Raising Receivables Recovery
FCO’s 10 debt collection best practices for rental property managers
Even in today’s healthy economy, the residential rent receivables that are written off as uncollectible remain at high levels. According to the National Apartment Association’s 2019 Income and Expense Survey, rents and damages sent for collections range from $79 to $103 per unit per year—or 0.5%-0.8% of Gross Potential Rent, depending on property type.
Renters’ debt disputes are more complex and frequent compared to a decade ago. Savvy ex-residents rely on the Fair Debt Collection Practices Act (FDCPA) and Fair Credit Reporting Act (FCRA) to ask for evidence of the debt and to dispute the amounts owed. Consumer attorneys and credit repair organizations increasingly deploy technology to supercharge FDCPA and FCRA challenges to property managers’ debt claims. The Consumer Financial Protection Bureau (CFPB) provides a new avenue—and ally—for debtors to complain about lease charges. And, call-blocking technology enables consumers to duck debt-related contacts.
To fend off these challenges, a well-tuned collaboration between a third-party collection agency and a property manager is essential to maximizing recovery of what is owed and minimizing litigation risk. Liquidation recovery and litigation exposure can improve by a factor of six to 10 times between well-run property management firms and those with lax operations.
Here are 10 collections best practices to help rental property managers increase recovery and reduce avoidable risks.
01 Integrate
Integrating the placement of accounting detail and documents from client property management software(s) to agency regularly increases the number of opened accounts, speeds time to placement and reduces inaccuracy and incompleteness. All three factors contribute to better compliance and higher recovery.
02 Provide documentation at placement to support the balance sought
Be sure to have a signed lease and application, identification of the debtor, final account statement itemizing charges, repair invoices to support claimed damages and move-in/move-out inspection reports and photos. The latter documentation is easiest to obtain right after moveout.
03 Meet with the resident at move-out to review charges
A move-out review of the condition of the property and itemization of charges in the final account statement provided to the ex-tenant can ease sub-sequent recovery of unpaid balances. Of course, this isn’t always possible.
If the tenant skips out, ensure that the final account
statement is sent to the tenant’s provided address to give adequate notice for
payment before placing the account in collections. Finally, consider a “handoff
letter” to the debtor, making them aware their account is being placed
in collections.
04 Damages demand documentation
As a rule of thumb, the documentation a property manager must provide under state security deposit law in order to withhold from a security deposit (e.g., repair invoices) should also be available to support the damages in a debt claim. Generally, damages owed must be more than normal wear and tear.
05 Follow the lease
For tenants who exit before the lease is up, ensure that the
date of re-renting is included
with the placement if the lease allows to charge for unpaid rent until the unit
is re-rented. Where a liquidated damages provision is applied, make sure the
property manager is not also charging actual damages at the same time when the
lease provides for only one method at a time.
06 Operators’ charge-off policies matter
Is the property operator charging for full flooring cost replacement for a short-term tenant who moved into a property with aged carpet and tile? Are additional charges for HOA-required fees added at move-out, but not clearly specified in writing at move-in?
These practices may well be challenged. Instead, consider prorating as appropriate, and make sure that fees to be charged are identified—in writing at the beginning of the lease—as a tenant responsibility.
07 Ensure tenant authorizations are broad enough
A well-tuned application or rental agreement makes clear that the landlord has permissible purpose under the FCRA to pull consumer reports for lease-related purposes that include both collections and move-in tenant screening. Good leases also make clear that the tenant agrees to accept email, mobile and text communications and to update provided contacts. These authorizations become more important under proposed new FDCPA rules for debtor communications.
08 After placement, let the agency handle it
Communications with ex-tenants and guarantors who are represented by counsel can be a problem. Where a property learns a debtor is represented by counsel, communicate this to the agency. Forward the agency the attorney’s letter of representation, if one has been provided, along with any attorney inquiries.
Another area of concern is credit repair organizations, which take a fee from debtors to clean up their file. They may ask an unwitting property manager to delete credit reporting in exchange for settling the debt. Forward these communications to the agency to resolve as well.
09 Go legal selectively
If you want to pursue garnishment or other legal action (where permitted by law) to secure what’s owed, make sure the debtor’s ability to pay and the amount owed are large enough to sustain court costs and delays. Also, be prepared for affidavits to sign and witnesses to send. Courts may ask the maintenance tech who walked the unit at moveout, for example, to appear to testify.
10 Respond promptly when asked
A consumer’s dispute may be subject to tight response timelines by the collection agency and property manager, especially where a credit bureau is involved. Often, the agency needs only a property manager’s verification of the amount owed, or the confirmation of a prior resident’s identity. Sometimes this request may come a year or two after moveout, when the ex-resident is back on their feet and wants to make good on her obligations. Prompt client responses to these agency requests speed resolution and improve recovery. The road ahead? Technology will continue to be both sword and shield in rental collections; that is, it will create new paths for consumer challenges, but ease document transfer through no-cost collection agency integrations. Well-run rental operators in clear dialogue with their collection agency can optimize debt recovery and limit litigation exposure when they follow best practices in their collections process.
