Late fee scam by PM - security deposit

49 Replies

I've posted here a few times about a bad experience I had with a PM. The more I look into it, the more convinced I am that she knew precisely what she was doing - which makes me wonder how common this is. 

Unbeknownst to me, my tenant started paying her rent late every month about 15 months ago. My PM didn't do anything about it at all, except just record the late fees in her ledger. That's it. She never really made an effort to collect the fees. The tenant "knew" those late fees were there, but since the PM never forced the issue, the tenant never paid them.

This went on for a while, with the late fees simply piling up, but no attempt to collect being made. Finally, when the amount of the late fees totaled the amount of the security deposit, my PM told me that the tenant paid late every month and hadn't paid the fees. She suggested evicting the tenant - which I agreed with. 

Now, the PM has used the entire security deposit to pay the late fees, leaving nothing to cover damages when the tenant moves out today. 

My strong suspicion is that the PM knew precisely what she was doing. It was a good racket. She could charge those late fees, do absolutely nothing collect them, and then take the deposit. It was an easy thousand bucks in her pocket.

Is this common at all? Is this something unethical PMs do? What other ruses do they use to get extra money? I am thinking about whether I want to hire another PM or just do it myself, but want to know what things I need to think about should I decide to look for another PM.

Nancy,

I don't believe that it is 'common' and I certainly would not accept this from my PM. Service companies work long and hard to land clients so, assuming they pocket 10% ($100), is that worth potentially losing a client and a long term relationship?

Having said that, I do need to push back a bit and ask how did you not know? My understanding is that the VAST majority of PM's send monthly reports. On one of the reports (e.g. Rent Roll, Tenant Ledger, Even Bank Statement) it would show that there is a growing balance (the late fees) or the deposit being made after the due date which should have raised a flag.

Unless no reports were sent (unacceptable) or there were not reviewed (also unacceptable), warning signs were visable after 2 or 3 months.

Oren

She was adding the late fees onto the tenant report, but not the owner report. All I got from her was a statement of the rent paid and the expenses. I suppose, looking at it in hindsight, that I should have realized the rent was coming in late every month as that is dated in the statement. But I didn't look closely at the dates - I just saw the payment was there and assumed all was well.

Should the PM have been putting those late fees on my owner statement? Is that normal? 

Obviously, I've never dealt with something like this before. I started suspecting "something" was off after about 5 or 6 months with this PM, and I started scrutinizing the statements trying to figure out what it was. There were no big red flags in the owner statements that I was getting.

This is a typical report from her - I've blacked out the tenant name. Now that I have parted ways with the PM, she sent me the ledger for that house. During this time, she added a $50 late fee, and a $75 3-day notice fee. Basically, every single month, she added those two fees to the ledger, but they were never listed on my owner statement.

the other thing she did was charge pet rent every month - an additional $25. I did not know the tenant was paying that. She only listed the $1040 on my statement, but had the additional $25/month listed on the ledger. That pet rent should have been coming to me, no?

You definitely should have been getting the monthly pet fee. There’s no logical reason that would go to the PM. After all, the pets are causing wear and tear/damage to your property. That money should be used to help offset that. 

@Nancy Sathre-Vogel   So sorry you experienced this. This was a great disservice to you and to your tenant! We own and manage all of our rental properties. You can choose to have someone else work for you, or you can choose to learn how to do the work yourself. But either way, learn what it takes to do property management well.

A few things come to mind.

1. Use a good rental agreement (lease). Thoroughly read it and understand it. Make sure the tenant understands the terms. Make sure the PM understands the terms.

2. Use a good contract for hiring outside help. Thoroughly read and understand it. Make sure the contractor (PM or other) understands the terms.

3. Enforce the terms of the rental agreement and all contracts. Do so in a timely manner. Collect fees and money for damages as you go. Don't wait until the end of tenancy, as there will rarely be enough to protect your interests if you do.

4. If after reviewing the contracts and documentation, you find the PM was embezzling funds, you may want to file a claim against her. Depending on the amount of money involved, it may be a small claims court matter or you may want to hire an attorney to represent you to pursue the matter.

5. Lastly, consider the tenant may have been wrongly evicted, or at least wrongly served. The tenancy might have been saved if there had been good property management. Sure the tenant got behind by not paying the late fees, but if the tenant was not properly informed and the terms of the lease were not properly enforced, then that was a great disservice.

6. Don't give up on working with property management companies, but do so with a clear understanding of the terms of agreement between all parties. You need to oversee the quality of work others provide on your behalf. Also, know and understand the landlord-tenant laws for your jurisdiction and take responsibility for how well your tenants are served. Personally, I love doing our own our own property management work and believe our tenants are better served because of it. The skill set required is not that hard to learn. Either way, just be sure you keep an eye on the operation.

Good luck!

Thanks Marcia. I will be the first to admit that I was naive, and that part of this is my fault. When we first started renting our house in 2008, we had a fantastic manager. She was truly awesome and I trusted her entirely. Unfortunately, she retired in May of 2017, and sold her company to this new person. 

When the new PM came on board, it never crossed my mind to question her. I know now that I should have. I should have done due diligence and looked into her background, but I had had such a good experience with the other PM that I just never thought to do it. I accept responsibility for that. 

However, even with my naivete, this should not have happened. The PM should have been ethical. She should not have been charging pet rent without my knowledge - and keeping it. She should not have let the late fees build up for a whole year. She kept all this from me, and it never occurred to me to ask. I mean - I shouldn't have to ask if she's doing this stuff, right?

As for the tenant eviction... you are right that we probably didn't need to evict her for being late. However, at the same time all this was happening, we were looking for an apartment for our son while he goes to college. A perfect situation was that he would move into the house with some roommates - so kicking out the tenant played into that scenario perfectly. If I could turn back the hands of time and known then what I know now, I might have made a different decision.

Mostly at this point, I have learned my lesson. I don't know that this woman did anything illegal, but most certainly unethical. I want to file complaints wherever I can in order to warn others.

@Nancy Sathre-Vogel   Sounds like you are gaining knowledge from this experience. That will serve you and your tenants well into the future.

At this juncture, a thorough review of the tenancy rental agreement and property management contract may be beneficial. And an audit of the books. There may indeed be funds due to you that the PM wrongly kept. The legal contracts and documentation will be key to determining this. I wouldn't hesitate sending a demand letter (nicely and carefully worded) to the PM to request what is due to you.  I've never heard of a PM directly contracting with a tenant (verbally or in writing) to get more money from a tenant above what was in the lease agreement. That indeed would be unethical. Perhaps take your fantastic first manager out for lunch and share with her what happened. She may have some useful insight for you. 

We're rooting for you!

I have asked the tenant to sit down with me and go over what the expectations were on her end. I suspect the manager was telling me one thing, and telling her something else. I know the tenant is really busy packing and moving (she needs to be out tonight,) but I'm hoping she will sit down with me for 30 minutes so I can get this all sorted out in my mind.

At the very least, I think I should have been getting the pet rent of $25/month, minus the 8% management fee. I didn't get any of that - nor did I know it was being charged.

Is it typical that the owner not have a copy of the tenant lease? When i didn't get it, I assumed that was how things normally worked, so I never asked for it at all. Should I be demanding copies of every document the PM has?

It does sound like your PM was scamming you, and likely other owners, to produce an extra income stream for themselves. It sounds to me, like the ammounts are probably under the threshold for a lawyer to want to get involved, but most have free initial consultations. I had a terrible PM when i first bought my place. I hoped and wished things would get better, and they did, when i fired them, and hired a real PM. I'm also gonna say...even with my crappy first PM, I was calling everybody and their mother if I didn't have my rents on the 5th. With my great new PM (that found me great tenants) and direct deposit now my rent money is in my bank account by the 6th or 7th.  : ). Roll up your sleeves, and kick some PM ***.

I would demand the PM pay the money that is owed you. Who cares if it is $50, $500 or $5000. Figure up all the pet fees and let them know any damage/cleaning comes out of the deposit. Only let the PM take money from the deposit that is left AFTER you are paid for damages. They can go after the tenant to collect the rest. It is their fault for being lazy not collecting the late fees along the way. 

If the PM refused to agree to this, I would tell them they will be terminated and take them to court for the money. Small claims court costs hardly anything and it could do major damage to their business having landlords going after them in court. 

At this point, I am still trying to figure out all the pieces to the puzzle. I heard from my tenant that the PM NEVER followed up about trying to collect the late fees. Never. I will be sitting down with my tenant tonight to hear how this all went down on her side.

It's looking like the PM got money three ways: 
1) She "charged" late fees, never attempted to collect said fees, then just took the entire security deposit.

2) She charged the pet rent every month, and kept 100% of it.

3) Every single maintenance issue came in VERY expensive. As in - WAY more than it should have been. I have no proof that she was pocketing money from the maintenance stuff, but this was the first issue that tipped me off that there was a problem.

@Nancy Sathre-Vogel sorry hear about your situation, but I’ve had a similar one where my PM would actually keep the late fee charge until I inquired about it. What really helped me was understanding that homeowners expect PMs to do a lot of work for a measly 8- 10% of the rent. PMs make their money is every time they have to find you a different tenant then they collect either half - a full months rent. Therefore, I’ve learned to set up reminders to pay more attention to the rent cycle for any late payments and get involved quickly. I also changed my agreement with the PM to read that late payment should be given to the owner and not solely the PM. In the end, the late payment is now applied and my PM collects 10% of everything thing collected which I’m ok with. If your PM are unable to work with you then I’d consider another company that will suit your needs.

We have parted ways - split about 6 weeks ago. I will NEVER deal with this woman again. I've learned a lot from this experience and have a better idea of what kinds of things to look for in the future. Now, I'm just trying to figure out what to do about this mess.

Originally posted by @Nancy Sathre-Vogel :

At this point, I am still trying to figure out all the pieces to the puzzle. I heard from my tenant that the PM NEVER followed up about trying to collect the late fees. Never. I will be sitting down with my tenant tonight to hear how this all went down on her side.

It's looking like the PM got money three ways: 
1) She "charged" late fees, never attempted to collect said fees, then just took the entire security deposit.

2) She charged the pet rent every month, and kept 100% of it.

3) Every single maintenance issue came in VERY expensive. As in - WAY more than it should have been. I have no proof that she was pocketing money from the maintenance stuff, but this was the first issue that tipped me off that there was a problem.

I don’t have property management yet, but these are 100% my concerns of hiring one.

@Nancy Sathre-Vogel I want to thank you for your post. A one year old woke me up in the middle of the night and I had trouble falling back asleep. I started perusing the BP forums on my phone and came across this thread. I've read most of the posts, and I think I've read most of your replies. Having several hours to think about this in my half-awake/half-asleep state...I'm ready to reply.

I'd like to say upfront that nothing I'll say is meant to be insulting, but more as a critique and to provide feedback from my years of working directly for and directly with Property Managers. Up close and personal.

Each investor needs to decide their level of involvement with each of their investment properties. There's very much a "Set it and Forget it" mentality with investors when they find themselves handing off property management to a PM group for the first time. This is a mistake, and most of all I think this is the lesson you just learned the hard way.

Owner's using PMs come in various levels of involvement from Ebeneezer Scrooge to Daddy Warbucks. Most passive income investors chart a middle course of involvement with quarterly or EOY audits, and what I call "Potty Audits" (perusing invoices on their phone while sitting on the toilet). Some owners are really good this way, others just create problems because they don't understand what they're reading.

I agree that you might have been spoiled by your first PM, but I'm not sure I agree with why. I'd need more data to confirm, but I don't necessarily thing your first PM was honest, I just think your first PM was good enough that you didn't question your confidence in them.

I think you learned from this that you need to be way more involved, and more hyper sensitive and reactive to red flags. This is an excellent lesson to learn, especially learning it in a way that you'll never repeat it again.

Also, I think I would take a very long look at your agreement with your PM, and what you're looking for in those agreements moving forward. Here are some things experience has made me add to the fine print.

1. Separate NTE amounts for CAPEX and OPEX per property. (i.e. $150 NTE on CAPEX, but $500 on OPEX). This is mostly for tax reasons, but every couple of months I do a long hard look at inverting these numbers. I'm pretty quick to give approval, and will do over text. If the PM takes the time to format it the way I want (Pictures, competing bids depending on cost) I can usually give "Potty Approval" by text or email. This slows down the free spending, and makes them get their stuff in a row.
2. Individual event and monthly CAPEX and OPEX thresholds. Similar to above, using OPEX as an example is a $500 NTE per event and NTE $1500 monthly. That's just a soft-stop limit so I don't get crushed one month because of 10 $200 jobs. Makes me stop and get involved, even if its just as the annoying oversight.
3. Competing bid requirements. I'll warn you, mine are low. <$500 nothing. <$1000 one bid. <$2000 two bids. $2000+ three bids. Again this separates the babies from the big kids.

I could add more but you get the idea. The PM group works for you, and that position of dominance shouldn't need to be refreshed from time to time. They should know and behave as if they do what you say, not the other way around.

You got smacked for involvement, and I'm so very sorry that it happened to you. Now you have to decide what to do.

I agree if this person has any sort of license you need to report them. First I could collect all of your evidence and present her with a number with the opportunity to rectify. See how that goes down.

Small claims court I think is $15K, hit her with that, as long as you have your evidence you shouldn't need a lawyer.

Last thing, aside from me wishing you luck. Red flags need to be acted on, every time. No more assuming, or hoping. This isn't personal, its business. :) 

Take her to small claims court. Situations like this are the reason small claims court exists.

All investors must understand that trust is not a part of doing business. A investors responsibility is to manage their property manager. Real estate investing is not a passive investment. Those that think it is are in the wrong business.

You are either managing your property or managing your property manager. Unfortunately when a PM does a poor job it is usually the investors fault for not being fully involved and on top of their business.

Lessons learned, move forward.