staggering late fee of rent charged by PM

55 Replies

We recently acquired a property with tenants who have been perpetually late paying rent. It didn't dawn on us that our PM has been charging hefty late fees until recently when they sent a statement with the late fee unsuppressed. 

They've always been suppressing this late fee charges. They verbally mentioned it but I was never clear how the late fee impacted us.  

How this late fee works is: If the tenant is late for Month 1, the late fee will be deducted from their month 2 rent and kept by the PM. Now since the rent is now partial - with the late fee deducted, when month 3 rolls around, their month 3 rent will be partial again with the late fee for month 2 deducted. This could go on infinitely... 

They've been charging $350 per month for late fee per tenant. So let's say if the rent is $1000, we only get $650 - management fee - repair.

Now they said that they cannot go back and reverse the late charges if payment has been sent out to us, due to some accounting issue. 

I wanted to work a solution out with them before considering switching, as I always feel like switching PM is an inconvenience for my tenants. 

I would like to hear suggestions and advice. 

P.S. The contract does say the PM keeps the late fee. But it doesn't specify how. In my opinion, late fee can be kept by PM only if full rent is collected for the month. 

Anyone knows solid PMs please recommend as well. 

Thanks!

This may not seem like something you want to do but it has worked for me in the past. You may want to rewrite your lease terms and then get some locks that you can control remotely. So if they are delinquent you can lock them out of the property until they pay their rent. After the first time being locked out they usually learn to pay on time. 

Texas law allows your landlord to change the door lock if you are delinquent with rent. (After January 1, 2008 - your landlord has the right to change the door lock to your individual unit for non-payment of rent only if your lease has a provision allowing him to do so.)

Originally posted by @Joseph OHare :

This may not seem like something you want to do but it has worked for me in the past. You may want to rewrite your lease terms and then get some locks that you can control remotely. So if they are delinquent you can lock them out of the property until they pay their rent. After the first time being locked out they usually learn to pay on time. 

Texas law allows your landlord to change the door lock if you are delinquent with rent. (After January 1, 2008 - your landlord has the right to change the door lock to your individual unit for non-payment of rent only if your lease has a provision allowing him to do so.)

Hi Joseph, thanks for the idea. I guess we can consider that in the future. What is this remote lock called? 

For the time being, can I have my PM tell the tenant that since their rent is partial - with late fee for the previous month deducted, we'll reject the payment and file for eviction? 

They are just being late, but normally pay up by mid month. If filing for eviction, that's months loss of rent, not sure if it's worth it?

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Well, that is Not how late fees are supposed to work!  While most PM’s Do keep late fees, as it is more work for them, they Only keep the late fee when the late fee is actuall,paid, in addition to rent....not simply subtracted from the owner’s money.  And yes $250 is outrageous, and likely violates state law.

Originally posted by @Wayne Brooks :

Well, that is Not how late fees are supposed to work!  While most PM’s Do keep late fees, as it is more work for them, they Only keep the late fee when the late fee is actuall,paid, in addition to rent....not simply subtracted from the owner’s money.  And yes $250 is outrageous, and likely violates state law.

I agree. I've talked to them on phone a few times, they kept saying that the accounting issue keeps them from reversing the late fees. Not sure what I can do. I emailed them multiple times as well. 

Interesting....I have not run across that before....so is the PM charging you less, based on the rent they collected...so 10% of $650 instead of 10% of $1100?

Under the situation you describe seems like it is in the best interest of the PM to allow tenant to be late...they make significantly more money.

Maybe you should revised PM agreement to split late fee and maybe eliminate PM fee for 2-3-4 months to adjust for their accounting system.  or that you get 100% of the late fee through the end of the lease to account for their software deficiency?  

Originally posted by @Bruce Lynn :

Interesting....I have not run across that before....so is the PM charging you less, based on the rent they collected...so 10% of $650 instead of 10% of $1100?

Under the situation you describe seems like it is in the best interest of the PM to allow tenant to be late...they make significantly more money.

Maybe you should revised PM agreement to split late fee and maybe eliminate PM fee for 2-3-4 months to adjust for their accounting system.  or that you get 100% of the late fee through the end of the lease to account for their software deficiency?  

Bruce, I took another look at the statements, late fee first listed under "Income", then moved under "Expense". So late fees are considered owner's expense! This is quite absurd. 

On a different note, is it legal to suppress late fees on owner's statement? 

@Zoe Lee I don’t use a PM but that would have me pretty upset. I wouldn’t worry about inconveniencing the late paying tenants and look for a PM that will handle the late payment issue and not sit back and benefit from it at your expense!

Suggest to them they are improperly handling trust funds and you will be reporting them to your states real estate commission. That will light a fire under their a**.

@Zoe Lee    I don't know if it is illegal or not, that's a lawyer question, but probably doesn't matter for the small amount of money....Probably just talking to the lawyer to handle cost that much.   I would want to resolve going forward.   From what it sounds like to me you have agreed to the fee/split in your PM agreement.   This is one of those places where people tend to hate their property manager.  PM looks like they're getting rich at your expense.  They're not getting rich at $350/month, but feels like that when maybe you make less than that.

If it is what you agreed to in your PM agreement then moving it from Rev to Expense is probably correct.   You're not getting it, they are.  Should it be on your invoice?   Maybe yes, maybe no.   To me would be nice to see what they are collecting really on your behalf and what they expense to you, but not sure they have to do this if it is really not your revenue/income.

Any chance you can self manage?  We can give you some ideas if you want to try.

If you need a recommendation for a PM change, just let me know.   I always say though, no one likes their PM.  I try to recommend good ones, but I've never met anyone 100% happy.

You may want to look for another PM as they are passing on all the liability to you i.e. it's no work for them to deduct the late fees from the rent. IMO a good PM would actually charge the tenant the late fee and do the work to either get it or evict the tenant. 

Originally posted by @Joseph OHare :

This may not seem like something you want to do but it has worked for me in the past. You may want to rewrite your lease terms and then get some locks that you can control remotely. So if they are delinquent you can lock them out of the property until they pay their rent. After the first time being locked out they usually learn to pay on time. 

Texas law allows your landlord to change the door lock if you are delinquent with rent. (After January 1, 2008 - your landlord has the right to change the door lock to your individual unit for non-payment of rent only if your lease has a provision allowing him to do so.)

Whoa!  While Texas law allows the landlord to change the locks, it does not allow them to lock out the tenant until rent is paid.  The landlord must provide a key when requested even if the rent is not paid.  Reality is that a lockout really just gets the tenant to make contact 

This scenario sets off a lot of red flags to me. First, I don't agree with locking them out. I'm not familiar with TX law, but everything I've ever read says this is against the law. @Greg H. ?

Your PM sounds like they're trying to hide this from you. While I agree that the late fee from month one should be applied from the payment for month two before the remainder is applied to the rent for month two, this should be more accurately conveyed to the tenant. But your PM hiding the fact that they're collecting late rent is shady.

While it is acceptable way of accounting rent from a tenant, the way the PM is accounting to you seems to be unjust enrichment to the detriment of the client(You)

Is their policy clearly outlined in the PM agreement?  I would send them a demand letter for the funds and/or seek to terminate the PM.  I would give them 10 days and state that I will file a complaint with TREC

In this scenario, when the tenant pays late, are they paying $1,350 or only $1,000?  If they are only paying $1,000 then you are getting screwed by your PM.  Why? 

Consider this happens for 3 month.  Tenant pays $3,000.  PM gets $1,050.  You get $1,950 (which from your perspective is giving the tenant one month of free rent)  So the question to the PM is, why are you allowing this tenant to fall farther behind each month?  How and what are they communicating to the tenant about this issue? Seems like grounds for eviction.  Or at least to start to the process with a Notice to Quit.

But hopefully in this case the tenant is paying $1,350 per month so you receive what is owed.  But it doesn't sound like it.  

@Zoe Lee , to go along with my previous post, I made a chart showing how this would impact you if it was aloud to continue for 1 year.  Follow across for each month to see how the totals add up.  Then the balance gets carried down to the following month and starts over again.  It's kinda like compound interest.  Only not the good kind in this case.

@Zoe Lee I've worked with some PM's that hide this and some that show this. They all generally keep the late fees, so that is not negotiable - it is part of their business model and how they make money, especially when dealing with lower end tenants that pay low rents and therefore they receive low monthly PM fees from the owners. I once worked with a PM that split the late fees with the owner, but that is not typical.

However, late fees should only be taken by the PM LAST, after the owner is fully paid rent for the month. Incoming funds from the tenant should be considered 'rent' until rent is caught up and then anything else collected should be considered 'late fee'. Late fees continue to accrue each day and the PM will eventually get paid all the late fees when the tenant catches up - this is their incentive to try and collect the late rent and late fees. Sometimes they forgive late fees or don't collect it, but that is on them and again should be after the owner is paid full rent for the month.

Yes, sometimes mistakes are made, and even if the accounting can't be 'reversed' after the fact, if you know the amount of the late fees that were taken by PM instead of paid to you in rent, they should be able to make new adjustment entries to fix it.

If PM takes income as late fee before rent is fully paid for the month, or if their accounting system doesn't let them fix mistakes like this after the fact, you need to find a new PM.

One other thing, I think it has been mentioned, but if tenant never fully catches up, then their effective monthly rent is higher than what you are receiving each month since the late fees accrue each day until they catch up. When I've worked with PM's that share the late fee balance in their online portal, and tenant was close to catching up, I've been able to step in and ask whats going on, and ask PM to forgive some of the late fees to get tenant back to $0 balance.

I've self-managed and worked with PMs in Texas. One of the advantages of REI in Texas is the fairly landlord-friendly laws, or the law is silent on the issue and the lease dictates the rules. This can work for or against you, however. To the best of my knowledge, there are no specific laws to cover this situation. The lease dictates how the tenant is charged late fees. Late fees cannot be as high as the rent itself, but otherwise the law is pretty vague and they can be quite high as long as they are clearly stated in the lease.

Your contract with the PM governs how fees are collected and who keeps them.  They should provide a fee schedule either in your contract or as an attachment.  This is typical best practice, but not mandated by any laws that I know of.

Be very cautious about doing anything like changing locks.  Not only do you have to let them in if asked, but depending on the city, having locked them out can get an eviction denied.  Some cities are more tenant friendly, others more landlord friendly.  (It's generally cheaper to get the tenant out without going to court, even if you have to pay them to leave.  Search for Cash-for-keys if you need more info on that topic.)

You need to work this out with your PM or get a new one.  One of the first questions most Texas judges ask the tenant in an eviction proceeding is "Did you pay?" - If they answer yes and can prove it, they deny the eviction.  In your scenario, they DID pay, but the PM did not apply the payment to rent.  That's pretty shaky ground to go to court unless the lease is very well written in my opinion.

Good luck and let us know how this progresses.

@Zoe Lee   I agree with others that some PMs keep the late fees, but as they said it is when it is paid.  They are charging you the late fee and that is not acceptable.  If it happened before, did you not question why you only got $650 instead of $1000 in rent from the tenant?  Any time there are charges, the PM must itemize them.  

The amount of the late fee is outrageous.  $350 is like those money advance places where you create a cycle.  If they have to pay that amount in late fees, it is going to create problems for next month and so on. I understand late fees, but $350 is ridiculous.  

I would find a new PM based on the fact that they are stealing money from you.  I would also tell them you are going to report them unless they return that money to you.  Do not buy the claim that their 'accounting' won't let them.

Originally posted by @Trent Honea :

I've self-managed and worked with PMs in Texas. One of the advantages of REI in Texas is the fairly landlord-friendly laws, or the law is silent on the issue and the lease dictates the rules. This can work for or against you, however. To the best of my knowledge, there are no specific laws to cover this situation. The lease dictates how the tenant is charged late fees. Late fees cannot be as high as the rent itself, but otherwise the law is pretty vague and they can be quite high as long as they are clearly stated in the lease.

Your contract with the PM governs how fees are collected and who keeps them.  They should provide a fee schedule either in your contract or as an attachment.  This is typical best practice, but not mandated by any laws that I know of.

Be very cautious about doing anything like changing locks.  Not only do you have to let them in if asked, but depending on the city, having locked them out can get an eviction denied.  Some cities are more tenant friendly, others more landlord friendly.  (It's generally cheaper to get the tenant out without going to court, even if you have to pay them to leave.  Search for Cash-for-keys if you need more info on that topic.)

You need to work this out with your PM or get a new one.  One of the first questions most Texas judges ask the tenant in an eviction proceeding is "Did you pay?" - If they answer yes and can prove it, they deny the eviction.  In your scenario, they DID pay, but the PM did not apply the payment to rent.  That's pretty shaky ground to go to court unless the lease is very well written in my opinion.

Good luck and let us know how this progresses.

Thank you Trent. What did you mean by "fee schedule"?

For eviction, since tenants paid partial rent (when late fee ia deducted), can they be evicted? I heard you have to deny partial payment to evict

Originally posted by @Bruce Lynn :

@Zoe Lee   I don't know if it is illegal or not, that's a lawyer question, but probably doesn't matter for the small amount of money....Probably just talking to the lawyer to handle cost that much.   I would want to resolve going forward.   From what it sounds like to me you have agreed to the fee/split in your PM agreement.   This is one of those places where people tend to hate their property manager.  PM looks like they're getting rich at your expense.  They're not getting rich at $350/month, but feels like that when maybe you make less than that.

If it is what you agreed to in your PM agreement then moving it from Rev to Expense is probably correct.   You're not getting it, they are.  Should it be on your invoice?   Maybe yes, maybe no.   To me would be nice to see what they are collecting really on your behalf and what they expense to you, but not sure they have to do this if it is really not your revenue/income.

Any chance you can self manage?  We can give you some ideas if you want to try.

If you need a recommendation for a PM change, just let me know.   I always say though, no one likes their PM.  I try to recommend good ones, but I've never met anyone 100% happy.

Could you give me a couple of names? I would like to be prepared should it come to that. Yes I am aware of that - there is no perfect PM, only looking for good enough :)

Schedule of fees is a document that outlines all of the fees a company charges for their services. 

This PM is ripping you off! A tenant who pays late is responsible for a late fee (if any), not the landlord who provides them with business! I would try to resolve this with them and get the money back. After that - leave them and get a new PM. Unacceptable.

Originally posted by @Zoe Lee:
Originally posted by @Wayne Brooks:

Well, that is Not how late fees are supposed to work!  While most PM’s Do keep late fees, as it is more work for them, they Only keep the late fee when the late fee is actuall,paid, in addition to rent....not simply subtracted from the owner’s money.  And yes $250 is outrageous, and likely violates state law.


I agree. I've talked to them on phone a few times, they kept saying that the accounting issue keeps them from reversing the late fees. Not sure what I can do. I emailed them multiple times as well. 



There is no way I would tolerate this because they have not collected the late fee. How can they charge you for the late fee they have not collected? They are basically having you pay the late fees. Is there any other way to look at this? If they fail to collect the late fee, they do not get to keep the non-existent late fee. The reason that they charge for the late fee is that it is work for them to collect it. Where is the work if they fail to collect the late fee?

You need to not accept this BS. It is also BS about accounting issues. Accounting allows them to pay all sorts of other unexpected expenses (not saying this should be unexpected with this policy).

Mot blaming the victim (curious), but ... Why was this not noticed the first month that you failed to collect full rent?

Good luck

Originally posted by @Dan Heuschele :
Originally posted by @Zoe Lee:
Originally posted by @Wayne Brooks:

Well, that is Not how late fees are supposed to work!  While most PM’s Do keep late fees, as it is more work for them, they Only keep the late fee when the late fee is actuall,paid, in addition to rent....not simply subtracted from the owner’s money.  And yes $250 is outrageous, and likely violates state law.


I agree. I've talked to them on phone a few times, they kept saying that the accounting issue keeps them from reversing the late fees. Not sure what I can do. I emailed them multiple times as well. 



There is no way I would tolerate this because they have not collected the late fee. How can they charge you for the late fee they have not collected? They are basically having you pay the late fees. Is there any other way to look at this? If they fail to collect the late fee, they do not get to keep the non-existent late fee. The reason that they charge for the late fee is that it is work for them to collect it. Where is the work if they fail to collect the late fee?

You need to not accept this BS. It is also BS about accounting issues. Accounting allows them to pay all sorts of other unexpected expenses (not saying this should be unexpected with this policy).

Mot blaming the victim (curious), but ... Why was this not noticed the first month that you failed to collect full rent?

Good luck

Dan, there are multiple units, all with different rents, plus maintenance expenses. So I didn't take notice. I did mention they suppress the late fee on the statement right? Of course I wasn't being good at math either.