Recover rent amid the COVID-19 crisis

As individuals, families and businesses continue to experience the agonies of the COVID-19 crisis, many residential real estate investors are wondering what their next step should be following the relaxation of restrictions and the start of a long journey back to normal. Eviction moratoria were put in place across the country to protect renters who couldn’t pay their rent after millions lost their jobs. The immediate consequence of this was that landlords had no legal recourse to deal with tenants who had not paid rent.

With units that were unable to fill while unpaid rent accumulated, it’s not hard to see how this can put a business at serious risk of insolvency. But with many of these eviction moratoria set to expire this summer (in fact, some have already), residential property owners should carefully consider their steps in the eviction and collection processes to avoid legal liability and maintain a strong ethical stance in these processes deeply disturbing times.

Ending the eviction moratorium

The web of eviction moratoriums instituted across the country can be confusing, as restrictions at various levels of government expire at different times. At the federal level, the CARES Act evictions prohibited until July 25 on all properties with mortgages backed by federal government agencies. furthermore, the Federal Housing Finance Administration (FHFA) announced June 17 that Fannie Mae and Freddie Mac will extend their moratorium on evictions and foreclosures on single-family properties through August 31. Urban InstituteThis affects approximately 28% of rental properties in the United States.

In Chicago, Governor JB Pritzker ordered an eviction moratorium while the Governmental Disaster Proclamation is in effect, which has now been extended through the end of June. Some in the legislature have supported a bill to cancel rent and mortgage payments in the state for 180 days, so don’t be surprised if your influence leads to a de facto extension of the moratorium. The city of Chicago has a rent relief program that existed before the pandemic, but the city has become overloaded with apps. He too Chicago Housing Solidarity Pledge seeks to act as a stopgap measure for both renters and homeowners who are struggling to pay property costs as a result of COVID-19. The crisis has also had long-term legislative consequences for homeowners in Chicago. The Chicago City Council recently approved the COVID-19 Eviction Protection Ordinance, which requires landlords to make “good faith efforts” to resolve problems with tenants prior to eviction, which lengthens the eviction process.

Making sure your tenants are aware of the relief options available to them should be critical to your role as a landlord, especially options related to rent relief. Not only will it increase the likelihood that they will be able to pay their rent and stay in your unit, but it will also show them that you are on their side, thereby strengthening the landlord-tenant relationship. If your tenant’s circumstances improve significantly, meaning he gets his job back and shows a willingness to pay in full, it’s up to both parties to find a payment plan. However, if that is not a path your tenants are interested in pursuing, it may be necessary to contact a landlord-tenant attorney to begin seeking eviction.

Collection of remaining balances

If your options have been exhausted and you sought and executed an eviction once it was possible, there remains the question of how you or your client will collect the remaining balance. It can be tempting to simply cut your losses, but it’s often not a small sum we’re talking about; the months in which the eviction moratorium has been in effect can cause the delinquency account to amount to several months of unpaid rent. This is likely to represent a significant dent in the owner’s cash flows and, amid the other financial problems the coronavirus crisis presents for residential real estate investors, it’s one they can’t afford to give up. One of the problems investors face is slower rental price growth, and this is especially evident here, as year-over-year rental growth in chicago it fell from 2.5% in March to 1.6% in April.

There are several alternatives to consider for collecting the balance after eviction. The most sought after option is probably the collection agency, due in large part to the fact that it is a quick process that requires little work on the part of the property owner. However, it is highly inefficient in terms of the return landlords get, a reality that is largely due to the highly inefficient process used by collection agencies. Without legal action, collection agencies have rather weak tools to induce payment from a delinquent individual. They often call and ask for payment, but considering the landlord has probably done this multiple times, it’s likely to be unsuccessful. They can put the debt on the debtor’s credit report, but if other accounts are already delinquent before the rent, landlords will be waiting in a long line of creditors to collect.

Considering the economic damage of the crisis, a better tactic may be to give the debtor some time to recover and avoid the hassle of going to court. Collection law firms have significantly more effective tools that can ensure that you and your clients do not lose money owed. From the first call from an attorney, the debtor will understand that you are serious about recovering money, so they may be more inclined to accept a forbearance plan. This is because any communication from an attorney or law firm will identify the practice on their letterhead and signature, as well as the membership of the bar, and typically the states where they have offices or memberships. Obviously, there is a level of skill, training, and professionalism that comes with these communications.

In contrast, there is no formal education or requirements to be a “collector”. Some will have basic training on compliance with federal or state laws, but again, that’s not required. Since there are no uniform qualifications for the position, the communication may not be formal, and the arrangements may be more flexible in construction than a binding contract or promissory note, without being able to reduce the debtor’s future obligations to legal terms.

An attorney will offer you the opportunity to enter into a formal settlement agreement, either in the form of a payment plan or an offer in compromise (a discounted settlement against the principal). Typically, a promissory note or contract will be drawn up, and executed copies served on the defendant (and potentially filed with the court, if litigation is ongoing).

The collection attorney can negotiate this plan with the owner’s permission and, again, it would benefit both parties. Executing a leniency agreement allows you or your landlord clients the ability to avoid garnishment of an agency contingency fee. Some law firms may offer flat fee services involving lawsuits that require the debtor to contact and work directly with the creditor. Depending on the nature of what is offered, the lender may feel comfortable continuing the rental relationship. For example, a tenant who is $1,000 behind on rent and renting at a rate of $600 per month could simply pay that $1,000 in $200 installments over the next five months to recover and continue renting the unit. However, if the former tenant is not interested in working with you or your clients, the attorney can file a lawsuit on your behalf. From there, the company obtains a sentence in court and proceeds to collect by seizing wages, bank accounts and tax returns; car seizure; put a lien on the property; and forcing a debtor to appear in court to serve a judgment.

There are no easy decisions in a crisis, from the individual level to large companies and government agencies. More than ever, you need to take into account the difficult situations your tenants are going through, but at the same time ensure that your clients and your real estate business avoid financial calamities, a balance that is difficult to achieve. The biggest mistake you could make would be to ignore these important considerations as a means of speeding up your decision making.

Ryan J. Fishman is the managing partner of Fishman Group, PC. The firm represents owners and operators of commercial and residential properties in the United States.

Previous Auto repossessions are on the rise after closing. Here's how to avoid having your car repossessed.
Next Why does Hollywood keep handing out romance franchises to male directors?