CHECK OUT THE FUTURE OF RENT PAYMENTS.

Imagine if you could clear your residents rent check the second they paid it. Are you surprised to learn that technology already exists? Discover what check truncation means and what it can do for you.

One 1,200-unit apartment community has three people who spend a majority of their day processing checks during the first 10 days of each month. There's got to be a better way. Now there is and it is called "check truncation."

Check Truncation Defined

Perhaps you have recently observed a situation at a store or office where checks are returned to customers on the spot after being processed. Wal-Mart has recently implemented this process in many of its stores. This is called "Point of Sale Check Truncation." After the check is presented, it is scanned and given back to the customer stamped "cancelled or void." In this process, the check is merely used as a source document to create an electronic funds transfer to move the funds from the customer's account to the retailer's. The funds are available to the retailer either that day or the next day, assuming that sufficient funds are available in the payer's account to cover the amount of the Automated Clearing House (ACH).

What is a check anyway? It is merely a piece of paper that authorizes the payee to make claim against the funds of the payer. The piece of paper itself has no value. Apartment owners and managers accept checks as a convenience to the residents. There is no legal requirement to do so. Most look at it as a competitive issues whereby refusing to accept checks would put a property at a disadvantage vis-a-vis the competition.

What if we could change that paper (check) into a source document that generates an electronic transaction that could serve the same purpose, i.e., authorize a claim on the funds of the payer? That's exactly what check truncation does.

Handling Checks Onsite

Apartment residents still make most of their payments by check. Check handling has always been a time consuming and troublesome task for property staffs. A recent study done by a large real estate investment trust (REIT) showed that it costs, on the average, $1.35 per check in time and bank charges to process checks each month. Of this, approximately $1 consists of staff time and $0.35 of banking costs.

Staff time consists of opening envelopes, posting payments in the accounts receivable system, balancing, making up deposits slips, traveling to and from the bank, including waiting in line and waiting for the deposit to be processed.

Isn't there a better way? Yes, and it is right around the corner. Check truncation onsite will save a tremendous amount of time and money for all apartment managers who process checks each month.

Drop Box Truncation

"Point of sale" truncation will not work at apartment buildings since "point of sale" rules dictate the payer has to be present at the time of truncation. These types of transactions are done one at a time as the customer' presents the check. Since most residents drop off their checks in a property drop box or hand it to office personnel for processing, the ability to process checks in batches is a must for check truncation to be beneficial to apartment communities.

Software has been developed by at least one electronic payment processor to meet this need. It can be loaded on the property PC or used through an Internet site and works in conjunction with a check scanner that is plugged into the property computer. The batches are transmitted to an authorized processor who inputs the ACH's to the Federal Reserve System in order to transfer the funds. Scanned copies of the check reside in the software and reports are received back from the processor that summarize all deposits and NSF's (not sufficient funds). Management reports are available to the property through the software and summary reports to senior management/owners through a processor's Internet site.

The truncation software is also capable of handling direct debits from a payers' account, checks over the phone and the scheduling of future payments to be drawn automatically from a payer's checking account.

NSF Checks/Negative Data Base

Even with truncation, there is no foolproof protection against NSF checks (redefined now "ACH returns"). When the check is scanned, a "negative database" is searched to ensure that the payer's account has not been closed or that there are no outstanding NSF's against that account. However, no database is currently available to perform a real time check on availability of funds.

Costs of Truncation

What does it cost to truncate a check? There are minimal one-time costs that include the cost of the scanner and a small charge for the truncation software (if not using the Internet). The ongoing costs depend on several things. There are soft costs that consist of the time to update the accounts receivable database of the property. Hard costs including ACH and bank charges are approximately $0.25-$0.30 per check.

Benefits

How does truncations benefit apartment building owners and managers?

* No more trips to the bank.

* Funds for payments by checks will be available in owner accounts either the same day as truncation or, at the latest, the following day.

* A property will know almost immediately if the check is an NSF.

The savings in staff time and the increased float from having the funds sooner will vary depending on existing systems. The value of knowing about an NSF the same or the next day depends on how long it currently takes to find out. Certainly, the benefits include faster collection of the funds from the payee and a speed up of the eviction process (and the re-renting of the unit) for those resident's that don't make the NSF good. Truncation will also allow a property to ensure that the initial check is good prior to a new resident move in.

The New Things to Come

Next in the evolution of improved check handling is the development of a system that not only truncates the check, but also tells the property immediately if there are sufficient funds in the payer's account to cover the check. There is an effort underway to tie all of the automated teller machine (ATM) networks (11) together to develop such a capability, but it could be years before this capability actually exists.

Just think of how easy it would be to process checks if there was an automated way to update the resident ledger for the payment. With many companies working on new Internet-based property management systems, this integration should be a priority in their development.

With short staffing and the increased workload of today's property staffs, just think how much more could be accomplished if there was an easy and efficient way to handle payments by check. Check truncation can save you and your residents both time and energy in the process of paying rent.

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ADVANTAGES/SAVINGS

                   Current                 Truncation

Cost Per Check     $1.35 (bank charges
                   + processing time)(*)   $.20-$.25 + processing(**)

NSF Notification   Normally weeks          Same/next day

Funds Available    Based on deposit time   Same/next day

(*) based on study done by a major REIT

(**) eliminating time to make actual deposit

PROCESS DETAILS

* Software/scanner is provided by the Electronic Financial Group (eFG). Software loaded on the property PC or used on Internet.

* Check is scanned and checked against a negative data base (accounts closed/NSF's outstanding)

* Check is imaged front and back in software. Image can be printed as needed.

* Check is converted to an ACH and the funds are transferred to the owner's account the same day or the next day at the latest.

* The summary deposit information/NSF's are available to the property same or next day.

* Summary roll up information is available to the owners via an eFG web site.

CURRENT NACHA RULES (NATIONAL ASSOCIATION OF AUTOMATED CLEARING HOUSES)

* Checks Limited to $2,500

* No Corporate Checks

* Checks must be retained for 90 days and then destroyed

* "Opt Out Notification" required of residents i.e., must tell them you intend to truncate their checks unless the opt out

Bruce Terwilliger is currently a Senior Vice President for Apartment Investment and Management Company (AIMCO); a Denver based Real Estate Investment Trust. Previously, Terwilliger was the Regional Vice President of the Rockville, Md., AIMCO office and was responsible for AIMCO properties in Virginia, Maryland and Washington, D.C.