States don’t even require a deposit large enough to cover one months worth of rent. And one in ten landlords have a deposit that is half what they charge for monthly rent.
Unfortunately these landlords are the most likely to be burned by bad tenants. After all, if the tenant owes you $900 in back rent and $450 for damages they have done to the property and all you have is a $500 deposit, you will have to go after them for to get that $850. However, if you had a deposit of $1200, then you would be looking at only $150 for collections—which is much easier for them to pay and much easier for you to collect.
Remember, deposits are designed to cover as much as possible your worst case scenario—not the average amount of damage that any given tenant might do.
Finally, one of the most important ways to avoid collections is to get the tenants to pay for damages while they are still living in your home. The first part of that is to bill them. The UAA lease allows you to bill the tenants immediately for damage that they do to the property, and evict them if they refuse to pay. The second part is to identify damages early by doing inspections. Almost always the earlier you catch the problem, the easier and cheaper it is to fix.