A/R, bad debt in Multifamily. How are y'all dealing with it?
As evidenced by the following frustrations, I've been helping out on the asset management side lately and boy is bad debt a fucking headache. The covid-era seems to have trained many folks that paying their rent is completely optional, or at least that's my best guess as to why this is becoming such a cancer.
I've tried to approach this issue with compassion in each instance, however the vast majority of cases we're running into today are just simply people who've decided they're going to live rent free in our units (and now my head). Went from 1, to maybe 2 evictions and subsequent writeoffs (as soon is an A/R balance goes into the 30+ days bucket you can kiss that money goodbye) per year pre-covid to more like 2-4.
On top of that, the ability to take action here is being encroached on what seems like every year via state or local government (or their lack of resources). Moved from 14 to 30 day pay or vacate notices, now incur penalties/damages for moving non-paying tenants to month-to-month leases at "prohibitive" renewal rates, and the courts are so backed up that we're seeing court dates some 6 months after the resident has gone delinquent.
And then, heaven forbid you actually get a court date, your case is highly likely to get thrown out over one of the thousand completely fraudulent reasons that are apparently valid today. We had a one case this Fall get thrown out because, I shit you not, a single notice was in the wrong font for fuck's sake.
Are others in the multifamily space seeing this type of issue? Besides hiring more competent legal teams, how are you dealing with this?
Bad actors are eating well through any credit loss we budgeted for folks with legitimate issues paying their rent, and it's tough to see any immediate improvement here with the current and (seemingly) worsening economic environment.
Based on the most helpful WSO content, dealing with A/R and bad debt in multifamily, especially post-COVID, has indeed become a significant challenge for many in the industry. The pandemic has shifted some tenants' perspectives on rent obligations, leading to increased delinquencies and evictions. Here are some strategies and insights gathered from the WSO forums that might help address these issues:
Enhanced Tenant Screening: Tightening up the tenant screening process can help mitigate future bad debt issues. This includes thorough background checks, credit checks, and possibly requiring higher security deposits for those with less than stellar credit histories.
Communication and Payment Plans: Early and open communication with tenants who begin to fall behind can sometimes prevent a full-blown delinquency. Offering structured payment plans or partial payments temporarily can help recover some rent while providing tenants a path to catch up.
Legal and Regulatory Navigation: Staying abreast of local and state regulations regarding evictions and tenant rights is crucial. Some property managers and owners are working closely with legal teams to navigate the evolving landscape, ensuring that all notices and actions are compliant to avoid dismissals in court.
Government and Non-Profit Programs: Leveraging available government assistance programs for tenants can also be a strategy. Encouraging or assisting tenants in applying for rental assistance through COVID-19 relief funds or other local non-profit organizations can help mitigate bad debt.
Technology Solutions: Implementing or upgrading property management software that includes features for managing A/R more effectively can also be beneficial. Some platforms offer automated reminders, online payment options, and even direct communication channels with tenants to address payment issues promptly.
Community Building: Fostering a strong sense of community within the property can indirectly help with payment issues. Tenants who feel a connection to their living environment may be more likely to prioritize rent payments and communicate openly about financial hardships.
Adjusting Budgets: Finally, recognizing the current economic environment, it may be necessary to adjust budget expectations regarding credit loss and bad debt. This could involve setting aside a larger contingency fund to cover unexpected delinquencies.
It's clear that multifamily property managers and owners are facing unprecedented challenges in managing A/R and bad debt. While there's no one-size-fits-all solution, a combination of tightened processes, legal diligence, compassionate tenant management, and strategic financial planning can help navigate these turbulent times.
Sources: Multifamily Deals are Starting to Fall Out, What is Your ADDITIONAL Reason to invest in Multi-Family?, For those of you in multi-family, Looming Liquidity Crisis?, We might be at the bottom in Multifamily (MF)
Your frustrations are valid and echo the challenges many in the multifamily and broader property management sectors have faced in recent years, particularly in the wake of the COVID-19 pandemic. The pandemic indeed changed a lot about how tenants view rent obligations, partly due to moratoriums on evictions and other temporary protections that were necessary during the crisis but had long-lasting impacts on payment behaviors. Many property managers and asset managers have been navigating similar waters with increased bad debt, rises in evictions, and more shitty complex legal hurdles.
That being said, I would caution against generalizations about renters' intentions or character. Many are facing real economic hardships, and compassion remains important even amid business realities.
Now guess what?
Just kidding.
That statement is bullshit.
Sure, I believe in being compassionate, but let's be real here. Most of the time, it's not about genuine hardship; it's about people trying to freeload. I've been in this shit for over a decade, and I can count on one hand the number of times I've seen someone genuinely struggling to make ends meet. Most of the time, it's just people who couldn't care less about anyone but themselves.
And I mean that – seriously, I just thought about it harder, and yea, never once did I ever see a single eviction be pursued against someone who wasn’t a total piece of shit and didn’t give a fuck about anything.
Seriously. I saw struggling single moms of 2 kids in a 2-bed apartment busting their ass, and they would sometimes be late, or even often be late, and our onsite PM would be cool as fuck and work with them. Payment plans, whatever. Any reasonable person can hit up the onsite PM and they will be so understanding. And People do it all the time. And it’s all good. Doesn’t fuck with profits, it is totally a nonissue. Things can always be worked out – assuming you have an income, and you use your words it can totally be resolved, and you will NOT be FORCIBLY removed from your living quarters by our PM and a cop.
The people that get evicted though – literally every single eviction I have ever seen – its someone who is just cancer. They fuck up everything out of spite, but everything is usually already fucked up out of how they live. They are combative or just uber evasive. Like, my point is, it’s gonna be so ultra rare where compassion is necessary for the situation when it gets to the point of an eviction. And it will be obvious as fuck when the situation does call for that. That WONT slip through the cracks. You can look at payment history, communication history, condition of the unit, the maintenance history – you can know instantly if the person is a scum fuck or a decent human being.
If I saw someone genuinely struggling and who was not malicious, and not blatantly at fault due to not giving a fuck in general about anything/being selfish as shit – if I saw an actual decent person STUCK in the eviction process, upset, possibly terrified, and truly vulnerable etc etc etc etc I would be so shocked I would immediately pay off their shit and then some till they got back on their feet.
But that’s uber rare. Anyone who tells you different is naïve or lazy. They haven’t seen instances like the ones I just described above. Not in earnest. They just take peoples words for it if they give them a sad story – they are easily manipulated, so naïve, lazy, and I will throw in “or dumb as fuck”.
So, what can you do about it? Well, I've found a few strategies that help:
Screen Tenants Thoroughly: You've got to be extra careful who you let into your properties. Check everything – payment history, job stability, references from previous landlords. It's worth the effort to avoid trouble down the line. Screen so hard. Stay on your leasing teams or onsite property managers, whoever handles lease up, make sure they are screening hard. If they let someone in who was a redflag do the Javier Bardem cointoss scene. Have the haircut.
Jump In Early: Sometimes, if you catch the problem early enough, you can nip it in the bud. Even if tenants don't really care about paying, they might cough up just to avoid the hassle of dealing with you. Its surprising how when dealing with people that are shitty enough to always be a problem, how if you just bitch, they’ll sometimes immediately be able to be resolved short term, but then at the same time they can just flip and decide to quit their job to make their new job fucking you. (And fucking over the corporate evil PM company you work for, making ludicrous pm management profit margins, those evil bastards, so corporate, so wallstreet)
Stay Legal Savvy: Keep yourself updated on all the legal stuff. You don't want to get caught out by some technicality because you weren't paying attention to the fine print. A property in ohio - you can often go to court and the judge will side with you and tell the fucknut they are a fucknut and they have to pay.
In Illinois, expect to have to make the resident cum in front of the judge, and possibly to be forced to allow him to fuck your wife.
And all that being said, even in Ohio, you can still get gayed. Always be careful with all this bullshit.
Tech Can Help: Using property management software can make your life a lot easier. It helps automate parts of the eviction process. Some softwares log shit as well, to a degree where its reliable enough to be used in court which can help with liability.
But let's face it – there's no silver bullet for this stuff. It's messy, it's complicated, and it's probably only going to get worse. I try to share what I've learned with others in the field, but sometimes it feels like we're just treading water.
At one site we had a tenant with his fiance and newborn baby. He never paid rent. Lied did all he could whatever to get out of it.
He died. Legally died. He oded. But he was revived and it was because our onsite manager was doing a good job and got the paramedics there in time.
He did the right things and saved this guy.
The dude not only didn’t thank the PM, he just openly hated him at all times throughout all of this.
Just treated the PM like shit just as he did before this incident and acted like it never happened.
And still they never paid rent. They were just fighting the eviction process pretty much from day 1.
And then a month later the fiancé told him (the tenant dude) that the PM tried to bang her.
It’s on cameras. All of it. The entire interaction. With audio. PM is innocently just in his office doing his job and she comes in acting thankful for being allowed to take some rent off for cleaning the common areas. She’s so thankful she starts begging him to “let me get on my knees and just grovel”.
She tried to get him to let her suck his dick. He straight up said “I will run, mam, if you don’t leave right now I will run out of the office and look ridiculous. So please stop.”
So, she finally gave up. But immediately reported it to everyone that he sexed her.
Almost ruined his life, and the husband WASN’t in on it, and was sending him messages threatening his life - it’s just chaos.
OHHHhh and she FAXED over a handwritten account of the incident that was pages and pages long.
It was so long it would be impossible for her to have written it from the timestamp on the camera to the time the fax was received. So it was premade. And she FAXED IT.
Do you understand?
She fucking faxed it man.
These people are insane.
But fuck it.
I can’t deal with it.
I am fighting off being evicted all the time.
It takes up most of my time, effort, and energy. I can afford my rent but then I can’t afford all the other shit I want that is unnecessary but is fun and feels good. Fuck the man.
You've got some serious scars man, damn... and I don't blame you for outlaying here. Hang in there, though.
I don't have any exotic stories like yours, but I will be seeing a roughly 25% reduction in EGI due to writeoffs for a single tenant at a single property in the coming 1-2 months, and investors will not be happy to see that shit (duh). That could theoretically turn pretty exotic.
Anyway, safe to say I may be going on similar rants soon. Thank you for the tips, PMs are now bloodhounds for any A/R that shows up (as if this needed to be reiterated but that's a whole 'nother deal). Of all things, communication and jumping in early seem to be the most actionable item. Screening is a close second but it's a difficult balance.
Damn, that was a wild ride.
Going to ignore the insane rant the other guy posted.
The short answer is that being a landlord does not entitle one to clip coupons, and there are as many bad actors in the landlord community as there are tenants (or at least relatively speaking). So lets calm down a bit.
We've been buying out bad tenants. Either offering to write off all their arrears, or even paying them a few thousand dollars on top to vacate an apartment. We're in the most tenant friendly municipal and judicial jurisdiction in the country (NYC) so for us, spending $10,000 to get someone out of a unit instead of spending 6-12 months and 6-7,000 on legal fees is actually a decent trade, especially when you understand that the odds of successfully evicting someone for non-payment is very low. That may not be helpful in the moment, but for future deals, fund a reserve for that, or capitalize one, and it'll help. And do a better job screening tenants, obviously. If your tenant has free rent, see if it's legal to cover some of their arrears with the free months.
But more generally, this is the job! I say this all the time, but real estate as an industry isn't about putting together a fancy and complicated underwriting model, it's about executing, and this is exactly the kind of problem most desk jockeys run into. They underwrote 5% economic vacancy on their crappy Class C MF deal and now have the shocked Pikachu face when it's double or triple that, because getting tenants to pay takes time and effort.
So yeah, it sucks when "bad actors" try to game the system and not pay rent and squat. I have no sympathy or love for those people, they're scum who make it difficult for tenants who are genuinely struggling to get help. However, I frankly have even less sympathy for the person complaining about how their life is so difficult because they can't get those folks to pay their rent. All that is, is an abdication of responsibility for doing the work of being a landlord. You want people to pay? Go be on site, every day, knocking on doors and forming relationships with each and every tenant. Your collections will skyrocket. That doesn't happen because it is way too expensive to staff that many asset managers and property managers; they're managing hundreds of units when it should be dozens. But once again, that's a failure of the landlord, who overpaid for the asset and couldn't afford to manage it properly and now is complaining that life is unfair
Follows one insane rant up with another…
Yeah, the fact that you dismiss that as a "rant" tells me which type of landlord you are.
The first portion of your commentary is spot on, and for the most part a strategy we've adopted though to a lesser extent (have yet to offer anything beyond debt forgiveness in trade for a move out, paying them is complete insanity but will likely pencil with all things considered. May need to review with partners on this fr).
Assuming you're pointing the finger at our firm as a.) acquiring Class C, b.) underwriting 5% economic vacancy, and c.) as having a sloppy approach to asset and property management, I can't agree with you there, certainly not on points a.) and b.).
We are a workforce housing bunch with a penchant for newer, well-maintained properties spanning up and down the B and A range. Our bare minimum underwrite today is 6.5% total economic loss with that floor increasing due to this very problem. With Property Management, you may have me a bit there but we hired individuals who, using our best judgement, were/are rock stars and execute in a fashion similar to what you describe.
In regards to that last sentence, it appears tougher times are exposing the worse performers on the property management front (as well as exposing our AM teams poor oversight so far of that/those functions, which is also crazy and why I'm now in the mix). Our whole portfolio is seeing an uptick in this problem, however the property managers with good tenant relationships and a process in-place for dealing with this issue are faring 1000x better than those who were caught with their pants down.
I was making a generic comment, not specifically about your firm (which I know nothing about). The expectation that things should be easy is an insidious one, and should be pushed back on, is my point. Being a landlord doesn't end with building a nice underwriting model and negotiating deal docs - that's where it begins, and wayyyy too many people don't seem to grasp that.
Yep! It's almost like the landlords who understand their residents are actual people do better than the ones that treat their tenants like they're just the source of a monthly check!
That's just kind of the nature of the business and where a good property manager/operations team shines. The past 4 years or so has been pretty easy due to full employment (especially for tech/white collar jobs) and the rent relief. Just casually increasing rent 8%+ every year and everyone pays it. Take screening seriously, be firm with the tenants, and be up to date with the current laws. Which leads to:
The managers/operations teams need to stay on top of this stuff. Texas is a bit spoiled with TAA, but wherever this property is I'm sure there's some kind of equivalent. There are certainly places that are antagonistic towards landlords, but they almost always spell out stuff that you're getting caught for.
Second paragraph is at the crux of the issue.
The community manager position at this specific property had turnover, and the portfolio manager (property management side) for the region completely fell asleep at the wheel. Had a resident who had been building a balance since this Summer, and a ballooning A/R balance overall, yet fucking crickets until it was completely out of control. Also speaks to a poor monitoring function overall, but we're talking a six-figure property management employee who just straight up didn't have an answer as to how this got so bad, and didn't surface the problem at all.
Thank jesus we're early in the hold and have fixed-rate debt.
There has absolutely been a shift with bad debt higher across the board. Regardless of the market and if it’s 0.25 to 1.5% or 2% to 5%, stabilized bad debt is much higher than ever before, including during the GFC. Don’t listen to the associates on here acting like they weren’t in diapers at the time.
Surety bonds
Sounds like the economy is not as hot as the S&P would seemingly indicate.
Our OMs will now all require a paragraph dedicated to where the property is in relation to Nvidia headquarters.
Anyone using any newer software solutions to improve and automate the tenant screening process?
We've been using software like Flex or Snappt. It seems to be helping, but the amount of fraudulent applications is still pretty high
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