Mastering Rent Collection: Strategies for Tackling Chargebacks, NSF’s, and Delinquencies

Learn how to mitigate 3 significant rent payment collection risks that property managers face when it comes to rent collection.

Inflation, demand, & high interest rates have created an unstable economy, increasing rent payment collection risks

The economy is facing instability due to factors such as inflation, high interest rates, and fluctuating demand, which are putting multifamily revenue at risk. The property management industry and overall economy have experienced both positive and negative changes in recent years.

Before the pandemic, the world was more predictable, with rents and asset values growing steadily for over a decade. However, since the pandemic, there have been significant changes and instability in various ways. Some aspects have been positive, leading to improved asset values and returns in 2021 and early 2022. However, there have also been challenges, such as inflation peaking at 9% in June 2022, which has put stress on the economy.

In addition, there are other macroeconomic conditions that are still unfolding. And despite the Federal Reserve’s efforts to stabilize the economy, there is a possibility of heading towards a recessionary environment. The latter part of 2022 and early 2023 have seen a decline in rents and asset values. It’s crucial for property management companies to optimize their business strategies now more than ever.

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Protect Your Multifamily Revenue: 8 Ways to Mitigate Risk

With potential economic challenges looming, identify 8 risks to multifamily revenue and protect your business with proactive steps and proven recommendations against chargebacks and returns, utility theft, growing resident turnover costs, and more!

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How to employ rent revenue safeguards that help protect against the top rent payment collection risks

Learn how to implement effective rent revenue safeguards to safeguard against the top rent payment collection risks. In this review, we will discuss strategies and proactive measures to combat chargebacks, minimize payment returns and errors, and reduce delinquencies in your multifamily rentals. By implementing these safeguards, you can optimize your business operations and strive to achieve the highest level of success.

What is a chargeback and how does it work?

A chargeback is a dispute initiated by a cardholder that is directly filed with their financial institution. Once the dispute is filed, the information is forwarded to the payment processor, such as Zego. Zego then notifies the property management company, which has the option to either accept or challenge the chargeback.

If the property management company chooses to challenge, they provide supporting documentation to Zego. Zego then forwards that information to the card issuing bank for review. The card issuing bank ultimately makes the final decision based on the evidence provided.

Why do chargebacks occur in property management?

There are various reasons why chargebacks can occur in property management. The majority of them (around 81%) are related to fraudulent returns, and are typically initiated about 120 days after the transaction. Some common reasons for chargebacks in property management include:

1. Delayed refunds: When a renter requests a refund from the property management company, but feels that it’s not being issued quickly enough, they may initiate a chargeback.
2. Accidental or duplicate payments: Chargebacks can occur when renters accidentally submit duplicate payments or payments in error.
3. Auto-payments not canceled: If a renter moves out but forgets to cancel their auto-payments, it can result in a chargeback.
4. Domestic confusion and disagreements: Chargebacks may occur when a family member or roommate uses a card without recognizing the charge on their bank statement or due to a disagreement.
5. Application fraud: When a potential renter’s application is denied, they may contact their credit card company to dispute fraud. This holds the property management company accountable regardless of any verification steps taken.

Resolving chargebacks is costly and time consuming

Dealing with chargebacks can be both costly and time-consuming. For every dollar associated with a fraudulent chargeback, it can end up costing you $2.40 in labor costs, including the time spent by your staff to track down the resident and gather all the required challenge documentation. For example, a $100 chargeback can result in labor costs of $240.

It’s crucial to keep in mind that there is a limited timeframe to respond to the dispute before a “no response” reversal occurs from your property’s bank account. Be sure to send our chargeback defense team your claim to challenge prior to the due date set by the issuing bank. You can find this date listed at the bottom of each chargeback. To ensure you meet the deadline, we bold and highlight the due date to draw your attention to when we need your documentation. As we work towards the war on chargebacks, timely and efficient response to disputes is essential to minimize the costs and impact on your business.

What steps can you take to prevent, challenge, & master chargeback disputes?

There are several steps you can take to effectively prevent, challenge, and win chargeback disputes. Here are some recommendations:

1. Require applicant signatures: Make sure all your applicants sign a form acknowledging your no refund policy. Check your application form and ensure that the policy is clearly stated and has a signature line or initial line next to it. This ensures that the credit card company recognizes the agreement with the policy.
2. Ensure all residents have signed the lease: It’s crucial to have every individual living in the unit sign the lease agreement. The credit card company only considers documentation signed by the cardholder as valid, so having all residents sign the lease strengthens your defense when challenging a chargeback.
3. Require verified funds in certain cases: If you have any doubts about a resident, you can ask them to pay with verified funds such as cash or money orders. Zego can also assist you with this process.
4. Keep all required documentation accessible: Store all necessary documentation, such as applications, credit reports, leases, ledgers, photocopies of driver’s licenses and pay stubs, and signed payment authorization forms, in an easily accessible manner. This information is usually required by the credit card company and will be essential when disputing a chargeback.
5. Encourage residents to research unrecognized charges: If a resident contacts you about an unrecognized charge on their bank statement, advise them to contact their credit card issuer to resolve any discrepancies. The credit card company will then contact you for additional information, and providing a receipt and description of the charge can often resolve the issue without resulting in a chargeback.
6. Avoid issuing refund checks for credit card payments: Refunds should ideally be given back to the cardholder through the same electronic payment method they used initially. Refunding via check can create confusion and potentially result in a double refund if the credit card company rules in favor of the cardholder. It’s best to refund directly to the card whenever possible.
7. Partner with the chargeback defense team: Our chargeback defense team is here to assist you at every step of the process. Feel free to contact us anytime with questions or concerns, and we’ll be more than happy to help.

By implementing these steps and working closely with our chargeback defense team, you can effectively minimize, challenge and successfully handle chargeback disputes, saving time and resources for your business.

How to virtually eliminate rent payment returns and errors

How can you reduce or eliminate rent payment collection risks such as NSF returns and payment errors from disrupting operations?

Why would a digital payment from a resident be returned?

There are several reasons why a digital payment from a resident may be returned. The most common return codes are R01, R02, R03, and R04, which have specific meanings.

R01

R01 usually indicates insufficient funds, accounting for about 5% of transactions per unit per year. This occurs when the resident’s bank account does not have enough money to cover the transaction amount.

R02

Another common reason is R02, which indicates a closed account. This can happen when a homeowner tries to pay from an account that has been closed, either because it is still on file or they forgot to close it earlier.

R03 & R04

The last two reasons, R03 and R04, are often grouped together and indicate an invalid or nonexistent account. This could be due to input errors or intentional actions to avoid paying rent or staying in temporary good standing with your company.

All of these returns pose a risk of lost revenue and allow residents to avoid paying their rent while appearing to be in good standing temporarily. Therefore, it is important to verify payments before processing them, and there are various technologies available to help with this.

Why NSFs on rent payments are significantly more harmful than beneficial to your revenue & operations

NSF fees on rent and other payment returns may seem like a small and steady revenue stream for some property management firms, but in reality, they can be significantly more harmful than beneficial to your revenue and operations. The costs associated with NSF fees, including the hours spent on resolution, staff wages, cash flow impact, and delays, far outweigh the extra income generated from these fees.

Based on calculations from the Kingsley report combined with our own historic data, even large companies charging for returns can still lose over half a million dollars due to the operational and time expenses involved in dealing with NSF returns and chasing down funds.

Small companies are also heavily impacted, with a net cost of $13,000 making a significant difference in their yearly finances. Additionally, team members spending valuable time chasing rent can have a detrimental effect on their ability to handle other important tasks associated with the community.

For more information on these calculations and to obtain your own custom report on return on investment, we encourage you to learn more. The small amount of income generated from NSF fees isn’t worth the hours spent on resolution, staff wages, and cash flow delays.

How automation technology can help eliminate rent payment collection risks

Automation technology can have a significant impact on eliminating returned rent payments by focusing on two key themes: authenticating accounts and verifying funds. Through advanced technology, we can verify that residents’ bank accounts are open and active, avoiding returns due to closed or non-existent accounts.

Additionally, real-time verification of funds ensures that residents have sufficient funds to cover their transactions, reducing NSF transactions and creating happier residents and staff. As technology evolves, there are effective ways to mitigate chargebacks and return payments, despite it not being the most glamorous side of tech.

However, revenue protection is crucial, as money, cash flow, and resident retention are all vital components of a successful property management operation. The impact of automation technology in rent collection can be substantial, with potential decreases of up to 95% in returned payments and an 82% win rate on chargebacks.

How to effectively reduce or prevent delinquent rent

The truth is, delinquent rent is a significant challenge that can have negative financial repercussions for both property owners and residents alike. Beyond the financial impact, it also creates emotional stress for renters and property management teams who are tasked with managing the situation.

Many property management teams did not sign up to be debt collectors, and it’s crucial for the industry to prioritize setting renters up for success and improving their experience.

To start, it’s important to understand the root causes of delinquency, including the personal financial situation of our customers. By gaining a deeper understanding of these factors, we can implement strategies to prevent delinquency and create a win-win opportunity for all parties involved.

Renters are becoming more financially challenged, pointing to an increase in delinquent rent

While it’s not new that Americans typically spend about a third of their income on rent, the alarming trend is that a quarter of renters now spend over 50% of their income on rent. This is exacerbated by inflation, with rental costs increasing by 6% to 8%. While wages are only rising by 1% to 2% annually, or even experiencing negative growth in some segments. As a result, the number of cost-constrained renters is growing, and on average, renters are spending 31.8% of their income on rent.

Delinquency has become a pressing issue, evident in polls and industry reports, with an estimated $100 billion of rent expected to be paid late by 8.2 million households this year. The industry is projected to lose $20 to $25 billion in rent due to bad debt, highlighting the significant impact of this issue.

Proven strategies to get ahead of delinquencies

There are proven strategies to proactively address delinquencies and prevent them from occurring in the first place. Two strategies that have shown promising results are screening and fraud detection, as well as offering flexible rent payment options.

Screening and fraud detection

When it comes to screening, there are three unique approaches that can help us better understand our renters. First, looking at monthly income instead of annual income. Many renters experience variations in their income on a month-to-month basis. So, understanding their cash flow dynamics can provide insights into their ability to make consistent rent payments. Second, examining credit data and trends, such as changes in credit scores and payment patterns over time, can provide clues about their financial situation and payment behavior. Lastly, considering job types and industries can also shed light on their potential for wage growth and financial stability.

By conducting thorough screening using these three factors, you can make more informed decisions about placing the right renters in your communities. This will ultimately reducing the risk of delinquency down the road.

Flexible rent payments

The second strategy is to offer flexible rent payment options. This involves implementing a flexible rent payment solution that accommodates the unique financial circumstances of renters. This could include allowing for different payment schedules, partial payments, or other arrangements that can help renters manage their cash flow and avoid falling behind on rent. By providing flexibility, we can proactively address potential rent payment collection risks and work with renters to prevent delinquency from occurring.

How flexible rent payments help multifamily companies & their residents

With flexible rent, renters’ credit and cash flow data is analyzed in real-time to create a personalized rent payment schedule that aligns with their cash flow. This approach breaks down the rent, one of the biggest expenses for renters, into smaller payments. These payments can be made throughout the month, based on the renter’s preferred schedule.

The key to flexible rent is optimizing the payment schedule to match the renter’s cash flow variability, allowing them to successfully make on-time payments and reduce bad debt and delinquency. This approach is particularly beneficial for renters with income variability or cash flow challenges. It enables them to pay their rent in a way that aligns with their financial situation. This, in turn, improves resident satisfaction and overall rental performance for property managers.

How flexible rent payments work

The process of implementing flexible rent is simple. Renters apply for flexible rent through the rental portal, and then they are underwritten to create a custom payment schedule. Once enrolled in the program, renters can continue to make payments according to their preferred schedule every month for the duration of their residency. Importantly, flexible rent is free for landlords and property managers, with only a small flat fee charged to the renters who opt into the program.

By offering flexible rent, multifamily companies can proactively address delinquency and improve their bottom line. It also provides a marketable advantage, as it offers renters a solution that matches their financial situation. And, it empowers property management teams to work productively with renters to ensure their success. Ultimately, flexible rent is a win-win solution that benefits both multifamily companies and their residents, creating a positive rental experience and reducing the risk of delinquency.

Overcome the top three rent payment collection risks by deploying an army of automation

Secure your revenue in uncertain times by leveraging the power of automation to combat the top three rent payment collection risks. To recap, we discussed valuable tips and best practices to reduce chargebacks, including preserving all documentation, offering multiple payment options, and partnering with a reliable team like Zego. We also explored how authenticating bank accounts and verifying pay funds in real-time can virtually eliminate returns. Lastly, you can decrease delinquent rent with thorough tenant verification and offering flexible solutions, such as flexible rent, to drive payment adoption.