Collecting rent is one of most fundamental responsibilities of a property manager. Unfortunately, not all residents pay their rent on time, and some won’t pay at all. As we’ve shared in previous articles, delinquency management in multifamily properties is an important, and often overlooked contributor to operational performance. In addition to the obvious and direct issues associated with late rent payments, an ineffective process for managing delinquencies can:
Create blind spots and increase risk for a community or portfolio.
Reduce financial performance through unnecessary expenses, write-offs, and working capital requirements.
Disrupt operations, impacting productivity, employee morale, and resident turnover.
How do the best property managers tackle this age-old problem?
In our experience working on delinquency management programs with some of the largest multifamily operators in the industry, we have found some common themes that separate the well-run from the not so well-run. Here are 7 best practices that can help any property manager control delinquent rent and minimize the cost and headache of late rent:
Create a disciplined approach. Most property managers recognize the importance of a disciplined late rent process, where everyone knows the rules. And more importantly, everyone knows the rules will be followed. Nothing can ruin a promptly paying resident culture than inconsistent enforcement of the rules. One-off favors, payment plans, or exceptions set a dangerous precedent and lead to residents building up insurmountable balances. The challenge is to create the processes, training, and technology to ensure all team members are accountable for their role in being a good steward of the asset.
Impose reasonable penalties. Residents that cannot honor the obligations of their lease, should face consequences. Ensure your leases provide for both late fees as well as the recovery of any legal costs associated with collecting late rent. Make sure residents are fully aware of the fees. Display the fees prominently in the lease and in public places, rather than buried in the fine print.
Recover legal costs. Having to pay someone else’s legal bill is painful. It shouldn’t take too many months of paying these filing costs to realize the importance of paying rent on time. The harder part though is making sure these fees find their way back onto the resident’s ledger. It can be a tedious administrative exercise to sort through legal bills and attribute specific costs back to each resident. The most effective approach is to ensure you have electronic invoices that are automatically posted at the resident-level back onto the ledger. This ensures you recover these costs AND that the resident feels the pain of paying late. Just be aware that some jurisdictions have statutory limitations on reasonable legal fees that can be charged to residents (even if the lease provides for full recovery).
Align team incentives. Be careful what you wish for, some property management companies reward their site managers for accomplishing certain goals such as reducing expenses or vacancies at the property. Such goals are a recipe for exploding A/R. You shouldn’t be surprised to find that while legal expenses and vacancies may be down, delinquencies have skyrocketed because no one has been filing on or removing non-paying residents. Be thoughtful about the unintended consequences of team incentives.
Eliminate the emotion. Site managers see residents each day and develop relationships with them. These relationships can be a secret ingredient to retaining residents and fostering a great reputation for your property. Unfortunately, it requires a delicate balancing act to establish appropriate boundaries between the role of providing a great living environment with exceptional resident support and being the guardian of the asset that collects rent. Separate the functions. Let the site manager focus on great resident services, have a paralegal team be the bad guys that enforce the collection policy. The collection role requires an entirely different skill set and demeanor than customer service. In fact, some of the best run companies no longer keep this function at the site. This insulates the site manager from the emotional pressure (and administrative burden) of collecting late rent. Instead of succumbing to pressure to make exceptions or special payment arrangements, they can say “I’m sorry, but the late rent process is handled by another area. It is out of my hands. Here is how the process works, though.”
Automate with technology. Many property managers still rely on old-school manual methods to prepare notices and court forms, file cases, pay court and sheriff fees, etc. Software now allows for these processes to be put on auto-pilot. Balances can be pulled electronically from the ledger on a schedule to ensure timely and accurate execution of the collection policy. There is no longer any need for property managers to routinely be running delinquency reports or preparing collection letters. With a properly designed software system, there should no longer be any excuses as to why the collection policy hasn’t been followed. Similarly, the legal invoices should all be electronic and automatically posted onto the residents’ ledgers.
Ensure success in court. The goal should be to run a disciplined process that prevents delinquent rent case from progressing all the way to a judge. However; in our experience, 10-20% of late rent cases must progress all the way to a court judgment and even an eviction order before residents will come up with their rent payments. Losing in court can mean the difference between a manageable one-month deficit versus an insurmountable 3-months of arrears. So it is paramount that you (or your legal team) is armed with all the required documentation, licenses, and accurate ledger details to win a late-rent judgment in court. Ensure that your properties maintain an efficient document management system to simplify the court process and ensure you are prepared for court.
Late rent can never be entirely eliminated, but adopting these best practices will ensure that your properties are at least minimizing the impact on your business. Having a disciplined process with the above attributes is a win-win all the way around. Investors can have confidence that you are running a proper collection process with the least possible risk exposure and cost. The management team minimizes the headaches and risks of relying on manual processes. Housing agencies can be readily satisfied that you are in compliance with proper and consistent collection procedures. The residents, in the end, are better served by ensuring they uphold their obligations before situations progress to the point where an eviction is required.