Moratoriums Lifted, Now What?
Written By: Sperlonga Data and Analytics
COVID has had devastating effects for so many. Entire industries have been shut down for nearly a year. And for landlords, it has become increasingly more difficult to collect rent when some of the tenants are not paying. Late payments across the US are accruing at a staggering pace. Each day, we hear from landlords with $50,000, $500,000, or even millions in past due rent, who have little clarity on a path forward for if, or when, they may receive some portion.
Rent has a unique type of credit quality to it. The contractual obligation is a hybrid of a secured and unsecured obligation. The bank with which you have the mortgage has a secured obligation in that, if you don’t pay your mortgage, they can foreclose on the house and resell it to recoup their money. Credit cards on the other hand are unsecured in that, they can’t really repo or foreclose on your lunch from last week. Rent fits in a funny spot in the middle. There is no foreclosure action, only an eviction with few remedies until then. This remedy solely gets your asset back to re-rent rather than dealing with the outstanding obligation. Other the other hand, the past due rent isn’t affixed to anything so looks more like a credit card.
It was common to hear landlords in certain states with low vacancies or delinquencies feel that their state’s laws protected them. They could timely work through the eviction process and were hesitant to make investments in ensuring collections along the way. If you know you can consistently get a non-payer out in 30 days and had a deal with my local attorney to do this for $500, you could easily underwrite my exposure and do a sensitivity analysis to find out how much delinquency needed to happen before you ran into any issues. Most rent is like a short-term loan, it has a short-term duration of 30 days, if not paid by the first, the pay or quit notice is placed and things progress. There is obviously a strong motivating factor for the tenant to pay or work out a payment plan of sorts given they need a place to live.
Now let’s explore the post-covid past-due rent bucket. Congratulations, if you are a landlord, you are now in the collections business. Whether doing it yourself or hiring an attorney or collection agency to do it for you, the amount of past-due rent has ever been higher in American history. Delinquent rent is something everyone needs to get smart on real quick.
In the past, you had the power of eviction, but what about the tenant who didn’t pay, moved down the street or across the country? We’re now into one year of COVID and many have moved around. The big stick before was the threat of eviction, but it’s not like you can evict someone who has already left. They still owe you $12,000 in past rent, how do you collect it? This past due rent is now worth no more than non-performing credit card debt, which trades for cents on the dollar.
When looking at valuing your past due rent, it is important to understand how the secondary market will view past due rent and take appropriate actions based on it. We will be releasing a white paper in the coming weeks which will go into more specifics. We highly suggest you download and read this important information. When looking at non-performing mortgages, these generally trade as a percentage of the house’s value, auto loans trade as a percentage of the NADA or Blue Book valuation of the collateral. Remember this all has to do with the collateral and taking a discount from there. Credit cards? If never collected before, maybe $.15 on the dollar. Has it been churned a bunch through various agencies already? Maybe $.02. We hate to be the bearer of bad news, but we think it’s important that landlords know this now and come to terms with the reality that there is close to a zero percent chance of full recovery of their unsecured past-due rent obligations.
So, how to lessen this blow? The landlord is now in the collections business and needs to start thinking about this asset differently than a real estate deal. It is now also a debt deal. Think like a bank. What do banks use to collect their capital and replicate all their best practices? The banking industry has used credit reporting since its inception. We believe, especially now, that credit reporting is a necessity for the multifamily and single-family rental industries.
The vast majority of landlords see the value in pulling a potential tenant’s credit score when ascertaining whether or not to rent a property to them. Why? It shows one of the “Three C’s of Lending”, Character (the other two being capacity and capital). Does this person make their other payment obligations and are they timely? An important dynamic to know of a prospective tenant. But as an industry, this is where participation in the credit reporting world tends to halt.
Landlords see value in seeing if the tenant makes their Bank of America credit card payment on time, their Wells Fargo auto loan each month, and their student loan obligations. Extracting information from the credit ecosystem is almost second nature to the rental industry, however, contributing data back is relatively new.
Fast forward to today in the COVID era, where contributing to the ecosystem could not be more important. Landlords can contribute up to 6 years and 9 months of payment data on their tenants. Further, this month’s report of whether or not they paid timely will stay on their credit for 6 years and 9 months into the future. Again, COVID has been terrible, however, there is a strong likelihood that most will be able to press on and get back on their feet.
It is critical to begin reporting your entire rent roll immediately, publish data going back as far as you can and continue to report each month going forward. 35%+ of someone’s credit score is made up of their tradeline history. So, accounts with the longest history have the biggest impact. You want to be reporting from the day the tenant moved into the property, not wait until the tenant moved out and you are trying to collect on the unsecured back due rent.
This also highlights a key and extremely important dynamic: sending an account to a collection agency and having them report it as delinquent has a minor impact compared to showing the longevity of the account beforehand with the “original creditor”. When collection agencies get a new account, it shows up as a new tradeline and begins on the tenant’s credit report as of when the collection agency starts reporting it, not when the person stopped paying you rent.
Sperlonga Data and Analytics is the industry-leading provider of credit reporting solutions to the multi- and single-family rental industries. Sperlonga’s aggregation technology via software integrations and data extractions from all accounting platforms allows landlords to report their tenants’ payment histories each month. Tenant pays on time? Great, they get positive points. Tenant doesn’t pay? Negative points just as if they didn’t pay their car payment. As it relates to the unpaid rent discussed above, that past due rent can be reported for 6 years and 9 months from the move-out date. 3 years from now when your past tenant wants to buy a new car or house, shouldn’t they pay you the $10,000 in past due rent they still owe you first? If the answer is yes, it won’t happen if you aren’t leveraging credit reporting through Sperlonga Data.
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