How to enforce fees (property damage, late fees, unauthorized pets/occupants) etc?

Question

Hi, I'm planning on investing in my first buy and hold in the next few months, but one thing that I could not find a concrete answer on these forums is how to enforce fees on a tenant? I.e. if a tenant is late on rent, or broke a window, or caused you to hire a plumber due to  their own stupidity.

If you collect rent via direct deposit - do you request them to wire you the $50 the plumber invoiced you?  do you send them a letter stating the charges they owe on top of the rent? What if they don't pay?  do you deduct if it from the security deposit?

What if they damaged something more severely, i.e. hosted a party and drunk guests punched holes in windows and walls (worst case scenario) and security deposit doesn't cover?  Do you evict and then sue them if they don't pay?

These are questions I always wondered and hopefully any advice received will go on to help others too!

Jon Holdman · Answer

I have language in my lease that says I can apply money received first to any fees or other charges (e.g., utility) that I'm owed.  Then rent.   I would send the tenant a letter stating there is an extra charge, the reason for the charge, and receipts to justify it.  Then, if they deposit or pay only the rent, I apply the money to the extra charges first.  That makes the rent come up short.  That means I post a pay or quit on the 5th (here in CO) and start eviction if they don't pay.

Do keep in mind that tenant damage in excess of security deposit is inevitable.  Most will be fine.  But every now and then you will have damage.  Don't plan on ever seeing a penny beyond the deposit.  Maybe you'll get lucky and collect something.  But unlikely.  NEVER, EVER let a tenant use the deposit as last months rent.    But also do not build a business model that assumes you will never have severe tenant damage.  That's unrealistic.

Michele Fischer · Answer

Phil,

You probably want to figure out what deposits and move in money is charged in your area; first, last, and deposit sounds prudent, but if I did that in my market I would get no applications, because people can't scrape together that much cash at once, so it is not the standard here.

Mr. Landlord has a lot of great landlording processes, you may want to read one of his books.  He does send monthly invoices.  Personally I think this is too much work.  We only send invoices when something unusual is going on, until the issue is resolved, not every single month.

Our local real estate group has started preaching about courtesy notices.  Before a pay or quit is posted/served, a friendlier letter/notice going out to remind/inform folks of late fees, late rent, additional charges.  You also may want to consider cost sharing costs with tenants; "per the rental agreement you are responsible for this, but since I'm a nice guy, we'll split the cost 50/50."  or "I'll pay it this time, but toilets shouldn't get clogged more than every few years, so the next one is on you." It builds good will instead of nickel and diming everything.

Try to be proactive about recouping costs, but don't  make yourself crazy about it either.  Landlords pay a bunch of stuff they shouldn't, it is a cost of doing business.  Get what you can at the time, take what you can out of the deposit, go to small claims court or get a judgement with eviction if possible, and turn the rest into collections.  The second two won't buy you much, but will limit their future housing options with landlords who do thorough screening.

Anthony Giannette · Answer

I am a little out of date. Back when I was working with adjusters, a typical investigation was $380.00. I expect it might run to $700 these days. Its all based on the number of hours needed to get in touch with the interviewee plus 2 hours for the interview. A 3rd party report does go a long way in a court room.

Aly W. · Answer

Hi @Andrew S. and thanks :)

My attorneys wrote my leases in FL and NJ. It's considered additional rent, because if they don't pay the fees/damage, it's just like not paying the rent, with the same consequences. As @Jon Holdman explained, what the tenant owes that isn't rent money itself, has to be applied first to fees/damage, and if that doesn't then cover the rental amount due, you can file the Pay or Quit. I hope that helps :) I would definitely advise having an attorney write your lease, one that specializes in landlord/tenant law.

I only take money orders for initial deposits and first month's rent. Never checks. It doesn't matter how fast you drive to the bank to cash it, if the money isn't there, you'll get hit with overdraft fees and you'll have given the keys to your property to the tenant already.

My tenants pay the rent and any fees due by using www.erentpayment.com or by direct deposit into my business account at the bank. No payments by mail, ever.

For our condos in FL, it's the norm for first, last and security, at least in the nicer complexes. I don't usually require that, nor do I try to charge the highest rent. As said, there is a good pool of applicants in the mid-high range, plus those types tend to have money in savings. Some people are willing to pay higher rent, but then ask about payment plans for the deposit. Getting a good tenant quickly is better than waiting for one that will pay more later.

Steve Babiak · Answer

@Andrew S.

They are called additional rent in the lease because in some jurisdictions a judge will only put rents owed into a judgment and toss all the "junk fees".

Richard C. · Answer

First, last and security is actually illegal in my state, unless you are renting a single family and own no other real estate.

And I completely agree with what Jon says about the rent.  Higher rents do not yield better tenants.  Better properties yield both better tenants and higher rents.  Some on here advocate setting rents high as a screening mechanism, but better tenants almost by definition have more options.

I do take a local personal check, and drive to the local branch with it immediately, but I understand what Jon is saying there.  I will probably require a cashier's check in the future.

Jon Holdman · Answer

If you can get first, last and security, great.  It would never work in my area.  First and security is a stretch for many tenants.  But if first, last, and security is common in your area you may be able to get it.

Also, set your rent right.   At or a bit below market will get you plenty of applicants.  New investors (I may be assuming something that's not true) sometimes think a high rent will get a good applicant.  It won't.  It will get you bad applicants who can't get accepted anywhere else and are willing to pay your high rent.

Whatever money you get at lease signing (when you also hand over the keys) should be cash or equivalent.  No personal checks!

Marcia Maynard · Answer

Perhaps you could renegotiate your contract with the PM to use the terms base rent and and additional rent, then make your contract with the PM to have his management override factored to base rent only, not to the additional rent.   Or another approach, your tenant agreement could outline the order in which you utilize monies received, the last being for current month's rent.

Andrew S. · Answer

Aly NA --  great response.  One question (and sorry to sidetrack the original question): why do you refer to these charges as "additional rent"?  It doesn't seem like the charges have anything to do with rent - they are reimbursement for damages.  I'm asking because I'm in an argument with my PM at the moment who also calls these charges "rent" and thereby applies his 8.5% management override on it.  Obviously, I have a problem with that.

Kimberly H. · Answer

Thanks @Anthony Giannette

How to enforce fees (property damage, late fees, unauthorized pets/occupants) etc?

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