This topic was tops on my list when I decided to start this blog...it's that important to watch for as a real estate investor. It takes different forms, appears when you least expect it, and usually results in an argument/disagreement with your current tenants and owner financed clients, with a big decision hanging in the balance. Let's dig in to the details and you'll soon see what I mean.
Let's start with a simple example. You decide to rent a house. For simplicity sake, you charge $1000 per month, and it's due the first five days of each month. New tenants agree, everybody is happy. You start to receive rent as promised on the 5th of the next month. Great! Let's assume you also receive rent on time for the next few months. Life is good...
During month four, your mailbox doesn't have the rent check by the 5th. You call the tenant. Check was mailed a few days ago. No biggie - just wait a day or two more for the rent. It arrives on the 7th - with a stamp date showing they mailed it on the 5th. OK - at least you got paid.
Next month - similar thing - except you receive the check on the 10th. The tenant was out of town, or sick, or child was sick and couldn't work two days last week etc - and it affected their paycheck. At least you got the check, you say to yourself.
Following two months - you see the rent being mailed later and later. You call the tenant. They changed the pay dates at their work. Now- twice per month. So- you adjust your dates to receive the rent. Now- it's the 7th and 21st of each month. Great.
After another month - the fun starts. You see- the car tires needing replacing, the medical bills from the sick child are due, the parents needed money... excuses start. The 7th rent check has arrived on the 10th - but its for half the rent. The balance will come due on the 21st - do you want them to pay with a certified check? They can do it- but not when they work- they'll do it on the weekend. Great.
Another month, another excuse. This time, they can't pay you on the 7th, but can on the 21st -the whole amount. So you wait. On the 21st - no rent. Why? You call them. Easy answer- they get paid on the 21st - they need time to get you the cashier check you demand. So- it'll be this weekend. You can't wait for the payment- and agree to meet them somewhere. Great. Now it's taking time out of your day to meet in parking lots.
Another month, another problem. it snowballs from here. You see- the 21st full payment put them in a hole - when the 7th rolls around - they don't have it - they will on the 21st. This time, they pay you by check- since you cannot wait the time for them to get a cashier check- and do not want to meet them in a parking lot again. This time, the check bounces. Uh oh. That's right...here it comes...
Turns out, it took two weeks to hear from the bank that they bounced their check to you. By now- it's the following month - and the previous month hasn't been paid yet. But - they can pay you on the 10th or so. You accept this half payment, since they agreed to pay you half rent twice per month according to their new paycheck schedule. They will have the balance on the 21st - well. most of it anyway. So- on the 21st - they mail you $350 - a bit short this month. Great... You realize you are falling down a dark hole now...
It keeps getting worse. Eventually, the 21st payments arrive after the first week of each successive month as if they are payments due on the first week of each month. By year end, you find out they owe you the full month they missed and a half payment that didn't arrive in time for December 31st- and must be applied in January.
Congratulations! Your tenant managed to pay you for 10.5 months - and it's only the first year!
How did this happen? You realize they are behind when it happens - and so do they. It's almost like a game to them. Would you evict them for missing a single payment - when it takes a 2-4 weeks (here in Georgia) - even if they don't fight it in Magistrate court? But most do. You see- it buys them some more time before it becomes mandatory that they leave. You have to hire an eviction crew and it takes a few weeks to get the Sheriff to witness the eviction - as fast as evictions are here in Georgia- they move too slow for landlords!.
So- you swallow your pride and let them stay - it's cheaper with less hassle. At least you talk yourself into believing that anyway.
How to solve this problem? A few ways work.
1. After every missed payment - a late fee helps motivate them ( this must be described in your lease). Also- they must either sign something or agree in e-mail that they will add X dollars to the rent due until paid in full. Each payment or half payment is now increased by this amount.
2. A 'sneaky" way to solve the problem: Calculate ahead of time, 1/12th of a missed payment - and add this to the initial rent amount. So - if rent is $1000/month, add $85 to the initial rent. Now $1085/month - or make it $1095 (sounds better!). At least you're covered for the missed payment. If it never happens- great! You just picked up more rent.
Oh, the fun has just started! I told you this blog describes how renting isn't always sunshine and rainbows! In case you think this stuff is made up...it's from actual cases I've experienced- and so many other landlords too. Sometimes, you just can't make this stuff up! To learn more about what we do, visit: www.suburbanhomesofga.com
Stay tuned for more...
