(The following is an excerpt from the new book from BiggerPockets, The Book on Managing Rental Properties. If you are looking to earn more and have less stress with your rentals, pick up a copy today!)
My first thought was: there is a dead body in this refrigerator.
Of course, upon closer inspection there was no dead body, just rotting food, garbage, and other unknown objects. The smell was unlike anything I had ever experienced before.
I don’t make it a habit to inspect rental properties myself anymore, as I have built systems to handle that, but I happened to be in this part of town a few hours after a tenant packed up and left, so my wife and I thought we would swing by and see how the property looked.
I wish I hadn’t.
The unit was left with garbage covering nearly every square inch of the floor, holes in the walls, doors missing, crayon on nearly every surface and that smell that permeated every cubic foot of space. All in all, it took nearly $4,000 to get the unit fixed up and ready to re-rent, including the costs of lost rent.
Luckily, when the tenant moved in, we had collected a double security deposit due to a minor red flag when performing her tenant screening. But as any third-grader can tell you, having a deposit for $1,000 and a bill for $4,000 means one thing: we were in the hole $3,000.
So what now?
I wanted to write this post because this is not an uncommon occurrence, especially among low-income tenants.
Of course, making sure you don’t get screwed over from a tenant starts at the beginning: by only accepting the best tenants, collecting the right deposit amount up front and adequately training your tenant while they live there.
But even if you are like us and have incredibly strict screening standards and give the tenant detailed instructions on how they should clean their unit when vacating, a decent percentage of your tenants will likely end up owing you money. I would prefer this not be the case and actually look forward to giving back an entire deposit because it means the unit was left in perfect condition by the vacating tenant. But alas, when you are a landlord, getting screwed happens.
I want to explore some options with you today for collecting on this debt, but first, let’s talk about the initial step: the Disposition of Deposit.
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Send the Disposition of Deposit
Most states require that you give a Disposition of Deposit form to all vacating tenants, showing them a breakdown of what their security deposit was applied towards.
This document usually needs to be mailed within a certain timeframe, or you could lose your entire right to collect any money AND you may have to actually pay the tenant money depending on the state. In Washington State, if we don’t send the Disposition within fourteen days, we could be forced to pay the tenant up to three times the amount of the security deposit. Imagine that… the tenant owes us $3,000 and we are forced to pay her $1,500. Therefore, make sure you send that Disposition of Deposit within the timeframe required by your state.
This document will also serve as your first invoice to the tenant, demanding immediate payment. In our experience, most tenants do not pay this. Many tenants falsely believe two things:
a) It doesn’t cost very much to clean and repair their unit.
b) The Security Deposit is the most they could ever lose and you won’t pursue it.
I’m sure the tenant in the story at the beginning of this post thought that her $1,000 deposit would easily cover the turnover and probably even expected to get some money back. As a result, she refused to pay the $3,000 bill and simply ignored it. So what next?
5 Options for Collecting Money Owed From Former Tenants
The next step in collecting what you are owed will depend slightly on the situation itself, the amount owed and the kind of tenant you are dealing with. But let me give you five possible choices you have for collecting that debt.
1. Ignore It
If the amount owed is very small, you may simply choose not to pursue it after sending the Disposition of Deposit, and just move on. If they owe you $50, it might not be worth the hassle to try and collect it, so simply send the invoice, and if it is never paid, mark that in your tenant’s file for future reference. Someday you’ll get a reference request for that tenant, and at that point, the tenant will wish they had paid that small bill.
Of course, you are not losing everything when you choose to accept that loss. The one thing you will gain is a valuable lesson, so take it gratefully! Learn from your mistakes and put systems in place so it doesn’t happen again, if possible. This might be far more valuable than the money owed to you.
2. Bill Repeatedly
If you don’t want to simply ignore it, but the sum is too small to take larger action, you can also set up a system that mails out a new invoice monthly as a constant reminder that they owe money.
Perhaps someday (like after they get their tax return) they will pay the bill. It might cost you $1.00 a month to do this, but someday it might pay off.
3. Negotiate With Them
Recently, another of our tenants left their apartment unit in a hurry and ended up owing about $200 to us from the cleaning and repairs needed above what his deposit would cover.
Of course, we sent the Disposition of Deposit form to the tenant in the mail, and upon receiving it, he immediately called to complain. (“Complain” is a nice way of describing the words he used on the phone. I believe we even had to hang up on him the first few conversations due to his rage.) This tenant expected to get his entire deposit back, but luckily we had photos and documentation to prove every one of our repairs (which, of course, is why a well-documented Move-in/Move-Out checklist is vital for any landlord).
My in-house manager spent nearly a week negotiating with the angry tenant, and in the end, we agreed to accept 50% of what was owed. Three days later we received $100 in the mail, which I gave entirely to my manager to thank her for her efforts in trying to collect.
4. Send It to Collections
Collection agencies are designed to pursue individuals for their past-due payments. They use a variety of techniques to get this money, including tracking down the tenant and calling them repeatedly until the debt has been paid. For their services, collection agencies typically charge a hefty fee, oftentimes 50% of the debt recovered. If you are fairly certain you won’t get the money from the tenant, you can send the invoice to collections and let them deal with it. Who knows, someday down the road you might get a check in the mail.
We will typically choose the collection agency route when the tenant owes between $1,000 and $4,000 and I don’t think they have the money right now. In fact, this is what we did for the tenant in the beginning of this story. I know you were probably hoping for a happy ending to the story that I started this post with, but let’s be honest: getting screwed comes with the territory when you are a landlord. Perhaps someday I will walk out to my mailbox and find a check for several thousand dollars. Unlikely, but a guy can hope!
5. Take Them to Small Claims Court
If the money owed to you is substantial and you think you can get the money from the tenant if a court makes them, you could pursue a lawsuit in small claims court. This court is designed to help people sue others without the need of lawyers and a lot of money. Usually, for less than a few hundred dollars in fees, you can sue someone, and if you win, you will receive a judgment against them. This judgment could be used to garnish wages or tax returns. Plus, this judgment can follow the tenant around for years, even showing up on background checks when they apply for a rental property in the future.
Hopefully this post has given you a few ideas on what to do when the tenant owes you more money than their security deposit can cover. It’s an unfortunate situation — and an expensive one at that — but it happens often to a landlord no matter how good you are at screening tenants. Of course, the risk can be reduced significantly.
Do you have any additional tips you would like to add?
Please share them below, as I’m sure I can learn from you as well!