Mastering Rent Collection: Strategies for Tackling Chargebacks, NSF’s, and Delinquencies

Learn how to mitigate 3 significant rent payment collection risks that property managers face when it comes to rent collection.

Inflation, demand, & high interest rates have created an unstable economy, increasing rent payment collection risks and putting multifamily revenue at risk. The property management industry and overall economy have experienced both positive and negative changes in recent years.

Before the pandemic, the world was more predictable, with rents and asset values growing steadily for over a decade. However, since the pandemic, there have been significant changes and instability in various ways. Some aspects have been positive, leading to improved asset values and returns following the pandemic. However, there have also been challenges, such as inflation, which has put stress on the economy.

In addition, there are other macroeconomic conditions that are still unfolding. And despite the Federal Reserve’s efforts to stabilize the economy, there is a possibility of heading towards a recessionary environment. In multifamily, there’s been a steady decline in rents and asset values in the past couple of years.

It’s crucial for property management companies to optimize their business strategies now more than ever.

FREE GUIDE

Protect Your Multifamily Revenue: 8 Ways to Mitigate Risk

Potential economic challenges are looming. Learn to identify 8 big risks to multifamily revenue. These proactive steps and proven recommendations will help defend against chargebacks and returns, utility theft, growing resident turnover costs, and more!

Start reading

The top 3 risks to rent collection and how property managers can protect against them

In this review, we will discuss strategies and proactive measures to combat chargebacks, minimize payment returns and errors, and reduce delinquencies in your multifamily rentals.

By implementing these strategies, you will optimize business operations while safeguarding against the top rent payment collection risks.

Rent Collection Risk #1: Rent Chargebacks

A rent chargeback occurs when a resident disputes a rent transaction, leading to a reversed payment. These disputes often stem from misunderstandings or dissatisfaction with the leasing process. They can significantly impact property operations and financials.

Chargebacks not only disrupt cash flow, but also require significant effort to resolve.This diverts resources from other property management activities.

Why do rent chargebacks occur and how to prevent them?

Rent chargebacks typically occur due to unauthorized use of payment methods, disputes over service quality, or fraudulent claims by residents. To prevent these, property managers can:

• Enhance transaction security 

Use payment processing solutions that detect rent payment collection fraud and reduce unauthorized transactions.

• Educate and communicate with residents 

Regularly communicate with residents about payment policies and procedures to ensure clarity and prevent disputes.

• Document everything 

Keep detailed records of all transactions and communications with residents. This documentation is crucial for disputing unjustified chargebacks.

Rent Collection Risk #2: NSF Fees

Non-Sufficient Funds (NSF) fees occur when a payment is made from a resident’s account that lacks the funds to cover the transaction. This results in a fee charged to the property management for the failed transaction.

Why NSFs on rent payments are significantly more harmful than beneficial to your revenue & operations

NSF charges on rent and other payment returns may seem like a small and steady revenue stream for some property management companies. But in reality, they can be significantly more harmful than beneficial to your revenue and operations.

The costs associated with NSF fees, including the hours spent on resolution, staff wages, cash flow impact, and delays, far outweigh the extra income generated from these fees. NSF fees can also signal deeper issues such as resident financial instability, which may lead to more severe payment issues down the line.

To reduce NSF rent payment occurrences, property managers can:

• Send payment reminders 

Implement automated reminder systems to notify residents of upcoming rent or ancillary charges, helping to ensure funds are available on time.

• Offer flexible payment options 

Flexible rent payments divide rent into smaller, more manageable payments. These payments can be scheduled throughout the month according to the renter’s preference, helping to reduce instances of NSF by aligning payment times with cash flow.

Rent Collection Risk #3: Rent payment returns and errors

A rent payment return or error occurs when a payment is not processed due to technical issues, errors in payment details, or bank-related problems. These issues can frustrate residents and lessen their trust in the payment process. Plus, they lead to operational inefficiencies and revenue loss at your property.

Why would a digital payment from a resident be returned?

There are several reasons why a digital payment from a resident may be returned. The most common return codes are R01, R02, R03, and R04, which have specific meanings.

• R01

R01 usually indicates insufficient funds, accounting for about 5% of transactions per unit per year. This occurs when the resident’s bank account does not have enough money to cover the transaction amount.

• R02

Another common reason is R02, which indicates a closed account. This can happen when a resident tries to pay from an account that has been closed, either because it is still on file or they forgot to close it earlier.

• R03 & R04

The last two reasons, R03 and R04, are often grouped together and indicate an invalid or nonexistent account. This could be due to input errors or intentional actions to avoid paying rent or staying in temporary good standing with your company.

How to prevent digital payment returns using technology

All of these returns pose a risk of lost revenue and allow residents to avoid paying their rent while appearing to be in good standing. To minimize these returns, property managers should:

• Provide real-time account validation

Implement real-time account validation to ensure that bank accounts are active and have sufficient funds at the moment a payment is initiated. This significantly reduces the chances of failed transactions.

• Send automated alerts and reminders

Automated alerts and reminders notifies residents about upcoming payments. Automated alerts can also let them verify their account details to prevent common data entry errors that lead to payment returns.

Verifying payments before processing them reduces payment returns and errors, improving overall operational efficiency and resident satisfaction.

How to effectively reduce or prevent delinquent rent payments

The truth is, delinquent rent is a significant challenge that can have negative financial repercussions for both property managers and residents alike.

Beyond the financial impact, it also creates stress for property management teams who are tasked with managing the situation. Many property management teams did not sign up to be debt collectors, and it can be an unpleasant and tedious task to manage.

To start, it’s important to understand the root causes of rent delinquency, including the financial situation of your renters. By gaining a deeper understanding of these factors, you can implement strategies to prevent delinquency which creates a win-win opportunity for all parties involved.

Renters are becoming more financially challenged, pointing to an increase in delinquent rent

While it’s not new that Americans typically spend about a third of their income on rent, the alarming trend is that a quarter of renters now spend over 50% of their income on rent. This is exacerbated by inflation, with rental costs increasing by 6% to 8%.

While wages are only rising by 1% to 2% annually, or even experiencing negative growth in some segments. As a result, the number of cost-constrained renters is growing, and on average, renters are spending 30% of their income on rent.

Delinquency has become a pressing issue, evident in polls and industry reports, with an estimated $100 billion of rent expected to be paid late by 8.2 million households this year. The industry is projected to lose $20 to $25 billion in rent due to bad debt, highlighting the significant impact of this issue.

Proven strategies to get ahead and reduce delinquent rent payments

To proactively address delinquencies and prevent them from occurring in the first place, two strategies have shown promising results. By implementing screening and fraud detection, as well as offering flexible rent payment options for your residents can help reduce delinquent rent payments.

Screening and fraud detection

When it comes to screening, there are three unique approaches that can help us better understand our renters.

First, looking at monthly income instead of annual income. Many renters experience variations in their income on a month-to-month basis. So, understanding their cash flow dynamics can provide insights into their ability to make consistent rent payments.

Second, examining credit data and trends, such as changes in credit scores and payment patterns over time, can provide clues about their financial situation and payment behavior.

Lastly, considering job types and industries can also shed light on their potential for wage growth and financial stability.

By conducting thorough screening using these three factors, you can make more informed decisions about placing the right renters in your communities. This will ultimately reduce the risk of delinquency down the road.

Flexible rent payments

The second strategy is to offer flexible rent payment options. This involves implementing a flexible rent payment solution that accommodates the unique financial circumstances of renters.

This could include allowing for different payment schedules, partial payments, or other arrangements that can help renters manage their cash flow and avoid falling behind on rent. By providing flexibility, you can proactively address potential rent payment collection risks and work with renters to prevent delinquency from occurring.

This approach is particularly beneficial for renters with income variability or cash flow challenges. It enables them to pay their rent in a way that aligns with their financial situation. This, in turn, improves resident satisfaction and overall rental performance for property managers.

How flexible rent payments work

The process of implementing flexible rent is simple. Renters apply for flexible rent through the rental portal, and then they are underwritten to create a custom payment schedule. Once enrolled in the program, renters can continue to make payments according to their preferred schedule every month for the duration of their residency.

Luckily, flexible rent is free for property managers, with only a small flat fee charged to the renters who opt into the program.

By offering flexible rent, multifamily companies can proactively address delinquency and improve their bottom line. It also provides a marketable advantage, as it offers renters a solution that matches their financial situation. And, it empowers property management teams to work productively with renters to ensure their success.

Ultimately, flexible rent is a win-win solution that benefits both multifamily companies and their residents, creating a positive rental experience and reducing the risk of delinquency.

How automation technology can help eliminate rent payment collection risks

Automation technology can have a significant impact on eliminating returned rent payments by focusing on two key themes: authenticating accounts and verifying funds. Through advanced technology, we can verify that residents’ bank accounts are open and active, avoiding returns due to closed or non-existent accounts.

Additionally, real-time verification of funds ensures that residents have sufficient funds to cover their transactions, reducing NSF transactions and creating happier residents and staff. As technology evolves, there are effective ways to mitigate chargebacks and return payments, despite it not being the most glamorous side of tech.

Secure your revenue in uncertain times by leveraging the power of automation to combat the top three rent payment collection risks. Revenue protection is crucial, as money, cash flow, and resident retention are all vital components of a successful property management operation.

The impact of automation technology in rent collection can be substantial, with potential decreases of up to 95% in returned payments and an 82% win rate on chargebacks.