THINKING AHEAD: IMPLEMENTING EFFECTIVE PRE-LEASE COLLECTION STRATEGIES
Any experienced landlord has had a problem tenant. Rent habitually becomes 30 days late, then 60 days…. The landlord decides to evict. Once the premises is recovered, the inevitable question arises: how do I collect the past due rent?
Landlords unfortunately ask this question too late in the game. You should think about this question before things go bad. In fact, you should think about this question before the lease is even signed! You read correctly: important collection information can be obtained before the security deposit is in hand.
Let me explain the big picture before getting into specifics. There’s no way to force a tenant to pay an unpaid rental balance without utilizing the legal process. The most you can do without the legal process is harass them. I’m sure you’ve been there before: sending emails, texts, calling the tenant. But you just can’t will them to make a full payment. So you sue them and then obtain a judgment. Now what? You’re right back in the same boat. You can send emails and texts and make calls informing the tenant of the judgment, but that piece of paper doesn’t put the money in your account.
Fortunately, there are multiple legal methods to compel a payment. The one I want to focus on here is called garnishment. In short, a garnishment is a legal action you can file against anyone (person or business) who holds money belonging to the debtor, or owes any money to the debtor. The two most common garnishment actions are against a debtor’s bank or a debtor’s employer.
Now let’s focus on the information you can obtain up front. If the tenant has incorporated (forms a limited liability company or corporation with the Secretary of State), the lease application should ask for the tenant’s federal tax ID number (also known as an EIN). The EIN is an extremely valuable piece of information. You will want to provide this number to the bank in a garnishment in order to help the bank locate tenant accounts. The EIN is also necessary in order to have a private investigator conduct a bank account asset search. Now, if the tenant is forming a new business, they may not have established an EIN at the time of the lease application. It is therefore important to follow-up on obtaining this information once the tenant does establish an EIN.
The other important pre-lease information you can obtain is the tenant’s credit report. Again, if the tenant is forming a new business, they will not yet have established credit. But you should certainly run the tenant’s principal’s credit. The credit report will often identify banks where the tenant may have accounts that can be garnished. Landlords should always keep a copy of the tenant’s credit report in the lease file.
There are numerous additional pieces of helpful information landlords can obtain that I will address in subsequent posts. In the meantime, we would love to hear from you regarding your tenant collection issues.