Our 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 we had ever experienced before. 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? Although it’s unfortunate, this will happen to you.
Of course, making sure you don’t get screwed over by 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 have incredibly strict screening standards and give the tenant detailed instructions on how they should clean their unit when vacating, someday a tenant will end up owing you money. So let’s talk about some different options you have at this point. The option you choose will depend slightly on the situation itself, the amount owed, and the kind of tenant with whom you are dealing. But let us give you five possible choices you have for collecting that debt.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
5 Ways to Deal With Rental Damages That a Tenant Deposit Won’t Cover
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 a dollar a month to do this, but someday it might pay off.
3. Negotiate with them.
Recently, another of our tenants left his 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. 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.) Our in-house manager spent nearly a week negotiating with the angry tenant, and in the end, we agreed to accept 50 percent of what was owed. Three days later we received $100 in the mail, which we gave entirely to our manager to thank her for her efforts in collecting.
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 percent 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 they ignore our attempts at collecting the debt on our own. In fact, this is what we did for the tenant in the previous story.
Related: Tenant Turnover Can Wreck Your Profits: Here’s the Simple Solution to This Costly Issue
You were probably hoping we had a happy ending to that story, but let’s be honest: Getting screwed comes with the territory when you are a landlord. Perhaps someday we will walk out to our mailbox and find a check for several thousand dollars. Unlikely, but we 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 for 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.
[This article is an excerpt from Brandon Turner’s The Book on Managing Rental Property.]
How do you deal with tenants who owe you money?
Let me know with a comment!