As a landlord, you go through a lot of trouble and effort to find reliable tenants who will pay on time and in full. You have your own bills to pay, so you need your tenants to fork over their rent checks on time.
One unpaid rent check is frustrating and worrisome. Two unpaid rent checks is a serious problem. As uncollected rent piles up, you start to wonder what the best response is. Assuming you’ve exhausted your go-to methods of collecting the rent from the tenant, you may contemplate hiring a collection agency to roll up their sleeves and do the dirty work for you. But is this a good idea?
How Collection Agencies Work
A collection agency is a specialized company that landlords and other lenders or creditors can hire to recover funds that are undue and past paid. A collection agency is typically only hired after multiple failed attempts have been made to collect the receivables – i.e. rent payments. Individuals working for the collection agency then get in contact with the debtor and attempt to track down the money owed.
Collection agencies use numerous strategies to chase down stray funds. And while there are specific laws that prevent harassment, collectors often use techniques like:
- Calling the debtor’s personal and/or work phones
- Mailing numerous late-payment notices
- Appearing at the individual’s door
- Contacting friends, family members, or neighbors to confirm debtor’s contact info
“If the borrower pays his debt as a result of the collection agency’s efforts, then the creditor pays the collection agency a percentage of the funds, or assets, that it recovers,” Julia Kagan writes for Investopedia. “Depending on the original agreement entered into with the creditor, the debtor may have to pay the full debt all at once, or a portion of it at a time.”
If the collection agency is unsuccessful in collecting the past due rent, they can update the individual’s credit report with a “collection” status. This leads to a serious drop in that person’s credit score, which hurts their chances of obtaining other types of credit or loans in the near future. This status can remain on a credit report for seven years.
The Problems With Collection Agencies
While there’s nothing legally or morally stopping you from using a collection agency to collect rent from a tenant, it’s not always the best option. Here are some of the problems you may encounter:
- Statistically unsuccessful. Using a collection agency may seem like a no-brainer until you realize that the odds of actually collecting the unpaid rent is low. Using one generous estimate, just 20 percent of accounts in collection are ever paid off (others put the figure around 11 percent). This means 80 to 90 percent of the debt you send to a collection agency won’t come back to you.
- Even if your collection agency is successful in getting the payment, they expect a portion in return for their services. While some agencies purchase all debt for a flat fee, others charge a percentage of what they collect. This commonly ranges from 25 to 60 percent.
- Shady and unscrupulous. Collection agencies are known for breaking the law. Even the ones that technically stay within the legal limits are totally comfortable skirting the law and pushing boundaries. Simply being associated with these guys can hurt your reputation as a landlord.
How to Avoid Using a Collection Agency
When it comes down to it, most landlords choose not to opt for a collection agency. Instead, they avoid them altogether by learning from their mistakes and setting up smarter, sounder practices that stop the bleeding and reduce future risk.
Here are some steps you can implement in your own landlording efforts to avoid using a collection agency:
Set Up a Better Screening Process
Let’s start at the beginning. While it’s too little too late at this point, you can avoid similar issues in the future by developing a more thorough screening process. In addition to basic screening using a couple of interview questions and personal references, you should also contact a prospective tenant’s employer to verify income, check their credit report, and speak with past landlords to get a feel for the type of tenant they’ve been in the past.
Establish Clear Expectations
Set up clear expectations with tenants on the front end to avoid problems with late and unpaid rent on the back end. Establish a simple, yet unwavering policy on how and when rent is due. You should also specify the consequences of late rent so that tenants know you’re serious. (If you do this, though, you have to be a stickler. Don’t let anything slide. The moment you offer leniency is the moment the tenant realizes they can get away with paying late.)
Automate Rent Collection
The best thing you can do is automate rent collection. This can be done via direct deposit or some sort of online rent processing platform that charges your tenant’s account at the same date and time each month. This eliminates common excuses like forgetting to cut a check or blaming the postal service. It also helps you organize your payments to stay on top of finances and accounting.
Start the Eviction Process
There’s never a good time to evict a tenant. It’s a complex, expensive, and time-consuming process that requires you to jump through numerous legal hoops to enforce. But if nothing else works, this option may be your last resort. Here are some of the steps landlords should take in this process.
Green Residential: Houston’s Property Management Leader
While collection agencies do serve a purpose and can be used to legally collect past due rent from tenants, they aren’t the best option. Instead, you should invest your time and energy into being a more conscientious landlord. By selecting the right tenants, establishing clear expectations, and streamlining the rent collection process, you can avoid most problems altogether.
Not sure where to start? Green Residential, the leading full-service property management company in Houston, can help. Contact us today to learn more about our comprehensive services!