In a perfect world, tenants would pay rent on time and make no excuses when they’re late. In the real world, sometimes it doesn’t work that way.
Although most tenants are only late on occasion, others are habitually late. Late fees are supposed to discourage tenants from being late with the rent — not provide extra income to the landlord.
Current Texas law limits how Houston landlords can charge late fees. Landlords are required to charge such fees in proportion to damages suffered. Some damages from late rent are hard to prove, and many landlords are unable to charge late fees sufficient enough to deter habitually late payments.
Beginning September 1, 2019, Senate Bill 1414 will increase the flexibility landlords have when they charge late fees. When this bill goes into effect, landlords can charge late fees for direct and indirect costs, expenses, and overhead.
They can also charge late fees in the amount of up to 10% of a tenant’s monthly rent for apartments and 12% for a single-family home. Landlords won’t need to justify late fees in these amounts. A landlord can charge more than the set percentages if he or she can prove the fee is reasonable.
Here’s what that looks like. If a tenant’s rent for an apartment is $1,000 per month, the landlord can charge a total of $100 in late fees (0.10 x $1,000=$100) for each late rent payment. For a $2,000 per month single-family home, the landlord can charge up to $240 in late fees (0.12 x $2,000=$240) for each late rent payment.
Most landlords impose a one-time fee for a late payment up to three days, and charge a smaller daily fee after that. For example, a tenant will be charged a $75 late fee for being up to three days late, and $10 per day after that. However, current law requires those fees to be justified.
When Governor Greg Abbot signed Senate Bill 1414 on June 10, people started to worry. When landlords no longer need to justify the fees they charge, many will be tempted to charge the maximum allowable fee automatically for every infraction. That doesn’t seem fair.
While charging the maximum late fee allowable by state law might seem like an easy way to increase your cash flow, it’s not a good way to maintain trustworthy relationships with your tenants.
Tenants want fair landlords. To be a fair landlord means being reasonable, especially with late fees.
Your tenants should pay on time and be held responsible for the terms of their lease, but exorbitant late fees can destroy them. Instead of using the new law to your advantage, here’s a reasonable way to handle late fees and reduce late rent payments.
While the new law allows you to charge a set percentage in late fees, it also requires that your fees be reasonable. Even when you charge the maximum allowed by law, you can still get sued for charging excessive late fees if those charges are found to be unreasonable.
What’s reasonable is for the courts to decide. Be a reasonable landlord and don’t charge late fees arbitrarily. If late rent doesn’t cause you any problems, charge only enough to deter your tenant from being late again.
If your tenant habitually struggles to pay rent on time, talk with the person and find out why. You’d be surprised what can be resolved through communication.
Your tenant might get paid in cycles that don’t give ready access to funds by the time rent is due. Many tenants live paycheck to paycheck and don’t have the luxury of pulling money out of savings to cover their rent.
You don’t have to collect rent on the first of every month. Try to be willing to change the date rent is due so it works with your tenant’s pay schedule. This can be especially helpful when your tenant is self-employed and needs time to collect payments from his or her clients.
As a courtesy, provide tenants with a grace period before you treat rent as late. Most landlords give tenants up to three days to pay the rent before it’s considered late. For example, when rent is due on the first, it’s not considered late until after the third.
Tenants will have a litany of excuses for paying rent late. Some reasons may be valid, but that doesn’t mean you should let people slide on late fees.
Always apply your late fees when rent is paid late. Tenants will take advantage of you when you don’t hold them to their lease agreement.
When a tenant legitimately can’t pay rent on time and doesn’t have money to pay the late fees, let the person pay it over a period of time. For example, if the tenant owes $100 in late fees, let them pay it in $50 chunks over two pay periods.
Just don’t charge them late fees for being late paying their late fees. That would be considered unreasonable.
Late fees apply when a tenant is late with any portion of the rent. That means you could apply them when a tenant is short just $20.
But it doesn’t seem reasonable to charge a high late fee when a tenant is short a small amount. When a tenant is short a small portion of the rent, it makes sense to give the person a warning that next time he or she will be charged full late fees.
If you provide that warning and they’re late again, however, make sure you follow through and impose the full late fee. Don’t let tenants take advantage of you.
You’ve got better things to do than sit around calculating late fees and chase tenants down for late rent. We can take this burden off your back.
At Green Residential, we know exactly how to collect rent and set up late fees to preserve the landlord-tenant relationship. If dealing with late rent is a chore, we can help; we’re experts in property management.
Contact us today for a free analysis and learn how we can help.
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