Letting Tenants Pay Late As An Advantage?
I own property in more than one town and I have a situation that I find very interesting and I wondered if anyone else has seen or tried this. The particular PM I went with in this town told me up front that they don't charge late fees. Also, as long as the tenant pays, even if they get as much as 6 weeks behind, they don't try to evict them. I only have a few houses with this PM but strangely enough, it has worked beautifully. This PM gets higher rents, and has far fewer vacancies because the long term tenants in the area all know this PM and know that he is not going to be on their back if they have a bad month. I have found it actually pays off well because the tenants stay put, and again, I get higher rents. What good does it do to try to evict after 5 days if you lose on both vacancies and lower rent. This may just be a very unique situation but I am thinking about trying it in other areas. Any similar experience or feedback?
I am slightly different but similar. I work with my tenants. I actually like most of them. More than likely, it is the personality, not the lack of fees, that keep that PM busy. I look at it this way. If I have to evict it is because they are behind. If I collect, it will be costly and unlikely that I receive all that is due. It takes approx 3 weeks with no complications and $65.00 to evict. Plus 1 month to clean and screen to get rented again. At $450.00 per month, thats approx $1200.00 loss by eviction whereas if I work w/ them, even to the point of forgiving SOME of the money due, it is less costly to keep what I have.
I do charge late fee's to protect myself legally. It may be thin or no legal safety net, but it is also a negotiating point.
Good Luck,
Shawn(OH)
Thanks for the feedback Shawn. What was so interesting about this PMs approach, was the fact that it goes against everything I have read. Now I know there is a difference between what people actually do, and what they say others should do. However, every book I have ever read says to charge late fees, strictly apply them, and post eviction notices on the first day you can. I wonder if part of it may have to do with the properties themselves also? I suppose a large percentage of real estate owners have a substantial mortgage payment to make each month, and the reality or even thought of not being able to make their payments prohibits them from trying this. I own outright some of my properties and have very reasonable mortgages on others so this method of operating wouldn't cause me any undo stress. On top of this, as I pointed out in my message above, it is currently working out in my favor if I look at a several month time frame instead of a day to day time frame.
I can support the option of leaving tenants in the property in some cases but not all.
We have one tenant that is late 5 out of 6 months. They always pay the late fees and often write the check with late fees into in and ask us not to cash til x date.
We have used this "extra" cash to actually pay for some rehab work so We actually make out with no cash out of the pocket when you balance it out. The late fees have been as high as $150.00 but avg about $80.
Since you roll your $ from one property to the next it is not so bad if you have these kind of tenants.
Well, I guess there's one in every crowd.
I'm from the old school. Your PM is popular because he don't do squat for his fee. When they pay, he takes his cut and remits the rest to you. If and when they don't -that's your problem. A handful of professional rent scammers will put the financial hurt on you.
I wonder if McDonalds, Krogers, or Countrywide have heard about your way of doing business. There's good business practices and there's receipies for disaster. Big investors can afford to make big mistakes. Small investors can't. I'm concerned that you're skating on thin ice.
I don't know what type and quality of people that PM is renting to, but the people that I am renting to are people living month to month, with no savings and are barely making it.
When they become late, it means that they made the choice to spend their limited funds on Cristmas presents, drugs or other non-essentials and decided not to pay the rent. To catch up would mean they would have to economize for months or even years. These tennants just will not do that, and therefore never get caught up.
What bothers me the most is not the loss of money, but the uncertainty. If I could lower the rent $100 and get it I would. But even if I lowered the rent, I still would probably get excuses.
When a tennant is late, and starts lying about when you will get it, it cramps my life. I spend alot of time thinking about if I am going to get the rent, and spend alot of time chasing tennants, leaving messages etc. I would rather spend that time working on another deal. If I miss a deal that could of made me $10,000 because I spent that week chasing down Bob the late tennant, his lateness has cost me alot of money. Much more than the late fee. Also when I go to the bank, I have to show the bank that my tennant has not been paying the rent. Then the bank lowers my income for considering my loan purposes and declares that I don't qualify. So I can pay hundreds or thousands in extra interest while I wait for the financials to look better.
I find that when a tennant starts to be late, they start to misbehave in other ways. They figure the landlord is a pushover. They get pets and let them mess up the rental. They cause damage to the rental. They don't keep the rental clean. Every one of my late tennants has had cleanup problems (leaving junk around and not cleaning up for months)
Interesting feedback. As far as the PM not doing his job, it is a family business that has been in the area for 62 years so I don't think they would survive that long without at least getting a bad reputation in the area(I checked). I personally know some of his other clients that have 100+ units with him. Again, I didn't say he doesn't evict. He will, and does. It seems like tenants in this small town(pop. 22k) know what the other PMs are like and they would rather pay than have to be evicted and have to deal with a worse PM. Six weeks is about his cut off before he files papers although he will contact me and let me know the tenant's situation before he does anything. It sounds different to me also, but on the other hand, its hard to argue with success. There are houses close to mine that seem nicer but can't rent at even lower prices. He has found renters for mine before I finished rehabbing them and I haven't had any problems in the year I've used him.
As far as the tenant not being able to catch up when they get late, I think thats true but it doesn't seem to matter. For example, I know of one house that he has managed for seven years. I was told by a cousin of his who helps me find homes, that the tenant had been late on paying almost since she moved in, but she always pays. What difference would it really make if all your tenants stayed for at least 7 years but they paid on the 21st instead of the 1st?[ Edited by davmille on Date 01/13/2004 ]
I try to enforce late fees, however, I manage most of my properties. I have never had a tenant leave because I am too strict on late fees. At the same time I try to work with tenants that are having temporary problems. This means that I still charge late fees but that I won't file a three day notice to pay or quit. On the other side, my tenants think I am much more responsive than a PM when it comes to maintenance. The only turnover I have had in the last two years was a couple who bought a house.
I also have rentals where my partner and I have long term tenants in houses, condos and small apartment units.
Our average stay has been 3-4 years with the longest so far being 10. We are and have been trying to get them to purchase a property. There are some months/years where we think we have been a little too lenient. The costs of turnovers have been mitigated by working with our long-term tenants. If someone comes to us first, we are only too happy to work out a payment plan. The longest we have been financially able to work with someone has been bi weekly payments for 3 months. Our margins are really tight still. The first 16 months of the rental, no one is allowed to be late. Notices are server promptly. Our rent is due usually the 28th or 29th with an incentive (formerly known as a late fee) to be in our bank accounts by the 1st of every month. ( I have known of other owners who have evicted and could not recoup their late charges.) If the money is not in the bank account, the entire rental amount is due. The tenant has chosen the bank that is convenient for them.
Out of 56 families, we have only had 1 true tenant from hell - they were inherited and only left a horrible mess when they moved. The mess was a TOTAL surprise they had been neat-niks when we randomly saw the place. We have only asked 2 units to leave because of continuing excessive noise. In Los Angeles that is usually hard to prove. They had 6 police calls w/ reports in 3 months, had been w/ us only 7 months and had excessive unreported visitors for more days (17 continuous) than is allowed in their contract. Basically, someone not on contract was beginning to move in. This "guest" was also the cause of most of the police calls.
The Renters are strictly screened and are at the very least, annually given an update of the "rules". We usually follow-up w/ greeting cards during the year. I truly believe that the screening process has weeded out LOTS of people. Our management style is pretty hands off, almost like a triple net lease w/ us doing approval of any repairs to be done by our approved list of vendors. Basically, the only thing I have not liked doing but must, is going over rental increases with our tenants.
Just my two bits.
I give a coupon worth about ~12.5% off towards the next months rent if they pay 5 days early (except for the first and last rent check which I collect when they sign the lease). If they pay 5 days early all year long, I give them an additional ~25% off coupon towards any months rent for the following year. Around Christmas time, I'll give all my tenants ~5% off coupon in a Holiday Greetings Card. The coupons are actually worth a $ amount and not a %, but they equate to about that % (I use a formula to calculate it). They can apply the coupons to any future payments. I encourage them to save them for a month that might be financially tough (like around Christmas).
I charge a late fee of $25 after 5 days, 30 days, 60 days and 90 days. After that point I charge a late fee every 90 days plus 24% apr on all payments due. I’m very strict in enforcing this and have every tenant sign separate documents stating that they clearly understand and agree to the late fees and interest rates. It also states that if I must take them to court, they agree to pay all fees plus 24% APR until everything is paid in full.
Finally, I have an alternative “partial payment” plan. If they can pay ~75% of the rent on time, I’ll give them an additional 20 days to pay the rest of it and wave the $25 late fee and charge them a $5 “partial payment fee” instead. Of course, they don’t get the “coupon” to use towards the next rent period.
Except for the holiday “gift” of ~5%, all of these options are clearly spelled out in the lease agreement and on the back of every invoice that I send them.
I agree with the fact that it cost more to evict and find a new tenant than to keep an existing one who is occasionally late. It is definitely not worth it. Ofcourse alot of the issues with this are overcome in the screening process but I have definitely given some leeway to tenants. I feel holding the line on the fees is important but you don't want to be unreasonable. I've cut the late fee in half over Christmas time for that extra gift money being used.[ Edited by 3qu1ty on Date 01/27/2004 ]