How do property managers collect last month’s rent?

Question

Every time a tenant moves out, they don’t pay their last month’s rent. Sometimes they leave without paying the last two months of rent. Security deposit is not enough to cover the turnover and back rent. It seems nearly every tenant has done this, costing us thousands throughout the years. We’re considering hiring a property management company. We have about 30 units right now. What exactly do property managers do for this specific issue? Do they go after the tenant after they leave or take them to court, etc.? Are they successful at collecting back rent?

Nathan Gesner · Answer

I don't collect last month's rent. I charge a deposit based on tenant risk levels. Low-risk tenants pay equal to one month of rent. Higher-risk tenants pay 1.5x - 2x the monthly rent. Tenants don't typically trash a place when two months of rent are held. Check your state laws because I think you can charge 2x the first year but after that you have to reduce it to one month of rent.

More important is solid screening, then policies and procedures to keep tenants on track so they don't get out of control. In my world, I charge a late fee on the fifth day of the month and I start eviction on the 10th. Even if they tell me they are moving out the end of that month, I still start the eviction process for non-payment. If they vacate before the court hearing, I can cancel the eviction and recover most of my losses with the deposit. If they don't vacate on time, I proceed with eviction and prevent myself from getting behind the curve.

I manage almost 400 rentals. I evict a tenant through the court once every few years. 99% of my tenants don't get that far behind on rent because they know I don't play around and I know what I'm doing. Of those that do get behind, they disappear before the court hearing because they know they will lose.

A good property manager knows how to fix problems. More importantly, they know how to prevent problems in the first place.

Remember: cheaper doesn't mean you'll make more money.

Start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. You can also search Google and read reviews. Try interviewing at least three managers.

1. Ask how many units they manage and how much experience they have. Feel free to inquire about their staff qualifications if it's a larger organization.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 6% management fee but the extra fees can add up to be more than the other company that charges 10% with no additional fees. Fees should be clearly stated in writing, easy to understand, and justifiable. Common fees will include a set-up fee, a leasing fee for each turnover or a lease renewal fee, marking up maintenance, retaining late fees, and more. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate, particularly if you have a lot of rentals.

4. Review their lease agreement and addenda. Consider all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that policies are enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. A tenant complaining online might indicate that the property manager handled them appropriately, so be sure to ask the manager for their side of the story.

7. Look at their marketing strategy. Are they doing everything possible to expose properties to the broadest possible market? Are their listings detailed with good-quality photos? Can they prove how long it takes to rent a vacant property?

This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!

Laura Stayton · Answer

Good advice except some states don't allow flexibility with the security deposit.  In Delaware, the maximum we can collect is one months rent.

Marc Winter · Answer

This is a common problem, but there are several actions we can take to curtail it:

Follow the l/t regs in your state to properly notify the tenant about any damages that will be deducted from the security.  In PA, we have 30 days to send written notice with details of damages.  Follow the same process for skipping on the last month's rent. If no response from the tenant within their legally allowed time, file in your local l/t court.  Assuming you win your case, or they don't show in court and you get a default judgment, RECORD that judgment at the county recorder level.  That will alert other landlords that the tenant has a rental judgment.  It will also show on most credit reports. Additionally, you can send that info to your preferred collection agency.

The recorded judgment hinders the tenant from making a major purchase (think real estate), and will ding their credit for years to come. BTW, we have received some nice checks years later from a few tenants who decided to pay off their judgment to close on their dream house.Does this practice often result in you collecting some money?  No, not often.  But, as landlords, if we all do it, our tenant screening will show those red flags.

Keep investing and moving forward.

Kyle Mccaw · Answer

@Elena Scott I understand you're based in Pittsburgh, and rental conditions might differ from Texas. However, it's uncommon for my tenants to skip out on the last month's rent. If that occurs, we report it to credit agencies and initiate collections. It might be beneficial to revisit your tenant screening procedures. In our office, we place significant importance on selecting the right tenants and thoroughly explaining the move-in/move-out process. It's crucial to clearly communicate to tenants the nature of your relationship and their responsibilities.

Gregory Schwartz · Answer

I've managed C, B and A properties with rent ranging from $500 for a garage apartment up to luxury apartments. Because of the strict screening upfront, I've only very rarely had a tenant not pay last month's rent (maybe 1-3 out of 100).

Maybe its time to upgrade your portfolio, I've come to the conclusion that over a longer buy and hold horizon (3+ years) the "non-cashflowing" A and B properties actually out preform C and D properties thanks to lower turnover and lower make ready cost. Foor for thought.

Adam Bartomeo · Answer

We collect last months rent for tenants that are more risky to rent to. We do not penalize all of our tenants. We follow the same process whether its mid lease or last month not being paid - post notice, communicate, file for eviction. When they move out and if their balance is not paid then we hand it to collections, put it on their credit reports, and in some cases seek a judgement.

Michael Smythe · Answer

@Elena Scott you are obviously dealing with Class C/D tenants that don't care about their credit or legal ramifications. These types of tenants often do this because they don't want to save in advance, so they take the rent owed to you and use it to put down on their next home.

Recommend you do a better job of communicating to the tenants that you will pursue every legal collection option if they don't pay last month's rent.

Also, why are tenants NOT staying with you? That would avoid this issue altogether!

How do property managers collect last month’s rent?

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