Pros and Cons of Debt Collection for Multifamily Managers
Managing multifamily property can be quite a lucrative and relatively stable business in America. Yet the business inevitably leads to some frustration when the landlord encounters a delinquent renter. Indeed, a survey found that 84% of landlords consider nonpayment to be one of their top worries with new tenants. After the payment becomes late, there are multiple avenues pursued to retrieve payment from the tenant. Late rent notices are sent out, calls are made, and eventually, the tenant is evicted.
Many landlords discover soon enough that they may not be able to collect the balance on the account themselves, so they seek out a third party debt collector. If you have a debt collection service under contract or are considering hiring one, it is critical that you are aware of some benefits and drawbacks to debt collection services, along with a way to mitigate those drawbacks.
Pro: Less For You to Handle
It’s no secret that trying to collect from delinquent tenants is an absolute headache. Making the repeated phone calls- many of which are destined for the voice mail box- are not growing your business’ cash flow and thus are not a proper use of your time. A third party collections firm will handle this issue for you, leaving you more time to pursue revenue boosting projects for your business. They often employ sophisticated technologies that can find the tenants’ new mailing address and phone numbers, in case they are intentionally ducking your outreach efforts. This technology makes for a far more efficient process in collections.
Con: Over-Reliability on Technology
While technology can be a great tool to make for more efficient collection practices, traditional collection agencies tend to rely on it too much. Their automated messages are far more likely to be ignored than heeded by debtors. Since they want to save every possible dollar they can on your account, they will only utilize their employees time on what they deem to be worthwhile, which may be different from what you perceive to be worthwhile.
Pro: Maintaining a Standard
Failing to pursue collecting on a particular account can set a dangerous precedent for your business, as it sets a precedent for accepting skipping out on payments. By continuing to pursue tenant’s for payment, whether internally or with a third party firm, it maintains that the debtor is still responsible for paying you for any unpaid rent, damages, or accelerated rent.
Con: Legal and Ethical Hazard
Public antagonism toward debt collection has grown in fervor in recent years, largely on account of ethically questionable and illegal actions from debt collectors. One needn’t look far in media coverage and comments from political figures to see the perilous nature of debt collection services, not just to the debt collector, but to companies like yours which employ them as well. Having your name attached to the often reckless actions of debt collectors can be a nightmare for your business’ public image, not to mention the legal liability risks you suffer in the process.
Pro: New Cash Flow Stream
When you make a decision to send an account to collections, you’ve determined that you will either not be able to collect the account yourself, or that utilizing your internal resources toward the collection is not worthwhile. Either way, getting that new source of cash flow can be a great boost for your business’ bottom line, since you never expected to collect from many of these accounts at all! This extra cash can go a long way in making new capital investments to improve your current properties or further grow your multifamily housing portfolio.
Con: Low Collection Rates
Unfortunately, traditional collection agencies typically have disappointingly low collection rates. Traditional collection agencies often refuse to send cases to a debt collection law firm because they know will have to split their fee with the law firm. When they handcuff themselves like this, the only real power they have is to call the debtor and ask for payment (which you’ve already done). While whatever cash flow you can get from such difficult accounts is helpful, seeing the collection rates from traditional collection agencies can be quite discouraging.
Mitigation: Debt Collection Law Firms
One option you may not have considered is hiring a debt collection law firm. Owing to the legal tools they utilize, debt collection law firms are able to achieve significantly higher collection rates than collection agencies. They are also far more careful in legal and ethical matters, as they often employ compliance attorneys to make sure that the client is always being protected from liability.
Debt collection law firms have a long history of helping multifamily property managers collect on unpaid rent through sophisticated technology combined with a well-trained and knowledgeable staff.
About The Author
This post was contributed to Property Manage Insider by The Fishman Group, P.C., a leading debt collection law firm. The 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. For more information, visit www.thefishmangroup.com or call 248-353-4600.