How to minimize the risk of unpaid rent ?

Question

Hi we have been managing 15 + rental properties (SFR) and been to eviction courts numerous times, but have never been successful to collect unpaid rents.

I understand following ways exist to collect unpaid rents.

1. Get a court judgement to garnish from the (ex) tenants salary, if the tenants is employed by someone. - I have not been to a municipal court to file a small claim. Is this realistic ???

2. To put a language in the lease agreement to bind the tenants to pay the outstanding rents and/or repair cost to put the property back to the condition as same as the time of move in.

I am well aware that Choosing a "performing" tenant is a key component to maximize ROI. In the meantime, I appreciate anyone's advice on how to minimize the loss (unpaid rent/unrecovered repair cost).

Thanks !

Al Williamson · Answer

Wow, I can't improve on the answer you already arrived at. You make your profit when you pick a qualified tenant. And you can get a qualified tenant if you:1) have a great product2) have the ability to hold out for someone that meets your criteriaThese things indirectly help you reduce your risks.

Account Closed · Answer

Hi Hisashi N.:As most folks have pointed out, screening is the best place to start to ensure (to the extent possible) rent payments and tenants that take care of your unit. But, let's talk more about collections.Collections start with the application for tenancy. Make sure you get as much and as accurate information about the prospective tenant as possible right up front, i.e. SSN, employer, bank, etc. etc. The tenant is more inclined to provide this info upfront then after you've given them the keys. (Believe it or not, some landlords do not get a SSN and do not run credit and criminal reports--YIKES!) Get co-signers and/or guarantors if the prospective tenant has no rental and/or credit history, e.g. students, others that are living on their own for the first time. (Or deny them because they have no rental or credit history...but be consistent.)As for suggestions on being successful at collections, here are some pointers: Evict quickly. Don't wait for the past due rent to out of hand or other damages. Stick to a policy of always sending a demand for non-payment (in Michigan) as soon as the tenant has missed the payment. Treat everyone the same. Crazy payment deals with tenants usually end up leaving the landlord with an empty bag. Evict quickly when tenants are destroying your property. This is all to mitigate damages to your pocketbook.Ask for a money judgment at the hearing. If you don't know all the damages at the time of the hearing, ask for the money judgment portion to be adjourned to a later date when you will know.Don't screw up by missing the required notice periods for returning a Notice of Damages form or for filing a case in court to sue the tenant to keep their deposit. Send the Notice no matter what. Too many landlords lose a money judgment because they didn't file the right paperwork at the right time. (Lots more could be said on this...but too much information for here!)There are several ways to collect a judgment. Here are the most popular ones in the order of the most successful (the top two are the most popular): State Income Tax Return Garnishment - Non-PeriodicWage Garnishment - PeriodicBank Account Garnishment - Non-PeriodicPersonal Property Garnishment (boat, car, motorcycle, etc.) - Non-PeriodicActually follow through with the process until you've collected. For example, you can do a state income tax return garnishment every year until you collect all that is owed you.Of course, you can always use a collection agency. It's a good idea to use one that is familiar with rentals.Finally, some larger landlord associations have all the forms, training and help you'll need to do most of this yourself.Good luck!Clay

Mike F. · Answer

One item is more powerful than anything else you can try - a huge security deposit. Money in your hands already is a huge factor in reducing the effort to collect if afterwards.

Mike Makkar · Answer

Hisashi N. has some good ideas on verification. Also, I've been spoofed by a particular tenant who used his friend to act as his previous landlord. I lated found out that he had no properties. Next time, I'm going to check on county records on previous landlord's proof. You just gotta do a lot of due diligence.

Hisashi N. · Answer

Hi everyone responded, thanks so much !,With the final response from Clay, the judgment on garnishment on Tax return is the new concept for me. Over now 4 years managing properties by ourselves, we have learned so many people (tenants) who are not responsible....Screening is the first and the foremost in this business, thanks again all.Sean

John Lampertius · Answer

Hello All,This topic is probably one of the most important questions an investor/landlord will continuously ask themselves...1. Screening is most important part of process to successful landlording - and YOUR Income! Insure your success by doing your homework - every time, all the time.2. Make sure your lease is updated with any CYA clauses you come across. I'm always updating a "master lease" for future uses.Cheers,John

Robert Melcher · Answer

After 30 days if the debt is not settled, forward a copy of the file to a collection service.They may never collect a dime, and when they do, they take a chunk (maybe 40%) but they keep the debt alive. I've had former tenants settle years later because they want to buy a house and the judgement and unpaid balance must be cleared first. Write it off in the year it happens, claim it when you get it, and the collection fee is an expense.

Gail K. · Answer

When you explain the tenants that you will be doing a credit check as part of the application process and they start confessing their credit history "isn't so good"...that's a bad sign.When I do their credit report I'm not looking so closely at the FICO score (although I'm keeping a track record of the lowest one I've come across...so far it's been 375..which I thought was actually impossible). I'm looking for all those little "oneses" next to outstanding bills that indicates applicants are at least making an effort to make payments on what they owe.If I come across a credit report where someone has a large number of accounts 90+ days behind...even if they haven't reached the point of collections...this is a red flag for me. It tells me folks aren't paying their bills and thus they aren't likely to pay MY rent.I've explained more times than I can count to applicants that a landlord is simply just another creditor and their past history of paying other creditors is the information I'm looking for in regards to their (hopefully) paying ME my rent.Listen; there are just folks out there who are so dang casual about NOT paying their bills that not paying their rent really doesn't seem to bother them very much. These are the ones that do tend to hippity hop from one private landlord to another in the hope that we WON'T do credit checks (like bigger agencies tend to do) or that we'll be so desperate (or gullible) we'll buy any story they might spew on past poor credit history (they got divorced and the ex took everything, they broke up with their main squeeze, they got laid off, they got sick, their dog got sick, they got depressed, their former landlord didn't fix anything, blah, blah, blah).I don't care what sob story they try to dump on me. I'm not Dr. Phil and I'm not their social worker. Bad credit....no lease.Gail

Kelly N. · Answer

I just went to court for the first time last week and got a judgment in my favor, and after deducting her remaining deposit the ex-tenant sill owes me $1000 which she says she will not have by the deadline. I will file with mall claims court, adding the fee for that process, and then turn it over to a collection agent and write off the debt- I don't expect to collect in this situation given the circumstances.So, as you obviously already know, screening well is the first step. Had I not given her a chance (she had a prior eviction and a sob story to go with it) this wouldn't be my problem. The next mistake I made was to wait to file with the court- she promised to get out and start making payments if I would hold off on filing with the court, and of course she did neither. Had I filed ASAP she would have been out about a week earlier and not ended up owing me as much. I now have reminders in my calendar to a. send out 7 day notices on the 6th each month (I was doing that anyways) and b. go to court on the 14th (the court requires I wait 8 days from mailing) No more exceptions.The other thing I need to consider is charging the max for a deposit. I typically ask for one month's rent, and in Michigan we can hold 1.5x rent. I have started using the larger deposit for tenants with cats, but in this case I didn't. If I had done that AND filed in a timely manner, she would owe about $500.I don't know if any of this is applicable to you, but my troubles with this one tenant has been an eye opener for me!

Jeff B. · Answer

You're on the right track - - judgments seldom get collected - - so avoid'm like the plague.Just like profits from selling are tightly coupled to buying it right in the first place, avoiding evictions is best handled by a massive, stringent screening process.Verify employement is not the same as verifying income! CALL the company to ensure they're still there and not on probation. You may need to fax authorization for background check to the companywhen applicant is in a rush (need to move-in this weekend) or offers prepaid rents, these are red-flags - - something's wrong in their lives.Instead of an eviction, attempt to gain possession via the Cash for Keys strategy. Yeah the remainder of the of the lease may be lost, but you get it back asap and can get it back on the market to reduce your losses.