Collecting rent electronically is a very attractive option for landlords nowadays, and there are many different ways to do it. However, more tenants and landlords are finding that going paperless actually can include some processing fees and other costs. What to do about those fees and what to pass on, if anything, to the tenant is up for debate among many landlords.
Fees for Electronic Rent Collection
A landlord’s top goal is to collect the full amount of rent on time every month. In the past, this usually meant waiting for a check to arrive in the mail or arranging to meet with a tenant to collect the payment. Electronic options for collecting rent can be very convenient for both landlords and tenants. It’s a more certain option for getting the funds on time and in full. It also doesn’t leave payment up to forgetful tenants and often relieves the landlord of having to chase down the rent. Like all modern conveniences, however, there is a cost associated with electronic rent collection—transaction or processing fees.
Many electronic payment options include a transaction fee. After all, the companies that are creating and managing all these payment portals take their share out of each transaction. These can range from flat fees to a percentage of the transaction amount.Depending on the service and the method, these fees can be anywhere from a few dollars each time to more than $35 per transaction. Processing charges and fees are increasing the cost of doing business, and landlords are often left wondering how they must deal with these at additional costs.
Types of Electronic Rent Collection
There are several types of electronic rent collection methods. Each one differs in convenience level for landlords and tenants, and also in the different fees charged to use those services. Here is a short list of some of the most common types of electronic rent collection methods:
- Automated Clearing House: ACH transactions include a range of bank to bank transfers of funds, from direct deposit and bank account bill pay programs to payroll disbursements. Essentially, landlords and tenants would work with their banks to have one bank request or send out a set amount to the other bank. Regular, repeating transactions can be set up and once established, the landlord or the tenant won’t have to do anything to make the transaction happen every month. The fees vary, depending on the actual process used.
- Credit Cards: While one of the most common systems of electronic commerce, the processing fees are considered quite high on the landlord’s end. It also requires security protocols and certain procedures to secure the transaction. It’s more common for large apartment complexes or property management companies to offer this type of electronic payment option, but few small landlords have it set up.
- Online Transaction Companies: While PayPal is the most popular, there are several different kinds of online systems that link online accounts to typical bank accounts. It’s a speedy and simple way to exchange funds electronically but there are generally fees associated with each transaction.
Regardless of what kind of electronic transaction process landlords choose to use, they should take all the factors into consideration that go beyond fees and choose the method that is most convenient and cost-effective for them as well as their tenants.
Who Pays the Fees?
Nobody wants to get stuck with paying for extra fees, and many landlords pass on the cost of doing business on to the tenant in some form or another. Other landlords choose to absorb the fees themselves. While there is no set standard, it’s important for landlords to be up front about fees and financial transactions when discussing the terms of the lease agreement with the tenant before signing it.
Option #1. Pass Fee Costs On To Tenants
When processing fees are added onto electronic transactions, many landlords make the decision to pass that cost on to the tenant. Depending on the amount, this could be something built into the rent amount or administered as a separate fee and listed in the lease agreement. If the tenant is responsible for fees, the breakdown of how the landlord expects the rent to be paid and what fees are associated with the process should be clearly outlined in the lease agreement.
Some landlords might also want to force tenants to use just one option for paying rent, but they should be careful about how they proceed. That’s because many states, such as California, have enacted laws that require landlords to always provide another non-electric payment alternative to online payments.
Option #2. Absorb the Fees
Often, landlords simply include the fees that must be paid for electronic transactions as part of the cost of doing business as a property owner. Depending on the amount, it may not make sense for landlords to chase down certain amounts from tenants. Landlords may not want tenants to feel like they are getting charged for every little thing, especially if there are already fees in place for things like parking or laundry.
Option #3. Assess Fees for Non-Compliance
Many landlords want to compel tenants to get on board with electronic rent payments and therefore assess a kind of “penalty fee” of their own if the tenant chooses to still pay via check or money order to the office or via mail. The most common example of this might be when a landlord assigns an extra $20 per check if they choose to continue to pay rent that way rather than go with the online payment plan they have set up. While many states don’t have specific laws that enable or prevent landlords from doing this, it’s a good idea for landlords to check with their attorney before implementing any penalty fees like this upon tenants.
Landlords who pay transaction fees themselves often feel that it is worth it because the electronic transfer methods are more secure, always on time, and once set up, relatively independent of action. In other words, for the convenience, many landlords feel that the cost of the fees is well worth it. No matter which option a landlord chooses, it’s a good idea to review all options and make the best decision for their own real estate investment needs.
Adding Fees Mid-Lease
One of the biggest sources of conflict between landlords and tenants takes place when landlords make changes or additions to the lease agreement. When it comes to adding fees, there are plenty of things that landlords can do to ensure it is legal and not cause problems for tenants.
Landlords should remember that making updates and even additions to a lease agreement can be done via addendums, but state laws generally support changes that don’t affect the tenant’s day to day lives materially. A non-material change would be something like adding rules for the complex swimming pool or adjusting the number of days overnight guests can stay. A material change generally affects a tenant’s wallet or serious lifestyle change, like suddenly banning pets or smoking when those bans were not part of the original lease agreement. Fees are generally considered a material change.
In other words, if landlords start assessing new fees that weren’t originally in the lease agreement, it would require more than an addendum—it would mean an amended lease agreement that both parties would need to agree to in order for them to take effect. If the lease is a month to month agreement, the landlords just needs to give a 30-day notice to implement the change. If the lease is still in effect until a certain date, any fees assessed should wait until the current lease expires and then added to the new lease.
If fees are being passed on to the tenants after a lease agreement is signed, the landlord runs the risk of upsetting them and pushing them to not renew. Landlords run the risk of alienating tenants if they start assessing new fees after the commencement of a tenancy, so they should consider carefully if that is something they are willing to take on.
Consider Tenant Pain Points
As more landlords catch on to the convenience of electronic rent collection, they should proceed cautiously and avoid the abrupt assessment of fees upon tenants. Many tenants may not choose to live in a place where there are constant fees being assessed. Perhaps the monthly fees are simply too much for tenants on a very tight budget. Some tenants, particularly the elderly, are not tech savvy and are computer illiterate and would have a difficult time setting up electronic payments. Still others do not trust putting their financial information online. There are plenty of reasons why tenants may resist complying with electronic rent collection efforts, and it’s up to landlords to figure out a balance between convenience and consternation.
Here are just a few of the many inquiries received at RentPrep from tenants expressing their frustration at the sudden appearance of additional fees and changes to the rent collection process mid-lease.
Landlords should pay particular attention to any reasonable objections that tenants bring up in regards to assessing fees to participate or not participate in an electronic rent collection process. A tenant’s pain points about paying rent may be easily resolved or at least explained in such a way that tenants feel more comfortable with the process.
Because assessing new fees for anything, including electronic payment processing fees or asking for fees from those who don’t comply, is generally considered a material change to the existing lease agreement, the tenant has a right to refuse to comply for as long as the terms of the lease are in effect. If the tenants don’t agree to paying fees and won’t sign an addendum or amended lease agreement, then the landlord can simply choose to not renew the lease when it expires. The fee information can then be included in the new lease agreement with the new tenant.
Communication Is Always the Key
As in all parts of the landlord/tenant relationship, communication is a key part of making sure everyone is happy with the current arrangement and that tenants understand where landlords are coming from. Remember that a lot of tenants already have a negative view of landlords, imagining them as greedy property owners who are looking to squeeze every last dime from them. By providing information about any fees connected to paying rent up front, tenants will feel fairly treated and can make the choice whether or not to sign the lease agreement.
When it comes to electronic rent transactions, landlords should make sure they are compliant with state and municipal laws, and should figure out how they will handle transaction fees. While there is no right answer when it comes to processing fees for electronic rent payments, each landlord that educates themselves on the ins and outs of the process will definitely be able to make sure they implement the best process for everyone.