There comes a point when apartment owners find that despite their best efforts at resident screening, they will have to grapple with evictions and collections in response to non-payment of rent.
The weak labor market is currently contributing to greater numbers of people encountering difficulty with paying their rent compared to just eight years ago—so owners beware. Irv Pollan, vice president of NCC Business Services of America, agrees that the volume of collections may currently be on the rise. Another reason, he adds, is that apartment occupancies are increasing.
“Occupancy rates have improved 3 percent to 5 percent over the past year. We’ll see the same proportion of increase in [collections] placements,” he notes.
Where evictions for nonpayment of rent is concerned, consultant Jeff Goldshine, president of Goldshine Management Consulting, based in Montclair, Va., advises that property owners should first make sure they are thoroughly familiar with the local landlord-tenant laws and regulations. Every jurisdiction has its own rules governing, for example, the minimum number of days the rent is delinquent before late notices can be sent out.
The company’s procedures should be to file the papers for a court date in connection with an eviction as soon as that is permitted by law—whether or not a payment plan is being worked out with the resident concurrently, Goldshine advises. “Whenever you can file upfront, you should,” he says. “You can still talk with the resident or devise a payment plan for good residents for whom things went afoul, while you are filing. The two are not mutually exclusive. Keep talking, but never lose your rights and obligations.”
Goldshine notes that it is important to take action at the earliest possible opportunity because each step in the eviction process can take time, and it can be at least one-and-a-half to two months before the resident is evicted. “It can be anywhere from 20 days to six weeks before you get to the judge,” he says. If the resident appeals, that will cause further delays. And if the property owner wins the case, it will take at least another 15 to 30 days before the resident is made to vacate the unit by the marshall.
Follow eviction rules closely
Goldshine urges property owners to be consistent and regimented in complying with their companies’ own rent payment rules and procedures, aspects of which may also be contained in the lease agreements signed by residents. For example, after the grace period, the notices need to be sent out.
There are absolutely times when residents have genuine and temporary problems paying the rent. In such cases, the company can deviate from the rule books and work with them to help them make the payments. “The office knows the resident. If someone who has been a very good resident all of a sudden has a problem, trust me, they will know that,” says Goldshine.
Of course, market conditions also play an important part in determining how strict the property manager wants to be. “If someone is a good tenant and has a history of paying on time, you may want to help them out with a payment plan under which they can pay in installments. You empty out the apartment, or you work with the good folks,” says Goldshine. “For many management companies, it is better to get the payment late, than to not get it at all.”
Property owners need to refrain from clearing out residents’ belongings too early—a common pitfall when a resident skips the rent and moves out, says Goldshine. If there is no court order in place to evict them, the residents may want to be reimbursed for the items. “If someone skips on you and leave sofas and other belongings, we may trash them. In many states, the person can come back and say ‘you owe me money’ for the sofas,” he cautions. “You may still want to go through the evictions process for that apartment.” Landlords can clear the apartment and hold the belongings in a separate location, but the danger is that things can be stolen.
The other aspect of evictions is collections. The accounts receivable of residents who leave an apartment, but still owe back rent, may be sent to debt collectors. The fact is, most property owners may be reluctant to go after their residents for backrent. A study released by TransUnion late last year finds that about half of property managers (46 percent) have had renters skip out on their rents, with 19 percent having had that experience in the past year. According to the study, which received 476 responses, only 46 percent of property managers pursue residents who skip out of their apartments and leave with unpaid rent or damages.
Steve Roe, vice president in TransUnion’s rental screening division, says it is a mistake for property managers not to try to claim that bad debt. There are two philosophies with regard to whether the account is turned over to the collections agency, says Goldshine. The first says that “if we have the wherewithal, let us get a shot at going after someone in the first 30 days. We are not splitting the recoveries with a collections agency.” The second school of thought says that “the account should be turned over to a collections agency immediately. There will be less time spent and aggravation on the part of your staff.”
“I want to believe you can handle the collections yourself in the first 30 days,” adds Goldshine. “But as times get tougher, I am fine with going straight to an agency. You will be dealing with a tougher negotiator. And as any collector will tell you, the quicker you collect, the higher your chances of getting the money.”
Property owners can expect recoveries, on average, of 15 percent to 18 percent if the agency is doing its job correctly, says Goldshine. The proportion of recoveries, of course, also depends on the profile of the portfolio. For example, in the case of affordable portfolios, recovery percentages may be less. Beware that a “collections agent may tell you the recovery percentage is very low, that times are tough,” he says. Goldshine advises that property owners obtain a commitment from the agency regarding the minimum recovery threshold, so that the company can have a benchmark against which to measure performance.
Collection agencies typically do not report to credit bureaus in the first 30 to 60 days of receiving the delinquent account, says NCC’s Pollan. Individuals are more inclined to pay if their accounts have not yet been reported to the credit bureau, as they find it important to maintain their credit files, he notes.
According to Pollan, successful recoveries depend on four factors: the applicant screening criteria of the property management company; the use of nationally licensed collections agents; how effective the agency is in skip tracing, that is, in locating the individual who skips out on the rent; and the initial conscientiousness of the property management company in gathering vital information—such as social security numbers, emergency contacts and places of employment—from the resident.
When it comes to choosing a collections agency, Pollan comments that it is important that the company has a national reach. A little over half the states in the country require collection agencies to be licensed or bonded in the state in which they operate. So if the agency is not licensed in that state, it would not be able to contact individuals who have moved there. Larger collection agencies may also have the resources to pay for, and sophistication to obtain, national data, Pollan asserts.
Indeed, the reputation of the collections agency is a prime consideration for the apartment firm, says Pollan. The apartment company should make sure the financial security of the agency is sound—as there are cases in which collection agencies collect on bad debt but do not remit the collections to the property owner. Checking references for collection agencies is also critical, Pollan adds.
Apartment companies may also want to make sure the collections agency does not mistreat its customers. Pollan believes that a professional and courteous manner on the part of the staff yields better responses and results. Also, the apartment company would “not want to see its names or our names in the papers. You must protect the image of the agency and the client,” says Pollan.
Pollan’s advice to property owners: obtain the information needed by the agency to do its job. And even more important, get the accounts to the agency as soon as possible instead of sitting on it. “As accounts age, they are more difficult to collect,” he notes.