To Charge or Not to Charge – Why Have Rental Late Fees
Nobody likes to waste money… well, maybe politicians, but not the rest of us. For anyone renting a home, late fees can be a major frustration; they can snowball into big problems, and they can be entirely avoidable.
So for a property manager, it’s an important decision whether to charge late fees or not, and if they do charge, how far should they go to enforce them. In this article I’ll discuss some important reasons why real estate brokers should charge late fees and why they should (almost) never waive them.
Every Month, Stuff Happens
As if a property manager’s job isn’t hard enough already, dealing with just about any issue that comes up out of routine is like throwing a monkey wrench into your engine. When repairs are needed at a rental property, it’s important to deal with it quickly, get it resolved, and make it history as soon as possible.
The same goes for rent. One thing is for sure: every month, there will be at least one property that needs a repair, and at least one tenant that pays rent late. So if it’s important to the tenant for repairs to be handled quickly and conveniently, it’s equally important to the manager for the tenant to pay their rent on time.
Avoid Problems Whenever Possible
When rents are late, there is a domino effect of problems it causes. As a general rule, most landlords expect to be paid on time. When the landlord does not get paid on time, they usually complain to the property manager.
Property managers are regularly bombarded with problems and complaints, so avoiding the unnecessary ones is always preferable. Trust me, property managers do not like receiving owner complaints, as this is sure to impact the owner’s perception of the manager’s competence and responsibility.
The Rent Process
For many property management companies, rents are always due on the first day of the month. Some tenants pay electronically, while others pay by check or certified funds. Few property managers accept cash, and if they do, they should stop.
Having cash in the office is a bad idea and can open the door to a potential robbery. By refusing cash, that risk can be eliminated. But with electronic payments (sometimes called “direct deposit” or “ACH”), it can often take two to three business days for the payment to clear and appear in the property manager’s account. Paper payments, whether they be checks or certified funds, are even worse.
Even in our current day of modern and high-speed technology, it’s still quite common for a check to take 4 to 5 business days to clear the bank. When rents are paid late, it takes the same time for the payments to clear, adding to the number of days before the manager can pay the owner.
Many property managers give renters a 4 or 5 day “grace period” to pay the rent. This means, if the rent is due on the 1 st , the renter can still pay up to the 4th or the 5th without incurring late fees. Grace periods are not a right and there isn’t any legal requirement to provide them.
Grace periods are give out of the kindness of your property manager’s heart and nothing else. So in consideration of the grace period, it often happens that many renters wait until the last minute to pay. So as an “almost always” rule of thumb, most renters pay after the first day of the month and as close to the grace period as possible.
Therefore, if the manager has a 5 day grace period, and the tenant pays on the 5th , even if the manager is able to deposit the check the same day (which they often aren’t), there is still the standard 4 to 5 day bank-processing time-frame on the back end that the property manager has to wait before reconciling the owner’s account and sending out owner checks.
So if you add the days up, simple math says that most, if not all, funds haven’t cleared the bank and aren’t available to the property manager until roughly the 10th day of the month.
The Compacted Accounting Calendar
Almost all businesses have a 30 day (or monthly) accounting cycle. This means that when they receive any monies, they have the full month to receive bills (repair bills from the plumber or handyman, taxes, insurance, etc.), make those payments, reconcile the accounts, and disburse owner payments.
In the property management world, a majority of landlords want their payment as quickly as possible. This often becomes a sticking point between the needs of the property manager and the demands of the owner.
So since we work for the owner, many property managers succumb to the owner’s demands to pay as early in the month as possible, usually around the 15 th . So instead of having a full 30-day accounting period, many property management companies only have a 15 day accounting period.
What About The Late Fee?
Well, when the renter pays late, inevitably the owner gets paid late. As the saying goes, “stuff rolls downhill”. Since the real estate company is sure to receive complaints from the owner, there’s plenty of good reason for the property manager to charge a late fee.
Late fees generally serve two important purposes: (1) create a financial motivation for the tenant to pay on time, and (2) to compensate the owner and property manager for the additional work and frustration caused by the late payment.
To Waive Or Not To Waive?
Waiving a late fee is each property manager’s personal decision, but one that I’ve found few reasons to not enforce. In limited circumstances, especially if the tenant usually pays on time, communicates the problem clearly (and preferably ahead of time), and keeps his or her promise to make the payment on a later agreed date, it might be OK to waive the late fee… once (maybe twice).
But when a tenant is routinely late, always has an excuse, and fails to keep promises to pay on the later date, the property manager should have no hesitation in charging a late fee. Bear in mind, though, late fees must be a condition of the lease and can’t just be arbitrarily determined on a whim.
Also, realize that if you routinely waive late fees, your tenants will eventually catch on and it will become difficult, if not impossible, to routinely enforce them. So if you’re going to charge late fees, stick to your guns.
You should also give consideration to the landlord’s preference on late fees… but as for the property manager, for whom it’s important to keep everything operating smoothly and on schedule, having and enforcing a late fee is an effective tool that can do a lot of good if used correctly.