Should I Hire a Landlord Collection Agency to Collect Unpaid Rent?
Whether you manage apartment buildings or home rentals, the harsh truth is that, eventually, you will have to go after unpaid rent. In addition to unpaid rent, you may need to collect for damage to the home or apartment. Many landlords choose to hire a professional collection agency to collect these monies.
Collection agency employees undergo specialized training and have a wealth of technology available to track delinquent accounts. Their sole focus is collecting money, making them highly effective at what they do. Of course, they charge for this skill and specialized knowledge. The trick for landlords is knowing when it's best to handle a delinquent tenant themselves and when it's time to call in the professionals. In addition to guiding you through the process of hiring the best collection agency, we walk you through best practices for collecting overdue rent.
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When is the Right Time to Hire?
Your first move is always attempting to collect yourself, as it is more cost-effective. Look at the renter's history. Has he or she consistently been late with the rent, or is this a first-time scenario? If this renter has an otherwise clean history, talk to him or her. If this truly seems like a one-time issue, it may be in your best interest to give the tenant an extra week or two to pay the rent. You also want to find out if the tenant is withholding rent due to an unresolved complaint or your failure to complete repairs. In some states, withholding rent in these situations is legal.
If the tenant's history and current situation make it clear you're never likely to see payment, your first goal should be starting eviction proceedings, not contacting a collections agency. If you evict the tenant, you want to turn the account over the collections within three weeks. The younger the debt, the greater the likelihood of collecting on it. What's more, that evicted tenant is most likely looking for a new place to rent. The pressure is on to handle credit issues quickly.
When it comes to collections, you want exemplary record keeping. Create a log of phone calls and other communication attempts, documenting dates and times of each attempt. Demand payment via certified letter, with copies sent to the rental address as well as every other address you have on file. Copies of correspondence and return receipts go into your documentation file. All of these items combine to prove you attempted to collect the debt before sending it to collections.
Hiring a Collection Agency
Your best bet is hiring a collection agency that specializes in rent collection. These companies have a greater understanding of the laws and regulations surrounding rent collections, which is especially important if your tenant is currently in the eviction process.
Collection agencies typically charge either a flat rate or a percentage of the amount collected. The flat rate is typically cheaper, but there's no guarantee of success. The percentage method typically costs more, but you pay nothing until the agency collects. Expect to pay around 25 percent. For every $1,000 collected, you keep $750 and pay the agency $250. Rates vary according to the debt's age.
Your excellent records come in handy once you go to collections, since you share it all with the agency. Give them as much as possible, including:
- Rental application
- Lease agreement
- Communication attempts, including phone log, letters, and certified mail receipts
- Full list of monies owed, including rent and property damages not covered by the security deposit
Use discretion when determining the amount owed, maintaining strict professionalism throughout. Collection agencies report that collecting rental debt has the lowest recovery rate in the industry. Part of the reason? Exaggerated and unfair fees and charges. When you attempt to charge exorbitant amounts for damages, you give the tenant ample grounds for disputing the charges, delaying the entire process and possibly discrediting your claim.
Reporting Debt to Credit Agencies
Do not neglect reporting delinquent tenants to the credit bureaus. In addition to warning future landlords about the tenant's lackadaisical approach to paying rent, you add another incentive for the delinquent renter to pay. Delinquent accounts, and especially evictions, show up in credit checks, making it extremely difficult to find a new landlord. Many renters choose to pay the money they owe to remove the item from their credit report.
The collection agency helps report these past-due debts, so be sure to include that in your negotiations.
A few practices help protect you from dealing with negligent tenants. First, require complete leasing applications and perform thorough background checks on every tenant. Next, make paying rent as easy as possible. Finally, resolve complaints quickly to help build a good relationship with your tenants. Happy tenants are less likely to renege on their financial responsibilities.