Rent Collecting Strategies During COVID-19
For Southern California
We now live in a time that has never been seen or experienced in our lifetime. The advent of the Coronavirus (COVID-19) around the world and now most notably in the United States, many things that we once considered normal has been upended and may change forever. We've seen a restructuring of our lives when we travel after the horrific events of 9-11. Now we have to deal with a deadly pandemic that is adversely affecting the lives of millions of people in this country. And with California having the largest population in the United States, we are going to be affected on an unprecedented scale. But I have hope in the America that we live in and we shall overcome this too.
As I turn my attention to real estate, many tenants and owners have lost their jobs, businesses, and sources of income, but the bills are still there and still coming in. With millions losing jobs due to COVID-19 and many cities and states declaring eviction moratoriums, a lot of tenants won’t be paying rent this month and in the months to come. And while they will eventually have to pay the rent back, the big question is when?
Politicians and scientist have no clue when this crisis will end and neither do we. Landlords are worried that they won't be able to maintain or keep their properties that they have put their hard earned money into. A good investment may not be such a good investment unless we can collect rent from tenants, pay our bills and still put money in our pockets so we can sustain our families. Don't get me wrong here, real estate is still a great investment, but we have challenges ahead, so here are some Strategies to employ in the coming months.
Strategy #1 – Determine what your local governmental regulations are where your property is located
California has 58 counties and around 482 municipalities and more than 80 local governments have passed temporary bans on evictions according to a Los Angeles Times article dated March 30, 2020. Each county and or city have their own rules and regulations, but none of them can supersede the laws of the State of California. The first thing to do is start with State laws, then go to the local city or municipality where your property is located. If your property is located in an unincorporated area of a county, then go to the County's governmental agency. This information should be posted on each governmental website. You should also note that many of these laws and restrictions during COVID-19 affects both commercial and residential real estate.
Strategy #2 – Communicate with your tenants
In many cities tenants are required to give their landlords notice if they won’t be able to pay rent due to COVID-19. The time frame in which they need to do this varies depending on where your property is located, so make sure to check with your local municipality. With thousands of people losing their income, many tenants won’t be able to pay their rent in the coming months and they probably won't call you first to let you know that. So your strategy should be to wait a day after the due date and be proactive and call them to see why they didn't make their payment and be open to work something out with them on a case by case basis depending upon their financial situation. The reason you want to wait until the day after rent is due is because some tenants are in better financial shape than others and will still pay full rent on time. When you do call, some of your tenants will know that it's you and won't answer the phone, so leave a message that say something like "you noticed that they haven't paid their rent yet and that they usually have their payment in by now, so perhaps they should call you back and discuss what their situation is. Be polite and cordial. When they do call you back, find out what their situation is. If their situation is bleak and they're not working or lost their income due to COVID-19, ask how much can they pay now and work out a payment plan with them. Some rent is better than none. Also, if you do work out a plan with your tenants, make sure you put it in writing and state that you aren't waiving rent if you agree to accepting partial rent for the time being. You should consult with an attorney and have a simple agreement written for you that can be used for every tenant. Most important is to be fair to every tenant, so have a rent payment plan and schedule that is standard for everyone.
Strategy #3 – Ask for Verification
While everyone has been affected by COVID-19 in one way or the other, not everyone has been financially negatively impacted equally. However, you should show compassion and understanding with everyone. It's also important to verify if a tenant can still pay or not. You can ask for a copy of bank statements, employment verification, salary verification...etc. It's one thing to work with tenants who have lost their income either entirely or partially, and it's another thing if a tenants makes $8,000 per month but only lost 20% of their income and can still pay or at least make partial payment. If a tenant wants you to help them, then they should be willing to give you verification of their changed financial status if it's within reason. Don't ask for unreasonable things and stay within the law. Follow strategy #1 above with regard to state and local local ordinances to verify that you're not violating in laws due to COVID-19.
If a tenant says they can’t pay their rent and their verification doesn’t line up, you may still be able to serve a notice to pay or quit depending on your local laws. In most areas you won’t be able to actually remove the tenant until after the state of emergency has ended, but it’ll send a strong message to your tenant that you are serious about collecting rent payments.
In other words, be willing to help the tenants that really need it, but don’t get taken advantage of by those that are fearfully hoarding money or just don’t want to pay rent for a few months. And once again, it’s also important to treat all of your tenants equally in this situation (especially tenants at the same building and across the board in all of your properties). Helping out the people you like and not others is a very good way to get sued.
Strategy #4 – Encourage tenants to pay what they can. Even partial payments are better than no payments.
This is self explanatory. Do what you can. Not everyone is equal (financially and situationally), but have an equal plan for everyone. Remember, don't discriminate here. It's illegal to do so, and you'll only end up hurting yourself in the long run. Be smart and fair to everyone equally.
Strategy #5 – Set-up a payment plan
If a tenant comes to you and says they won’t be able to pay all or some of their rent this month, and their verification checks out, work with them to come up with a payment plan. If their rent is $1,500 per month, see if they can pay $450 per month over the next 3 months. If they still can’t pay their full rent after the payment plan ends, then extend the payment period for an additional 3 months at a time, and do a short addendum extension each time only extending the original partial payment plan agreement. Once the state of emergency is over, and they hopefully get their job back, you can add for example an additional $250 to their normal monthly payment until the debt is repaid in full.
Strategy #6 – Call your lender to see what kind of help they can give you
Cash is king and you're human too. That means you need money to survive and to continue to live as well. Unless you're some really rich person who don't need money coming in to meet your current and future obligations, then in all likelihood you are going to need help too if your tenants aren't paying you rent. COVID-19 has affected the vast majority of the people in the United States and you're not alone. If you can't make your mortgage payment on your property, then contact your lender to see if they have a forbearance plan or something else to help you. A forbearance is not a forgiveness of debt but rather a deferment of your payments which can be due (all missed payments) once the forbearance period is over. Your lender can also work out a payment plan to add a little bit more to your monthly mortgage payment over the next few years until you catch up, or the missed payments can be added at the end of your mortgage period, thus extending your time to pay. You may even be able to refinance at the end of this period which may result in a lower payment all together. You'll never know until you ask, right?
One more thing, several counties now offer tax penalty waivers if you can't pay your entire property tax bill by the due date. However, you need to apply and state that you have been affected by COVID-19 on your penalty wavier application. I know that Los Angeles and Orange Counties have already announced that they will consider a penalty and interest free waiver due to COVID-19. Just remember, your property taxes are not waived or deferred, just the penalty and interest is, providing you file the application. Just go to your county's tax collector's website for more information.
Strategy #7 – See if you qualify for a government loan
Regardless if your lender will or will not work with you, check to see if you can qualify for a government loan. For example, the SBA Economic Injury Disaster Loans (EIDL) are available for rental property owners in all U.S. states and territories.
Here’s how it works:
The loan offers up to $2 million in assistance
The loan terms are 30 years at a rate of 3.75%
No payments are necessary for the first 12 months
There’s no prepayment penalty
Funds are to be used for working capital needs
Strategy #8 – If you have vacancies, consider hiring a real estate agent that can do virtual tours, and offer incentives to get units/space rented
Filling vacancies right now may or may not be easy because it’ll be difficult to maintain the six foot social distancing rule when doing a tour. To combat this problem, many real estate agents are doing live virtual tours of vacant units and spaces. Real estate agents are required to do this plus implement social distancing strategies between themselves, their clients and prospective tenants. This has to be done in person if they ever meet, but most paperwork can now be done digitally.
Agents accomplish this by using Facetime, Zoom or Skype, and it gives them the opportunity to point out the features and amenities of the space and building. It also allows them to get a feel for the prospective tenant, their needs, to answer their questions in real time and also qualify them when the time comes.
If you really want to get your units/space rented quickly, you might want to consider offering incentives like, 2 weeks or a month of free rent after the third month or so. This can be done for both commercial and residential properties. People are still looking and people still need a place to live and work, even during the COVID-19 Pandemic.
If you need to discuss any real estate matters, just go to the bottom of this page and fill out the short contact inquiry form and I'll reach out to you via email or voice if you leave your contact phone number. Good luck and stay safe!
Disclaimer: First Commercial Enterprise Realty Inc. or any of its principals assumes no liability for the reliance and accuracy of the information provided herein. It is provided for informational purposes only. Clients or visitors to this website should seek independent professional legal, financial, and tax advise from their representatives and they should conduct their own due diligence before taking any action.