We get asked “How do you collect rent from tenants?” all the time from homeowners who are considering gkhouses.com as their Birmingham or Nashville Property managers.
Collecting rent from tenants is extremely important and the only way to do this successfully is to have a system.
We actually believe that light and steady pressure is better than “Hey, where’s my rent, it’s the 10th and I haven’t seen it.”
I was able to sit down with Daniel Gable the other day and interview him about our tenant collection process. Here’s a transcript of that conversation:
Spencer: All right, I’m here with Daniel Gable.
It’s January 18, 2016, and today we’re going to discuss the gkhouses collection process. So, this is something that is extremely important to the property management business and for anyone who owns rental property, whether you have one house that used to be your personal house that you’re renting out, or whether you’re an investor and you have 10 or 15 houses, collections is really the lifeblood your business.
So, I can remember how I first realized this. It was the very first time I owned any kind of rental property.
I was buying and selling houses here in Birmingham as a HomeVestors franchisee, and I bought a 10-house package from another investor. And of course, I had driven a lot of houses, I had done all this stuff, but I was pretty young and pretty naïve.
But I knew that rent was due on the first, late after the fifth, according to the leases that they had signed. And when it came time to collect rent, I had already sent out letters to everybody. I think maybe 5 of the 10 came and paid rent. So I thought, “Well, I guess it means I’ve got to go and knock on some doors.”
And so the very first house I went to…I remember the street, it was on 15th Street (I no longer own the house).
I pulled up to the house, and I went to put a letter on the door and on the front porch were two gigantic pit bulls. And so I looked at the pit bulls. They looked at me. I didn’t think that it would be a good meeting if I went up on the deck. So, instead, I turned around and drove away, and proceeded to mail them another letter.
So that was my very first experience collecting rent from a delinquent tenant. And it’s not the best-case scenario. I’ve learned a lot since then. That was back in, I want to say back in 2005, and so it’s been 11 years since then.
And the great thing about what we’re doing here at gkhouses is we have specialized departments that handle different aspects of our business.
Daniel is here with me because he is one of our operations coordinators, and his day-to-day task involves communicating with tenants. And you can imagine if we have 800 tenants then that is quite a task. And he stays busy all of the time.
So, what I’m going to ask him to do is walk us through how we collect our rent. And then I’m going to ask Daniel to take us a step further, what happens if a tenant doesn’t pay, because a lot of people want to know that.
So, if a tenant has signed on a gk lease, rent is due on the first. It’s late after the third. And by the first of the month, every tenant has already received some type of notification that rent is due.
And so that’s a either a letter mailed to their house or an email. Essentially it’s just a statement. It’s a reminder…just a touch from us saying, “Hey, Dear Tenant, Hope everything is going well at your house. Just a reminder rent is due. Here’s the amount. It’s due on the first, late after the third.” It’s really just a friendly reminder. It’s either a letter or it could be an email.
And so they get that notification, and when it rolls around the first of the month, we have drop boxes outside, right here on the door. Tenants can pay any time. We have a number of tenants who pay electronically online or have it automatic drafted.
But there are some instances where tenants are late, and if you’ve owned rental property for any amount of time, you realize this is just a part of the business. It doesn’t mean tenants are bad. It doesn’t really mean that you’ve done a bad job. This is just a part of the business.
And so Daniel not only communicates with our tenants, whether they have questions about certain things or need his help in certain areas. But he also really manages our entire collections process.
And so Daniel, I’m going to let you talk now, and just take us through. Let’s just say today is the 10th of January and a certain tenant didn’t pay rent. Take us through the collections process and what happens.
Daniel: I couldn’t agree with you more when it comes to monies not received. This doesn’t mean tenants are bad. This doesn’t mean you’ve done a bad job. That’s completely correct. Life happens.
And I actually tailored our collections process in order with that understanding in mind. The very first touch you get outside of just that normal statement would be our first green bucket. I broke them down into buckets.
The Green Bucket
The first green bucket would be a kind of just a very friendly, warm reminder that rent is due and is late. It’s almost like I assumed that they didn’t know that they had missed the payment.
It is more along the lines of, “Tenant, I hate to tell you this, but we have not received your rent payment.” And they’ll get this in the form of an email. And they’ll also get this in the form of a pre-recorded message sent to all of their phone numbers…we send out once a week on Fridays.
So it’s going to be a phone call as well as an email, both of which say the same thing. It directs them to email us back and communicate back with us. But it just lets them know the exact amount that is owed, plus the late fee. And that’s within the first 30 days.
Spencer: And when does this happen. So due on the first, late after the third, when does that first reminder go out?
Daniel: The first reminder will go out the following Tuesday.
I receive a Collections Report, and it breaks down everyone by buckets. The first bucket is within the first 30 days of that payment being delinquent.
The Yellow Bucket
If this hypothetical person let payment lapse past that 30-days they would fall into a yellow bucket, which is between a month and a month and a half.
And this is based off the percentage rent that is due. So if they owe anything below $700 they’re going to be in the green bucket, but the moment that it tips over owing that amount, it will push them into the yellow and the orange and/or the red bucket.
The yellow and the orange are similar but different.
The yellow is a little harsher reminder. We’ve already touched them once with a friendly and now we believe they’re intentionally not paying and they know this but have not communicated with us.
So this is more of a “Hey, we’ve not heard from you. And I would hate to have to move forward with posting a notice of eviction.”
The Orange Bucket
In the orange bucket, which is between a month and a half and two months, owed. That’s when it’s stated that if we don’t hear from you, you’re going to receive a notice of eviction on your door, and we will move forward if this continues.
Spencer: Okay, so at this point, it’s really a matter of communication.
Like, we want to hear from you. Whether you call us and say, “Hey, I’m sorry, I got behind. I want to start making it up,” or whatever. We’re really looking for some type of communication. So to move them into the orange bucket it means they haven’t communicated with us.
Daniel: It means that their balance is worthy of being in that bucket, and it also means that there’s been no communication.
And I tell tenants all the time, communication is almost as important as the payment. If I know you’re behind, and I know that you’re willing to move forward, I will help you set up a payment plan.
And then I created a bucket specifically for people who have communicated with me, that have a payment plan and are actively working toward getting down to a zero balance.
And I actually will color them in a different bucket so that they get a completely different email. It’s not threatening. It actually is very appreciative.
It’s intentionally supportive and positive reinforcing. “Thank you for your payment arrangement. Please understand that communication is important. And I expect to hear from you this week,”
It’s really just a reinforcement of that correct attitude coming toward us.
The Red Bucket
So, in the event that there is no communication, then they fall into what’s called a red bucket. And anything that is left in that bucket gets sent an email saying, “Unfortunately, either due to either a breaking of a payment arrangement, lack of payment, or lack of communication, we’re going to be posting a notice of eviction on your door. And this notice gives us legal right to send you to the attorney within seven days.”
Spencer: Are they receiving phone calls these times as well?
Daniel: Each bucket receives…the green, the yellow, and the orange all receive one phone call a week. Once you fall into the red bucket, you’re receiving four phone calls a week. You’re actually going to be receiving them at periodic times throughout the week. And it’s just a constant reminder. It’s just letting them know that they’re one step closer to eviction.
Once we’ve either posted notice or just before, we contact the owner of the home and let them know the tenant’s current balance.
Unfortunately, if we must go through that process of eviction it roughly costs around $850…sometimes as much as $1,500 depending on the circumstances.
And that typically takes around 90 days in Alabama.
Spencer: Okay, I remember the first time that ever started collecting a lot of rent.
I didn’t have a system at all. Instead I would call all of my tenants and mail them letters.
I had no system…so the system we have here at gkhouses.com is great.
But I’ll never forget the one house that I actually had to go through the full turn of eviction. It wasn’t a pleasant thing, because not only had they not paid for 3 months before I finally decided to evict them, but they didn’t pay the other 90 days.
And the sheriff actually came and put their stuff on the street. And it’s just not very good, because typically the house is not left in a very good state. And it cost me several thousand dollars to get that house back up and running.
Daniel: That’s why we start this process well before we ever get to that point. By the time…if someone has to go all the way through that process of eviction, we will have sent them over 100 emails, or there would have been over 100 touches, between emails, phone calls and physical letters.
The good news is that most of the time, people want to pay, and that’s the good thing. And that’s the reason we don’t start off with accusing them of being delinquent.
That’s the reason we start off very warm and very understanding of their situation, because again, life happens and we understand life happens.
And we’re very willing to work with someone who is willing to communicate that with us and create a payment plan. We have found great success with that. We have…I think our eviction is less than 1% of what we actually manage currently. And so that’s…I think that’s a phenomenal average.
I would say that our biggest collections success comes from assuming that people want to pay versus the opposite.
Coming at it from a very positive standpoint, assuming their best intentions until proven otherwise, I think just treating people the way you want to be treated is probably the best way to receive rent on time.
Spencer: What percentage, do you think, get caught up and back on track, versus, “Hey, it didn’t work out.” They either moved or they got evicted?
Daniel: I would say over 50% of them get caught all the way back up to zero. Some of them stay behind until they move out and then get on a payment plan to pay it off.
And then others have to be sent to collections, but the debt is much smaller and the owner doesn’t take on the debt of having to evict them.
So any time that we can get away from having to send someone to the attorney and save that $850 is always a better solution.
Spencer: And just a side note, we actually offer what we call an eviction protection plan for owners. It’s a part of a new Gold Package we are rolling out for homeowners.
The Gold Package not only includes the Eviction Protection Plan, but also a quarterly inspection/HVAC service and gutter cleaning once a year.
The entire package is a great value and covers an owner for all of the attorney fees, court costs, admin fees, and Sheriff set-out costs involved in an eviction.
And should your tenant go to a full eviction, it’s totally covered. And like Daniel said, the minimum is around $850. It can go up to $1,200, $1,500 for an eviction.
Daniel: Absolutely. I think it’s well worth the money.
Spencer: And I think this is good because when you’re a homeowner and you’re renting your house, or whether you’re an investor and you’ve bought a few houses and you’re managing those properties and you’re the one collecting, it tends to be more personal.
And so, it’s harder to be as objective as we can be, as we manage a bigger portfolio, so everyone goes through the same process. And like Daniel said, over 50% end up getting caught up, just because of life circumstances happened or whatever the case. So great overview of that process, Daniel. Thanks so much.
Daniel: Any time.