DIY Landlord Tips: Setting Up Fees and Payments
If you don’t want to return their funds, you can’t legally call them a “deposit”!
As a do-it-yourself landlord, there are a lot of small lessons that are often learned too late by trial and error. This month, we’re going to cover some — the ones that deal with the most treacherous of terrains: collections and evictions. Starting with the ‘proper prior preparation’ side of the collections equation: how to set up your fees and payments within your lease so that your life is as easy as possible going forward.
Clearly Label Fees vs. Deposits
Leases are legal documents, and if they’re ever being examined critically in court, they’re likely to be interpreted as much in the tenant’s favor as possible. This means you should be as specific as possible when discussing everything, especially when it comes to distinguishing between different kinds of monetary transaction. Everything that isn’t going to be returned to the tenant under normal circumstances should be labeled as a fee — and anything that isn’t going to be returned to the tenant under any circumstances should be labeled as a non-refundable fee.
One of the biggest mistakes we see is when a landlord accepts money from a prospective tenant before signing a lease. In purchase transactions it’s common for buyers to get their deposit back if they don’t get the property. Many landlords though, don’t return deposits to tenants that waste their time and don’t go through with a lease signing. Well, if you don’t want to return their funds, you can’t legally call them a “deposit”! We use the term “Holding Fee”, which has stood up in court.
Fees Should Count as Rent
This one might not be legal in all states, so check your state’s laws — but in most places, a landlord is totally allowed to say “Any unpaid fees at the end of the month become part of the next month’s rent.” This is important, because it allows you to initiate eviction proceedings against someone who doesn’t pay whatever fees they’ve triggered — which you want to be able to do, as the threat of eviction is your best collections tactic. (More on that in a few posts.)
Lay Out Where Money Goes First
This is another step that’s extremely common to overlook and can gimp you when it comes to collections efforts: write out in your lease the order in which payments are applied. For example, say outright “Payments are first applied to unpaid utility bills, then unpaid maintenance expenses, outstanding late fees owed, then toward any other non-rent debts on the account, and only after everything else is paid off does anything go toward paying the rent.” This prevents a tenant from saying “But I paid the rent!” if he gave you the correct amount of rent money but still owed you $200 in other costs at the time — which in turn will save you from a judge who might otherwise rule against you.
By being very detailed and clear about how you will be treating fees and payments in your lease, you set yourself up to be able to navigate future collections efforts (and ultimately, if it comes to it, evictions efforts) in the future. Come back next week for some tips on how to deal with tenants who have left this system behind by not paying in the first place.