Late Rent Fees

11 Replies

Who should receive the payment for a tenant late fee, the landlord or the property management?

For example: Suzy's rent is due by the 5th of the month, however her property managers do not receive her payment until the 10th of the month, therefore they bill her another $35 for the late fee, should they collect that late fee since they had to track down Suzy, or should the landlord receive the payment because he had to pay the mortgage even without her rent check.

*Related question: How much should you charge for a late fee? Is there a certain percentage you base these numbers off of or do you just set a flat fee for all tenants?

Late fee policy can be anything you agree to with your property manager.  This issue greatly influenced my choice of manager.  Most property managers I contacted charged the late fee and kept it because, as they said, it took extra work for them to send the notices and collect the rent and they should be compensated for that.  I can accept that it takes more work but if the tenant is a poor tenant who constantly pays late wasn't that tenant chosen with the advice of the manager?  Isn't it the manager's responsibility to screen for tenants who will pay on time or, at least, stop poor behavior when it surfaces?  Why should they profit from poor management?  In fact, if the manager chose only tenants who pay late every month the manager stands to earn quite a bit more money.  Should the owner reward the manager for doing a poor job while the payment to the owner is delayed every month?  I think not.  I chose a manager who charges a late fee but the fee is split 50/50 with me.  This way the manager has some compensation for the extra effort but the fee is not enough incentive to want to do it every month and I get a little compensation for the rent being late also.

The amount of the late fee can be structured in many ways.  My favorite is to charge a set fee (I usually use $50) and then add an additional $10/day for every day past 5 days.  That way, even if the tenant is late they have an incentive to get the rent in as soon as possible.  I have had this upheld in court but some local judges seem to get uncomfortable if the late fee exceeds 5% of the monthly rent.  (My rents range from $950 - $1,400/month).

Originally posted by @Jeff Rabinowitz :

The amount of the late fee can be structured in many ways.  My favorite is to charge a set fee (I usually use $50) and then add an additional $10/day for every day past 5 days.  That way, even if the tenant is late they have an incentive to get the rent in as soon as possible.  I have had this upheld in court but some local judges seem to get uncomfortable if the late fee exceeds 5% of the monthly rent.  (My rents range from $950 - $1,400/month).

 Exactly Jeff. My leases state a $50 flat late fee, plus $5 a day until the total is no more tan 8% of the total rent. My attorney says the court frowns on anything over 10%, and they recommend no more than 8%. My rents range from $850 to $1450, but it's mostly on the low end that there are consistent late issues. 

The owner should get the late fee in my opinion.  The owner picked the property manager.  The property manager picked the tenant.  The owner should get their money on a timely basis.

The exception would be if the PM was willing to send in to the owner the rent money before the tenant paid, then the PM is taking on extra financial risk so they could keep the late fee.  This way the owner will have their money no matter what.

We believe late fees should be treated just like rent. PM takes whatever the usual management fee is (7%-10%) for collecting the extra money and the owner should get the rest. The owner is taking the risk and they are the one that is inconvenienced by the late fee, not the PM.

I agree with @Jeff Rabinowitz  and @Dawn Anastasi  , late fees belong to the owner.  While the PM may need to expend additional effort to collect rent from late payers, they are also being paid 7-10% of the rent which should be sufficient incentive to chase it and to do a better job selecting tenants in the future.

The only possible exception I would entertain would be if the PM inherited a problem tenant (i.e. with a new acquisition from a client owner).  In this case, I would be willing to give them the same percentage of the late fee (7-10%) as they receive from the rent revenue.

Originally posted by @Jeff Rabinowitz :

Late fee policy can be anything you agree to with your property manager.  This issue greatly influenced my choice of manager.  Most property managers I contacted charged the late fee and kept it because, as they said, it took extra work for them to send the notices and collect the rent and they should be compensated for that.  I can accept that it takes more work but if the tenant is a poor tenant who constantly pays late wasn't that tenant chosen with the advice of the manager?  Isn't it the manager's responsibility to screen for tenants who will pay on time or, at least, stop poor behavior when it surfaces?  Why should they profit from poor management?  

Saying that a property manager is responsible for picking tenants that pay late is akin to saying that an owner should have known that a home would experience future foundation problems when they bought the house. All one can rely on is the metrics. I don't handle any rentals, just commercial and large HOA associations, but I've always thought that the best way of gauging tenants isn't just a credit check but a call to the last couple landlords. Odds are if they paid the last two guys on time every month, they're probably not going to start a habit of paying late with you.

Originally posted by @Marc M. :

Saying that a property manager is responsible for picking tenants that pay late is akin to saying that an owner should have known that a home would experience future foundation problems when they bought the house. All one can rely on is the metrics. I don't handle any rentals, just commercial and large HOA associations, but I've always thought that the best way of gauging tenants isn't just a credit check but a call to the last couple landlords. Odds are if they paid the last two guys on time every month, they're probably not going to start a habit of paying late with you.

Not at all, Marc.   Besides, if property experiences a foundation issue, it's the owner's purse, not the PM's which remediates the issue.   If the PM places a bad tenant, it should be their problem to remediate.   Sadly there are PMs out there who are less than careful in filling vacancies as they are paid for each lease-up ... so turn often works to their benefit.

When we screen our tenants we perform a credit cheque in addition to reference checks from past landlords and employers.

Originally posted by @Roy N. :
Originally posted by @Marc M.:

Saying that a property manager is responsible for picking tenants that pay late is akin to saying that an owner should have known that a home would experience future foundation problems when they bought the house. All one can rely on is the metrics. I don't handle any rentals, just commercial and large HOA associations, but I've always thought that the best way of gauging tenants isn't just a credit check but a call to the last couple landlords. Odds are if they paid the last two guys on time every month, they're probably not going to start a habit of paying late with you.

Not at all, Marc.   Besides, if property experiences a foundation issue, it's the owner's purse, not the PM's which remediates the issue.   If the PM places a bad tenant, it should be their problem to remediate.   Sadly there are PMs out there who are less than careful in filling vacancies as they are paid for each lease-up ... so turn often works to their benefit.

When we screen our tenants we perform a credit cheque in addition to reference checks from past landlords and employers.

 My point was that no one, not even property managers, can predict the future. There is no way to predict with certainty how a tenant will turn out. Tenants with excellent credit default or pay late every day so blaming the property manager for that *may* be unreasonable. I'm certainly not defending all property managers as there are many out there that are utterly useless. 

Also, in the commercial investment properties I managed previously, I presented all info on potential tenants to the owners to let them make the final decision. This negates the entire debate we're having now as it shifts liability to the owner. We certainly assisted the owner in making the best choice but they understood the final decision rested with them.

@Marc M.  

I was not so laying blame with the PM for placing a bad tenant, but stating that it is there problem (they should be accountable).  You are correct, every once in a while a good tenant turns bad, or a bad one slips through the screen ... it's part of the business.

@Marc M. , I, as the owner, am ultimately responsible for all decisions regarding my property.  As you say, if I choose a property with future foundation issues I will pay the price for it.  This is something I have not experienced but if I did I believe I would be much more diligent about looking for this type of problem when I am considering purchasing a similar property in a similar neighborhood.  I most certainly look for issues that have burned me before when choosing properties.

I have final approval for all my tenants so I share the responsibility when they are placed but I pay my manager a significant fee for their advice in choosing and managing that tenant.  The property manager shares the responsibility for the choice.  If the pm earns a greater fee every time they advise me to make a poor choice they have no incentive to improve their selection process. If they tell me up front that they are keeping all of the late fees and that is not negotiable they are telling me they only care about their compensation.  This was the most common fee structure I found when I started turning my houses over to management.  I did not sign a contract with a pm until I found one who treated this issue according to my point of view. 

(I think I misstated my pm's policy above--they only take their usual percentage of all funds received including late fees.  I haven't read my pm contract in quite a while.  When I spoke of the 50/50 arrangement I was thinking of the way my note servicer treats late fees).

@Roy N.  I agree with you, the PM should ultimately correct the issue, that's part of their job and part of any management agreement I've ever seen.

@Jeff Rabinowitz  Simply to present another point of view, the PM business isn't always a profitable one. I imagine that making $100/month, sometimes less, to spend sometimes hours working on a property isn't much at all. That's just over half of what I bill out by the hour. Therefore, it can be difficult to actually make a profit on an account, which those ancillary fees help with, not necessarily that those companies are only trying to make a buck without further concern for their clients. Again, there are always exceptions, which is why it's important to find a company that puts the client first.

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