You might have noticed already, but we’re certainly not living in the 1950’s – paying in cash, in full, and upfront is as much a dinosaur as antenna television. As a result, if you’re in business, you’re in the business of extending credit to your customers. As the owners and operators of multifamily properties, you understand uniquely just how relevant a tenant’s credit is when deciding whether to lease them an apartment. That decision may put long term stress on the financial health of your property – when tenants are short, late, or don’t pay at all.
Take comfort in knowing you are not alone – a 2016 study found “93% of businesses experience late payments from customers.” While you might know, however, that bad debt is a burden on your property and portfolio, you might not realize how toxic it is.
How Bad Debt Affects Your Business
Most obvious is you’re short of cash on hand – the lifeblood of your business. If a unit needs a repair or a fine must be paid, you might really feel that crunch. Cash is a key component of working capital and paramount to the day-to-day operations of your business. If you’re low on cash, you might struggle to make payroll for property staff, miss a utility bill payment, or find it difficult to make necessary investments in your asset. These resulting dominoes can have an adverse effect on tenants who now don’t see the benefits of capital improvements made to the building or to their units. This can, in turn, hurt your ability to raise rents or even keep paying tenants as demand for units in poor condition is weakened. In short, cash flow is the key to keeping your business above water, and bad debt is often the anchor that weighs it down.
Now, think about the time spent by staff, the expense of hardware and software, and the stress associated with collecting even on-time rent payments. Tangible and intangible resources go into the work you do to ensure you’re getting paid and some are more expensive than others; like employee time or investments in software and technology. These assets are already committed to reminding and managing payments from your reliable tenants. Now committing these resources to chasing down delinquent tenants is simply a waste. No property staff enjoys (or prioritizes) calling or visiting delinquent tenants and asking for payments. As a multifamily housing owner and operator, you know your time is better spent on marketing to new tenants or otherwise improving the value of your real estate portfolio. Playing a game of cat and mouse with a soon-to-be evicted tenant doesn’t accomplish that goal.
Trying to collect bad debt from your delinquent tenants isn’t just difficult – it’s legally hazardous and the process is fraught with landmines. The body of law at the local, state, and federal levels concerning debt collection a growing, tangled web. The Consumer Financial Protection Bureau in Washington has its own laundry list of things you can and can’t do in collecting your own bad debt (forgetting the framework aimed at third party collectors working on your behalf). States and local governments also write their own rules, with states like New York and California continuing to regulate to death the multifamily industry. In the last year alone, California passed the Tenant Protection Act of 2019 and New York passed the Housing Stability and Tenant Protections Act of 2019 — both are compliance nightmares that seriously handcuff you as a landlord. Your business exposes itself to tremendous legal liability by trying to collect these debts without proper and updated knowledge of the relevant statutes. This can mean defending a lawsuit filed against your business by tenant advocates or the disgruntled tenants themselves. Hear that sound? It’s more cash being sucked out of the bottom line of your property to be dedicated to chasing down delinquencies you might never collect.
Why Choose a Debt Collection Law Firm
Fortunately, you don’t have to just give up – there is a light at the end of that rather dreary tunnel. The answer is working with a credible, compliant, and effective debt collection law firm.
Out of desperation or habit, some multifamily owners and operators opt to hand their debt off to a collection agency without realizing they can’t do anymore than you’ve already done in-house. Boiler room bill collectors can only send letters or make phone calls and ask for payment – why would you expect them to have any more luck than your staff? This explains the anecdotal success rate somewhere at or below five percent for their industry.
Collection law firms, on the other hand, have various tools at their disposal derivative of their ability to file a lawsuit on your behalf. From there, they will obtain a judgment; garnish wages, bank accounts, and in some states income tax refunds; seize cars and other assets; lien real property; and/or compel a debtor’s appearance in court to satisfy a judgment. The collection agency can contract the job out to a law firm, but they often choose not to because they know they will have to give up most of their profit to the law firm.
Not only are these collection law firms superior in their ability to collect from delinquent tenants, critically they are better informed on the law and more capable of compliance. Collection agencies are known to be reckless in their collection practices, which explains why they are constantly mentioned in the news for illegal and unethical practices. Collection law firms often have attorneys specifically dedicated to maintaining compliance standards, which is critical to protecting you, the creditor, from potential legal liability.
Why keep dedicating your company assets or risk your money and your reputation to try (and fail) collecting that money yourself? This work is often handled by the collection attorney on a strictly contingency fee basis, which means little, if any, exposure to you. Working with a collection law firm can turn those numbers on some spreadsheet into a tangible new revenue stream, given their legal arsenal of tools that allow them to actually collect. That minefield we talked about before? You don’t have to navigate it alone – instead have a personal guide in the form of a dedicated compliance attorney can help to improve your in-house best practices as well. A debt collection law firm is simply the affordable, effective, and responsible choice for any landlord looking to do anything but box up and write off their bad debt.
Fishman Group, P.C. represents the owners and operators of multifamily housing communities across the United States. Our firm has succeeded in making the recovery of accounts receivable a profitable endeavor for more than four decades. Today, we use automation technology partnered with the experience of our attorneys and staff to seamlessly integrate with our clients; manage compliance in multiple jurisdictions; and collect for our clients. Ryan J. Fishman is the firm’s managing partner. Nisim Nesimov is a marketing intern and finishing his undergraduate degree at Wayne State University. For more information, visit www.thefishmangroup.com or call 248-353-4600.