Tenant could not pay full rent. What would the pros do?

[Aaron Sizemore]

So here's a little background on my situation. Just wanted to get some input from you guys on how one should handle this particular situation. I purchased my first rental property, a bank owned townhouse approx. 1 year ago. I spent a little time cleaning it up and had it rented within 60 days or so. My property manager said he had tons of potential tenants but finally settled on a single woman in her 40's, who also held a respectful paying government job. However, she mentioned going through a rough divorce and foreclosure in 2009/2010 which left her with a terrible credit score (I know, first red flag). Property manager supposedly performed all other screenings and spoke highly of her regardless of the credit score. So, fast forward 10 months. She has paid perfect rent, sometimes even a couple days early. This month was different (assuming she spent her rent on Christmas?). I contacted the property manager on the 4th asking if he had heard anything because the contract clearly states that rent is due on the 1st and will be charged a daily $40 late fee after the 5th. I received a response stating that her check has not been deposited yet and that she could only come up with $975 (rent is $1000) until she gets her check. That's right, she apparently couldn't scrounge up $25? My property manager collected the $975 on the 5th and told her that there would be a $40 daily late fee until the rent is paid in full. I finally received a text from the property manager (as I am typing this) stating that she now only has $100. A little math $25+40+40=$105. I know its only $5 but come on! I feel like she is toying with me? If a 40+ year old woman that makes $75k a year cant pay $5 to keep a roof over her head, she has way bigger problems. I also feel as if my property manager is a little inexperienced and soft. So what would you guys do in this situation? Should I set a date stating that if the rent is not paid in full by xx/xx/xx I will do XX? Sorry for the long post. I may be overreacting but this is my first experience with this. Thanks for the future advice!  

[Kyle J.]

For an otherwise good tenant with a history of on-time payments, I'd either forgo the $5 she still owes or let her pay it with the following month's rent since this is her first time being late.  I'm all for enforcing your own rules, but I certainly wouldn't keep charging her $40 a day because she was $5 short.  Especially after she already paid $80 in late fees.

(Side note:  Not sure about South Carolina but in my state, and others, $40 a day late fee on a property that rents for only $1000/month would likely be considered excessive and unenforceable.  But I digress.) 

Whatever you decide, I hope it works out for you.  I'd suggest keeping a close eye on things from here on out, and maybe have a talk with the tenant, as there is likely trouble brewing if she's that short on money. 

[Ward Mcdaniel]

Hi Aaron,

I have a long time tenant and we have a good relationship and sometimes it is necessary to look at the whole situation when dealing with them.  I have been in the same situation and allowed them some leniency.  The monkey then is on their back to get it right the next month....Unfortunately, life happens and sometimes too quickly and if your PM is still high on this tenant paying, then I side with Kyle; let her make it up on the next months rent.  Sometimes, this little gesture by you will turn into a big deal to your tenant and she will think that you are gold for being understanding.  However, if this becomes a pattern, then with her 12 month lease coming to a close, it may be time to part ways.  Hope this helps out.

Ward

[Dana Dunford]

@Aaron Sizemore -- A couple of comments, and I'm really sorry that you have to deal with this. The property manager is my main concern, so perhaps you should call him to let him know why you hired him and what you expect (rather than having to deal with his frustrating text messages that ruin your day :( ). Here's why I say this:

• The reason to hire a property manager is to give you a peace of mind. You shouldn't have to stress at all when you have a property manager, that's why you pay them 6 - 10% of monthly rent! 
• He seems inexperienced, and it's a concern that he's taking the side of the lady. You should never get a text saying that your tenant is $25 / $5 behind on rent ... he should continue to follow the agreement listed in the contract (aka initiating a late fee) until he gets the full amount.
• It sounds like he's waiting for you to say something like "Oh that's fine ... just skip the $5." If you do this, then it sets the precedent that rent can be late or partially paid, so don't budge on what is agreed in your contract.

Good luck and hopefully your property manager steps up to deal with this in a more professional manner. I know that would frustrate me to get such text messages on the shortfall.

[Kay Kay Singh]

Arron look at the big picture because I would consider her a good tenant because she paid on time for ten months which I think is good and secondly $40 per day late fee per day is a little off standard in the rental world , just my opinion and I hope everything works good for you.

[Mark Holencik]

Take the money and forget the $5.

[Account Closed]

So she has always been on time and now she has paid you $1100 of a $1000 rent for being seven days late?

I would have just said "Happy New Year don't worry about the $5."

The time it took you to write the post was worth more than $5.

[Brock Adams]

Good advise above.  .Let's remember that it cost more than the late fees to get a new tenant and clean the place up.  One time in 10 mos. is not too bad however your PM (not you) should be doing the heavy lifting on this account otherwise you need to adjust his fee that month.   Give her some incentive to pay early each month by discounting her rent.  In my lease agreement, I give incentive however if it happens more than 3 times I go up on rent.  I find it hard to believe that she makes 75k. Something does not add up.  Unfortunately, most due diligence is learned after the fact. 

[Sib Bahjat]

Hi Aaron, 

I think the folks here that gave you suggestions were all great and helpful in my opinion. I really don't think there is a right or wrong answer. In the business world, it is not always so black and white. I really think you can use this situation to your advantage all the way around. You can set the tone with your pm and your tenant. What I mean by that is, if you decide to forgive the $5, then you can hold the tenants feet to the fire and let her know you are watching her and next time late fees will apply. You can have a dialogue with your pm and hold them accountable to do their job at 100% because that's why you are paying the the 6/10%. This will be a good $5 lesson. 

Happy New Year!

[Darren Budahn]

Forget the $5 and be lucky that she hasn't questioned your $40 a day late fee which is probably either illegal or unenforceable.   

[George P.]

Instead of the 5 bucks,  you should barter for something...  like a box of Ramen noodles. or 2 sneakers bars. 

[Cashmere Robinson]

I think you should allow $5 for this time. If she had paid rent earlier couple of times you can be a bit lenient for the time being. 

[Aaron Sizemore]

Thanks for the input guys. You all make very valid points. It was my first issue with landlording and I think I panicked and typed up a huge rant more than anything haha. I just didn't want to appear weak and set a precedent, whether it be $5, $25, or $800. I understand that it's not a huge amount of money. And I may have made my property manager sound way worse than he really is. Sometimes I just think he is too nice of a guy. My plan is to acquire a few more properties and maybe start doing the property management myself.

[Aaron Sizemore]

Originally posted by @Kay Kay Singh:

Arron look at the big picture because I would consider her a good tenant because she paid on time for ten months which I think is good and secondly $40 per day late fee per day is a little off standard in the rental world , just my opinion and I hope everything works good for you.

 Thank you sir. I guess I have been fortunate with her and it could be way worse. She is my first tenant so I have yet to have a really bad one to open my eyes.

[Aaron Sizemore]

Originally posted by @Darren Budahn:

Forget the $5 and be lucky that she hasn't questioned your $40 a day late fee which is probably either illegal or unenforceable.   

 Yeah I never really paid much attention to the $40 late fee in the contract. Not sure where the property manager got the number from. What is the going rate for a late fee?

[Dawn Anastasi]

Originally posted by @Aaron Sizemore:

Originally posted by @Darren Budahn:

Forget the $5 and be lucky that she hasn't questioned your $40 a day late fee which is probably either illegal or unenforceable.   

 Yeah I never really paid much attention to the $40 late fee in the contract. Not sure where the property manager got the number from. What is the going rate for a late fee?

Most people charge a flat rate. I charge $10 a day but I cap it at $50 because I don't want it to get excessive. I agree that a $80 late fee for being $25 short was excessive.

[Phil Earley]

From what you have said about your tenant/customer,  good customer service from a landlord/business should pay off.   

[Brie Schmidt]

Originally posted by @Darren Budahn:

Forget the $5 and be lucky that she hasn't questioned your $40 a day late fee which is probably either illegal or unenforceable.   

 Totally agree!  

I never enforce late fees for the first offense if the tenants have been good up to that point and contact me ahead of time with what seems to be a one time problem

[Joel Owens]

I didn't read all of these posts. You can put many things in a lease as a landlord. Having it stick when you go to court in front of  a judge is another thing all together.

Yes some late fees a court will deem as excessive and disallow sometimes. That doesn't mean however that it won't be a strong motivator for a tenant to not let the days roll by for full payment.

5 bucks a day late sounds worth it to buy 15 late days. 600 in the same time frame does not.

If you can afford late payments then as long as they do not snowball over into next month you are making additional money.

No legal advice.

[Mike S.]

     You want your late fee to be enough of a hammer to encourage compliance.  Good tenants can and do run into issues that may cause a late payment.  You want to encourage them get back on track and not be punitive.  $40 a day and no cap?  There is a point where you push the tenant to wanting to get back on track to being actively hostile and with that much of a fee, your tenant will have the judge on their side.

    I charge a flat 10%.  In my county, I know for a fact that the judges here will throw out in it's entirety fees greater than 15%.  Down south of me, that number is a little higher.  So the actual allowed depends on the jurisdiction. 

[Joel Owens]

I know someone who has a tenant that for years out of habit pays late and the 100 fee. Over the years the landlord had made thousands extra on them. The tenant is consistent and has a positive pattern even though payment is late each time. 

If a landlord has reserves to pay the bank on time each month it's not that big of a deal.

The biggest mistake time and time again I see is investors overpaying for a property and not accounting for proper reserves and costs. They are counting on no vacancy and the tenant to be angel and stay forever so no repairs have to be completed.

As soon as the tenant starts paying partial payments or not at all the investors world starts falling apart.

[Russell Brazil]

I honestly cant believe you would post about not being paid $5. If you are going to be petty over $5, then just be ready to have in the future the most difficult tenant you have ever had, and be ready for them to destroy your unit.

[Lesley Resnick]

I would not sweat the $5 bucks or late fees provided they are not chronic offenders.  This is one of the areas that landlords are at a disadvantage.  Some people take a very hard line approach PAY UP NOW or GET OUT!  The tenant could simply stop paying and force you to evict them.  Cost $250-$500 and the managements fees.  Could take 2-6 weeks depending on municipality and your ability to complete the paperwork correctly.  Try getting someone evicted during any holiday season or a particularly cold winter.  Assuming you can get them out quickly and they don't trash the place, you can now re-rent it.  You mentioned that it took 2 months or $2,000 to rent it last time.  My point is simple, sometimes it is cheaper and better for everyone to have some flexibility.  I do not advocate being taken advantage of, but it can be in your own best interest not to be a hard ***.  Furthermore, If my tenants pay the rent on time and take reasonable care of my place, I will not raise the rent.  The difference between profitability and loss in many cases is the vacancy.       

[Joe Splitrock]

I am going to give you a Dr. Phil reality check.

Your commentary on the situation shows inexperience. The fact that you had no idea charging $40 a day is unreasonable when someone owes you $25 is one example. Keep in mind your property manager has more experience in this business than you, which I assume is why you hired them. I am not saying they are a good or bad property manager - I don't have enough information to form an opinion. Still, my recommendation is to get rid of your property manager and manage the property yourself. Then you can learn through experience. Only after successfully managing your own property, will you gain the right perspective.  

You made the comment that a 40+ year old woman making $75K cannot pay $5, so she has big problems. Many renters make good income, yet barely come up with rent each month. Income and money management are two different things. She obviously is a poor money manager and/or has problems that have financially drained her. That is why she is renting! Keep in mind that tenants who barely scrape by will often be long-term tenants. (Low vacancy = more profit.) Would you rather have a 5 year tenant that pays a $40 late fee once a year or 1 year tenants that leave you with a 1-2 month vacancy every year? Yearly vacancy over 5 years would cost you $5000-$10,000 in rents plus fees and rehab costs. 

I would forgive the $5 she owes and when the lease renews, modify the late fee to something reasonable. I charge $25 on the 6th of the month, then add $5 per day. My average lease is a monthly payment of $1100. That works out to around 13% of the rent per month in late fees. Check in your local area what is acceptable. (Your late fee is currently 100% per month which is the highest I have ever heard of).

You should prepare yourself for worse situations in the future if you continue to invest in rental property. 

[Michael Julian]

Originally posted by @Aaron Sizemore:

Originally posted by @Darren Budahn:

Forget the $5 and be lucky that she hasn't questioned your $40 a day late fee which is probably either illegal or unenforceable.   

 Yeah I never really paid much attention to the $40 late fee in the contract. Not sure where the property manager got the number from. What is the going rate for a late fee?

 In Tennessee, the late fee cannot exceed 10% of the monthly rent, so that's my cap..

[Bryan Bagge]

I have a tenant that I have a similar problem with. In the beginning, we had bigger problems to worry about, and we let him off not paying late fees because we were the new owners and as that, we wanted to start out by offering some kindness and was just happy about getting the money as long as it was all there. Fast forward over a year later and rent is consistently late, and paid in small increments rather that the full payment.

He has had medical expenses and again, we decided to try and work with him instead of being stern as our lease states about late payments. For the future, I will not be lenient about this because I feel that by offering slack that first time, I set a precedent that my tenants needs come first and that paying rent comes second. 

He is currently on a month to month contract and has stated that he intends to move out when his son ( a senior) graduates high school. We have decided to just ride this one out a few more months and start fresh by sticking to the policies we have in place for future tenants.

I am only 23 so I call it a valuable lesson about being too nice while handling business.