How Are Your Tenants Late Payments Handled?

If you own a rental property, you will almost certainly at some point need to deal with late payments from your tenants. Hopefully late payments occur on an exception basis. Unfortunately, they are a fact of life in the rental business. Having a policy and procedure to quickly address late payments with your tenants will ensure that your losses are minimized.

The Problem Begins

Your tenant is habitually late and getting later. Rent that is due the first of the month now comes in on the 10th, 12th and even 15th. Late fees are ignored. You don’t want to ask too much because you are just happy to get that money order ( you did put your foot down and stopped accepting personal checks, right?).

Does this scenario sound familiar with any of your tenants? Are you working with a property manager that is relaying this scenario month after month?

This rental relationship is deteriorating. Just being happy some money shows up during the month is not any way to manage a property. Your tenant may offer many different excuses why they are making late payments. Just when you think that you have heard them all a new one comes up. We actually had a tenant once tell us “my indoor marijuana garden got raided by the cops. I don’t have any pot to sell, so I don’t have any money for rent.” This was an inherited tenant (where we had not even gotten to the point of scheduling an internal inspection) in the first (and last) month under our management.

Late Payment Policy and Procedure

The best plan for addressing late payments is to create a monthly timeline. Let your tenants know the timeline and stick with it.

Here is an example of a timeline and standard procedure.

  • 25th of the month – statements go out to tenants for next month
  • 1st of the month – rent is due
  • 5th of the month – late fees begin
  • 10th of the month – collection calls/letters begin
  • 15th of month – personal visit to home
  • 20th of the month – pay or leave notices are posted
  • End of the month – eviction filing begins

Implementation of a Late Payments Procedure

A timeline is your guide for every late tenant. In some cases you may need to deviate from the timeline based on your tenant’s communications with the landlord. History shows a tenant who still is communicating with a landlord (even when they have a terrible excuse) may still be a tenant where money can be recovered.

One of the most frequent requests from a late tenant is to make a partial rent payment. The offer will likely defer payment of the full balance due until some later date. Sometimes a tenant might be more specific and request a payment plan over a few months. The plan defers late payments and promises to bring the tenant back to current within their timeline.

You may not want to automatically dismiss a request like this. It might be better than the ensuing costs of eviction or a vacant unit. At the same time, do not agree to waive any late fees until the tenant has performed as agreed and brought the balance current. Even then, I strongly suggest some penalty be paid and it should be a part of the plan.

If a plan is considered, it presents an opportunity to update all the application information. In particular confirm social security numbers of all applicants, employment and employer address, and emergency contacts. This is crucial information to have if a collection effort is the final outcome.

Don’t chase bad money with good

If the inability to pay the rent is more than a one time issue, ask why? If the answer has to do with changed circumstances, it could be better to allow the tenant to break the lease. Any lease termination agreement must include a condition that the tenant will leave the property spotless.

There are a lot of factors to consider before making this decision. Ultimately though it could be a better financial route for the landlord. While taking a temporary hit on cash flow, a tenant who can’t make their payments who agrees to leave the property in rent-ready condition is not a bad situation. While doing the tenant a service, the ultimate result of finding a paying customer will likely improve the finances of the rental owner. Not to mention the time spent always trying to collect late payments.

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WILMOTH Group is headquartered in Indianapolis, Indiana. We focus on providing creative local solutions for a variety of residential real estate needs including, properties for sale, property management services in Central Indiana.