What You Need to Know About Collections.

No matter how careful you are when screening prospective residents, no matter how many credit and background checks you conduct and no matter how good a judge of character you think you are, it's bound to happen--a resident is going to refuse to pay rent.

Whether residents move out in the middle of their lease or simply stop submitting rent and force you to evict them, nonpayment of rent is a nightmare for multifamily property owners and managers. Knowing what steps to take--from polite letters to not-so-nice correspondence with these renters--can be a complicated business. Laws are complex and seem to change all the time, and everyone agrees that letters alone are rarely effective when it comes to residents who've bailed on the rent. And if those residents have vanished in the middle of a lease leaving a damaged apartment, you could be looking at a significant loss of revenue.

If a resident is still living on your property and stops paying rent, a solid eviction process might take care of the problem. Even then, however, it doesn't guarantee that they'll pay when they're forced to vacate. Residents who have moved out in the middle of a lease pose an entirely different problem.

Experts say there are steps property owners can take to make collections less painful and tedious for property staff, and there are specific rules to be aware of when going after unpaid rent.

The First Step: The Lease

Believe it or not, collections all start with the initial application and lease signed by a resident. According to Bruce Krieger, National Sales Manager of Associated Credit & Collection Bureau Inc., those first documents can make a world of difference if rent goes unpaid down the road.

"One area that's very important right now and that we're coming across more and more is the whole issue of accelerated rent," he says. This is an issue that seems simple enough, but has the potential to create nightmares when it comes to collections.

Simply put, accelerated rent is supposed to force residents to pay their rent for the balance of a broken lease. If a resident's lease expired in June, for example, but he moved out in January, the lease spells out that he's responsible for paying rent for the five months after leaving the property. Once a resident signs a lease for a specific amount of time, he must then pay the rent for the entire lease term, even if he moves out significantly ahead of the lease expiration date. Only it's not always that simple.

"When a person moves out with eight or nine months left on a lease, some management companies feel justified charging them the balance of the term of that lease," Krieger says. "We run into difficulties with that. It becomes a real point of contention."

First of all, he says, residents who have vacated a property early become "extremely irate" when called to pay for the remainder of their lease term. "They're going to assume the apartment's been rented and will dispute that they owe the balance," he explains. And an irate former resident isn't very likely to pay the balance an apartment owner claims he owes without a fight, sometimes escalating to the point that attorneys must be involved on both sides. "In many cases, the renters will find attorneys and bring a case against us," he says.

The second difficulty with this scenario came into play with the passage of the federal Fair Credit Reporting Act, which governs exactly what can be recorded on a person's credit file. Reporting a former resident for nonpayment of rent when an apartment has been re-rented is a murky area, Krieger says, and one in which renters may be justified in bringing a lawsuit against an owner, charging him with violating the Act.

"The Fair Credit Reporting Act has become very stringent in regulating the accuracy of information on people's credit files," Krieger says. "If we accept an account for $7,000 in rent, we're going to be very reluctant to place that information in a person's credit file. If that apartment is re-rented, it's only going to be justifiable to charge the person for the rent until the apartment was re-occupied."

"You can face regulatory fines and lawsuits from former residents for damaging their credit if you record an amount that might not be representative of the actual balance due," he says. "In theory, the lease may say they owe that money, but in actual practice, enforcing it can be difficult."

The solution, he says, isn't necessarily to. write accelerated rent clauses out of leases. Instead, he encourages his multifamily clients to choose a reasonable amount of time for which to hold former residents responsible for rent. "We're asking our clients to accept accelerated rent balances of up to 120 days or until an apartment was re-occupied, whichever is less," he says, noting that this does not include fees due for damage to an apartment or eviction proceedings. "You want to keep to a reasonable amount that will stand up in court and stand up against any regulatory scrutiny," he says.

Avoiding Collections Problems

The number-one consideration owners can take into account when preparing for collections actions is to keep clear records of exactly what charges are due and why.

"It's really important to have as much documentation of charges and damages as possible," Krieger says. That helps both the property owner and the former resident, who might be willing to pay what he owes but won't do it without an itemized bill. "It's difficult when we get an account for a lump sum of, say, $1,400. It's much more helpful for us to know that sum includes a $500 concession payback plus a termination fee, plus one or two other items. When a collector gets on the phone with a former resident later on down the road, it's easier to gain their cooperation when it's clear exactly what a bill is for."

That extends, again, to applications and leases, which should clearly spell out exactly what residents are expected to pay each month, he says.

He also recommends that properties have their collections policies spelled out in no uncertain terms, and that those policies are exact: this letter goes out on day 30, this one on day 60, this on day 90, and so forth. "Collections takes a lot of follow-up and consistency," he says.

Choosing a Collections Vendor

Because most property owners and managers are too busy to keep track of complicated collections procedures, most delegate rent collections to outside collections firms. Choosing the right one, obviously, can be vital. Krieger says there are several important questions to ask when selecting the company that will handle collections for a property:

* How long has a collections company been in business? "There are a lot of fly by night, here today gone tomorrow agencies out there," Krieger says. "You really want an agency that has a track record of financial stability."

* Is the company a member of the American Collectors Association? This organization has an established code of ethics and provides continuing education programs for collectors.

* Do they specialize in apartments? Are they active in apartment associations on both a national and local level? What's their track record in multifamily?

* Do they carry professional liability insurance?

* Do they report to the major credit reporting agencies?

Above all, Krieger recommends that apartment owners set realistic goals when beginning collections proceedings against former residents. "Have a definite end point when you'll make a decision about that account," he says. "Decide when you're going to drop it." Having set goals will save you time and energy in collections process.

Kim Fernandez is a Freelance Writer for trade publications who lives in Bethesda, Md. A former Managing Editor of Units, she has written about the multifamily housing industry since 1994.