Bad debt doesn’t have to be a bad thing.
Many residents have suffered economic hardships in the past year as a result of uneven employment, and other personal life factors. The federal eviction moratoriums – which protected residents to some degree – have delayed, and in some ways, made things more challenging for residents and owners to pay their bills.
It reminds me somewhat of what happened after September 11th and the ensuing widespread financial downturn the country endured. And years later, again, the economy fell on hard times during the Great Recession from around 2008-2010.
Working in property management in both instances, I spoke on a personal level with many of our residents, residents who were significantly impacted and that spanned every demographic group. We had dealt with residents who failed to pay rent, but what I was hearing from the site level team was different. We hate to see things evolve to where eviction is required, but there is a difference when you have consulted with renters who continue to deprioritize paying their rent from those who have had the rug pulled out from underneath them and cannot meet their rental obligation for the first time. I remember sitting with residents while on site visits that were my parents’ age at the time, they had used up their savings and cashed out 401k’s hoping they could hold out until the job market improved. Hearing their stories really hit home for me.
Sadly, many of these same people were unable to regain employment in time to avoid eviction proceedings. Across the country we saw evictions increase and with that an increased number of renters who had significant damage to their rental history and credit reports. Evictions not only damage a consumers’ credit scores for years; the eviction is a public record that can follow them for 10 years or more.
Now, here we are in 2021 and we are looking at a backlog of eviction filings with more on the horizon. Eviction should be the last resort, because it is hard for these unfortunate residents to start their lives over without quality housing. The industry stepped up and worked with renters like never before. I have no doubt that operators of all sizes are willing to work with residents to help them file for rental assistance and for those who must move, they are open to payment plans.
Working with residents to set up resident debt relief programs is a smart course of action. The challenge has always been that there was not much serviceable technology to help property staff offer, set up and track payment arrangements for former residents. If the management company had a way to effectively deliver payment plans while having visibility so that balances do fall through the cracks, they would be happy to offer this an alternative to eviction and negative reporting to the credit bureaus.
Today, ResMan, is here to help you with this.
During those past financial crises, we created a solution in house to manage former balances which in turn increased the revenue from bad recovery. Revenue that was desperately needed as we faced decrease effective rents and saw our occupancy drop. (The functionality is now part of what later became the ResMan’s Core Platform) Not only did the in-house collection model prove to be impactful financially, but it also provides an alternative solution that helped us to do the “right thing” for our residents. My recommendation is to rethink your bad debt policy and aim to avoid collections agencies, because when using those, you recover only a tiny portion of the back rent owed.
You can send your bad debt (unpaid rent after 30+ days) to collection agencies, but you’ll only get about percent of what they can recover, and they won’t recover a lot.
As an owner or manager, you have to ask yourself: How much of our rent write-offs are collectable? Are we paying for someone to manage something we could have done on our own? How many days does the balance remain unpaid?
We have found that when you work to recover it yourself, it oftentimes can lead to a significant financial bonus. We realized that we could collect on 85% of the balances when we worked them in house with the right tools.
Forecasting Bad Debt Recovery for 2022
Here are some national numbers on what our industry is facing in terms of bad debt:
According to Moody’s, CBRE and National Multi Housing Council, 22.2 percent of the nation’s units owed approximately $70 billion as of year-end 2020 on rent and utility payments, that totals 12 million renters.
Say you write off $21,000 to your collection agency, it might capture $3,150 of that and keep 65 percent of it for its efforts. So overall, the owner recovers just $1,102 of that $21,000.
If you attempt to collect that same $21,000 in-house, you likely will still end up writing off 15 percent of it as truly, uncollectable rent. But if your software helps you to put in place a resident payment-plan strategy that recaptures 85 percent of it, the owner recovers $17,500 of that $21,000.
Evaluate your residents’ debt load on an individual case basis. For example, if the resident owes $2,000, you could give them 12 to 14 months to repay it. When doing so, it’s important to let them know by agreeing to this, and by fulfilling their promises, you won’t report the debt to the credit bureaus.
Visibility is key, the property manager and corporate accountants need to know collection status on all payment plans in place. When you don’t have the right tools in place, setting up and tracking falls to manual processes which is where the problem was to begin with. Ever taken over an asset and found the formers who have balances that are not being worked and that were never processes to collections? When you have technology in place to manage the process, you can effectively administer payment plans and increase your bad debt recovery.
There are plenty of reasons why apartment operators should avoid letting bad debt become a bad thing. Here is one more: Have you anticipated spikes in move-out damage expenses and other oddities that might come from what figures to be a volatile 2021? For this and variety of reasons, recovering money owed becomes even important.