Original post on Payrent.com
Although PayPal, Venmo and direct deposits are fantastic features, there are negative consequences with collecting rental income through these applications. I hope you never experience these problems, but I want to educate you on worst case scenarios. Approximately 2.7 million families face eviction each year, and collecting rent improperly can adversely affect your business.
If an unlawful detainer lawsuit (eviction) has been placed on a tenant and is contested in the courts, it can take anywhere from 3-4 months to have a motion filed by a judge. In the timeframe up to the motion-the tenant pays you $1, the eviction clock starts over in some places like California.
I heard a case the other day, which is too unfortunate not to share. An owner sent a 3-day notice to pay rent or quit. After 3 days, the tenant still did not pay. The owner hired an expensive lawyer to take the tenant to court. One day before the court case, the tenant deposited 25% of the total balance due directly into the owner’s bank account (the tenant had the owner’s routing and account number). The owner could not evict the tenant because “partial rent was accepted.” The owner lost the court case and the tenant is living in the property — at a deeply discounted price. The owner not only does not have the full rent, but also had to foot the bill for the lawyer.
Accepting partial rent payments
If you allow the tenant to pay via their own mechanism, then they can deposit partial rent into your account. Unprofessional investors and managers allows this to happen and have a difficult time evicting tenants or keeping account of tenants. By accepting partial rent, you can forego your ability to evict them.
Lease gets automatically renewed
If you do not want to renew a lease, you set yourself up for a difficult court case when you allow the tenant to deposit money at will. By allowing them to use Venmo, PayPal, or direct deposit, you may have already “accepted” next month’s rent and are unable to turn over the property sooner.
Let’s take a deeper dive into each of these three online rent collection methods and real-life examples of what can go wrong.
The problem with PayPal
First, you leave it up to the tenant to determine the type of payment. If the tenant selects rent as “goods and services” transaction, then you can incur fees. PayPal also does not make it as easy to automate your process, systematizing the late fees, allowing control over payments, and showing you are professional in the rental industry.
Second, there is a money back guarantee with PayPal. If the customer representative “feels” you have defrauded the customer, then they will give the money back to the customer. Imagine if a tenant calls to argue about the security deposit refund. You are leaving it up to a PayPal representative (who has no property management experience) to determine whether or not to refund the tenant.
The problem with Venmo
It’s free — what’s the catch? Nothing in life is free and cheap alternatives cost you in the end. This is a consumer app. Anyone can pay anyone, and the amount is automatically accepted. The problem is identical to the situation described with accepting direct deposit.
In addition, the tenant can cancel their Venmo transaction before it reaches your bank. As this Money article describes, Venmo should not be used for business transactions. The payment platform was built as a convenient way to pay people you know personally.
One bad tenant can destroy your annual cash flow. Do not let that happen to you. Your only source of income is rent. You do not want to set up your rent collection process to allow the tenant complete control over payments.
Tenants refusing your payment method
During initial interactions with a tenant, he/she may refuse to use your preferred method of rent collection. This type of tenant has always been a red flag to me. They are looking for an unprofessional landlord or manager, where they can make excuses for not paying according to the lease agreement.
You also want to make sure to work with them by offering one offline method and one online method (most states require two routes of payments)
The best ways to collect rent
There is a reason professional property managers and real estate investors request rent through only certain methods. The best methods are a money order (for the full amount due) or a professional online payment system. If you use an online system, make sure it has the following features:
- Automatic payment scheduling with monthly alerts will reduce the risk of past due payments and help track payments
- Ability to accept only full payments reduces the risk of partial payment that prevent moving forward with an eviction in many States
- Automatic late fees reduce the risk of late payments by always sending out late fee notices
- Ability to cancel future payments if you are starting an eviction, there should be a process in place to cancel the remaining balance of the payment
- Lastly, which no other P2P online rent payment application has to offer is the ability to automate the ability to keep account of and receive detailed payment receipts on each payment.
For more information about our online rental payments visit: Payrent.com
How do your renters pay currently? Have you had any problems with alternative payment options like Paypal or Venmo before? Let us know in the comment section below and be sure to subscribe!