For many people, rent is the last reason to have a checkbook. When it comes to paying bills, the extra step of making sure to have stamps and getting the "check in the mail" is becoming archaic. However, in San Francisco, which just ranked second in Wired's 2009 list of "Top Tech Towns," most tenants are still paying their rent by check. Given that most tenants, landlords and property managers are probably spending the majority of their time in front of a computer each day, why are they choosing to take their rent transactions offline? Property managers, landlords and attorneys in San Francisco all have their own take on the best practices in the adoption of rent payment technology.
The process of modernizing rental payments can be done through Automatic Clearing House transactions, online bill pay, online software (which can facilitate ACH transactions and/or credit card payments) or bank drafts. Online bill pay is set up by the tenant and is essentially the same for the receiver as processing a paper check. Although it may be more convenient for the tenant, it doesn't offer any benefit to the landlord or property manager. The benefits to a landlord for setting up ACH drafts oronline payments are reliable and consistent payments each month, and less administrative work. Online software and some methods of ACH drafts provide a third benefit, which is a third-party record of each month's payment history.
Risky BusinessACH transactions can be facilitated by the tenant or the landlord. If the tenant sets up the ACH draft from his bank, the landlord must give that tenant her routing and checking number and the tenant transfers the rent each month to the landlord's account. While this might cut down on the need for the landlord to take a check to the bank each month, there are a few risks with this method.
One attorney who represents landlords in San Francisco described one such risk. He had a client whose tenant created fraudulent checks with the landlord's bank information and stole money from the account.
But there are other risks. Leonard Mastromonaco, also a San Francisco landlord attorney, warns that ACH transactions could allow landlords to accidentally run afoul of the Section 6.14 Rule, which establishes rental rates for subsequent occupants. When a lease is created, a base rent is established and the leaseholder is protected by San Francisco rent control. When the original occupant(s) moves out, the landlord may then increase the rent (in the terms of the code, 'establish a new base rent').
However, if a landlord has knowledge that another party has moved into the premises (a "subsequent occupant") and the landlord does not serve a 6.14 notice to that subsequent occupant, that "subsequent occupant" is entitled to the protection of rent control. Payments by persons other than the leaseholder could be used to establish the landlord's "prior knowledge" of the occupant. If a checking account has been provided to a tenant as a means for paying rent, then people other than the original occupant(s) could make deposits to it without the landlord's knowledge. Then those payments could be used as an argument for rent control protection.
The second of the two risks Mastromonaco highlighted occurs if a landlord needs to evict a tenant for nonpayment of rent. Under California Code of Civil Procedure Section 1161, the landlord would serve a Three-Day Notice for Nonpayment of Rent, including the full amount due. After that three-day period is up, the landlord would not want to accept any payments from the tenant, as they could interfere with the eviction process. At that point, a tenant with the ability to make payments directly to the account would be a liability. (For the same reasons, allowing a tenant to set up payments through Paypal would be risky.)
One other reason for the slow adoption of automated ACH payments is the logistics of the administrative process. When ACH payments are deposited into an account, there is only a reference number or maybe a bank account number associated with the deposit. Sorting out the rent roll from the deposits would be a problem without assistance from some type of software or system with the bank.
A good solution for large property owners and managers is an automatic ACH debit that is initiated by the landlord's bank. Carolyn Chandler of Chandler Properties manages 4,000 units and offers automated monthly debits for rent and HOA dues. Her company obtains an authorization and blank, voided check from the tenant at the time the lease is signed. The key to having success with this process, according to Chandler, is the banking relationship. US Bank set up a system that automatically transmits the details of all the debits to Chandler Property's accounting software and forwards the funds to the appropriate owner accounts. Since it is the property manager and not the tenant who initiates all of the ACH transactions, the receiving bank account numbers are never revealed to the tenants and Chandler Properties is in control of stopping debits and checking the tenant name on the original check against that of the leaseholder.
Chandler's solution is a good one for a company that manages a large number of units. But for a landlord whose financial transaction volume is small, it will be difficult, if not impossible, to find a bank that will put together a system that synchs with the accounting software necessary to reconcile the payments.
Extra Effort
Bank drafts are essentially paper checks that the landlord prints on the tenant's behalf. The landlord would obtain an authorization from the tenant and a blank, voided check. The landlord would also need some sort of check printing software. Each month, the landlord would print out the tenant's check and deposit it. This is a good solution for a landlord who is using this form of payment solely to ensure that their payments are more reliable and consistent, but instead of automating the payment process using software, the step of generating and printing the drafts adds a step to the monthly process.
Software Solutions
There are solutions available to small landlords online. In looking for this type of service, there are many important factors that San Francisco landlords should look out for. The National Automated Clearing House Association, the governing body for ACH transactions, mandates that service providers verify checking accounts to ensure that the name and address on the account match the person who is authorizing the payment. A good online option will follow this rule. In order to avoid the 6.14 risks outlined above, the system chosen also needs to allow the landlord to set up the tenant's name and address before they are allowed to make payments and provide alerts if someone other than the leaseholder attempts to make a payment.
In the event that the landlord should need to evict a tenant, the system chosen to collect rent should put the landlord in control of stopping the automated debits. For example, some online systems offer the ability to mark a tenant as "Moved Out" or "Evicted," after which time the tenant is no longer able to login and pay rent.
In order to get the full benefit from online rent collection, the best option is one that automatically justifies the rent roll and captures all necessary information. All of the receipts for payments and missed payments should be archived so that the landlord has access to the documentation in case it is necessary for an audit or a legal proceeding. Attorney Shauna Matlin of Matlin & Associates remembers a client whose tenant demanded written receipts for payments. If this type of administrative task can be easily automated and emailed, the system provides the benefit of aggregating information in addition to collecting rent.
Don't Give Your Tenant Any Credit
A few online systems allow tenants to make credit card payments. Potentially, this enables a tenant who does not have the cash available when the rent is due to pay the rent on time. However, Dan Croley of Grosvenor Properties says that Grosvenor chooses not to offer this option to tenants because of the fees charged by the credit card companies -- 2% of total sales. Indeed, credit card fees are between 2% and 5% and either cut into the property manager or owner's margin. Property manager Chandler brings up an interesting point outside of the costs -- the instability of a tenant who does not have the funds available to pay rent. "A tenant who needs to put rent on a credit card is probably only a couple months away from not being able to pay," she says.
Moving Forward
If rental payments are more reliable and consistent with automated payments and require less administrative work on the part of the property manager, why not make it mandatory as part of the lease? Matlin says that condition is permitted under the California Civil Code. She highlighted Civil Code 1962a2b(ii), which states: "At the owner's option, the rental agreement or lease shall instead disclose...the information necessary to establish an electronic funds transfer procedure for paying the rent."
She's not alone. Fellow attorney Mastromonaco calls automated rent "the wave of the future."But although these lawyers give their blessings, it is always best to consult an attorney for more details and guidance.
Christine Valenti is the vice president of marketing and sales for Rentmatic, a complete online platform for landlords that automates and simplifies the rent payment process. She can be contacted at www.rentmatic.com or 888-759-4678.
