BiggerPockets

When A Tenant Is Behind In Rent, When Should You Call It Quits?

Today I reviewed over eighty tenant debt accounts and noted that the average balance due is significantly higher than a year ago. With the exception of the most expensive areas (such as California, New York City, and the northeast), the average amount of tenant debt is normally between $2500 and $3000.

I separated all accounts over $4000 and took a hard look at them to determine why there were so many high balances. The answer was that landlords allowed tenants to go month after month paying little or no rent, before they were eventually evicted or the tenant skipped out. This is obviously a sign of the times.

I assume landlords are allowing tenants to live in their units for three to four months without paying rent for one of two reasons:

1. Compassion - Times are tough and some landlords are trying to help their tenants through a rough period. I admire anyone who would help someone out.

2. Low Occupancy - The rational is that if a landlord has empty units he cannot rent, then a promise to pay from a current tenant is better than an another empty unit.

Of course, how you handle a tenant who is delinquent on rent is up to you. Speaking from experience, I can tell you that once a tenant becomes two months behind, the likelihood that he will get current and stay current on rent is very slim. If I had a dollar for every story I have heard from landlords about them bending over backwards for a tenant only to get burned in the end, I could take a very nice vacation.

From a collection standpoint, the higher the balance, the tougher the debt is to collect. Not only is it tougher to collect, the landlord is out a lot of money, and is now emotional about the debt. By the time the landlord gives the collection account to an agency, he or she is upset and wants the account collected immediately. Now the agency has a client whose expectations are way too high. Logically, if the tenant would not, or could not, pay when he actually lived in the rental unit, how likely is it that he will immediately pay a collection agency?

I am not suggesting that the debt will never be collected. However, if it is collected, it will most likely take some time. The circumstances that got the tenant into a difficult financial situation must change, and he must be motivated to improve his credit rating before he will pay. Again, reporting tenant debt to Experian, Equifax, and TransUnion
is very important if the debt is ever to be collected.

As I have said in previous articles, it is a mistake for a landlord to assume the debt they are owed by a previous tenant will never be paid. You have three options: go to court, turn the account over to a collection agency as a non-judgment, or simply report the debt to all three major credit bureaus yourself. Any of these three options could result in recouping some of the money you have lost.

Comments

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  Joshua Dorkin — over 2 years ago

  Bill - I learned from the school of hard knocks. I thought I'd show some compassion for tenants at first when late, and learned a valuable lesson. If you operate your landlording business as a charity, you're going to get paid like a charity. If a tenant doesn't pay, it is time to say goodbye (legally, of course).

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  Matt Reed — over 2 years ago

  I have a solution! I use a rent reporting company....this has helped my business collect ALOT more rent payments on time!!!

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  Bill Gray — over 2 years ago

  Hi Matt, Can you give me more info about this? Do you report the payments every month? I am very interested to learn more. Email me if you'd like. Thanks!