Keeping Late Fees Seems To Be S.O.P.

I've been away on vacation for a couple of days, but upon my return, I picked up some messages from the other property management companies I contacted last week. Turns out, keeping the late fees is standard operating procedure at management companies, at least in the Tulsa area. I don't like it, but it appears I don't have much choice.

I'm off on a other little mini vacation to Las Vegas tomorrow, so expect another slow week here on the blog.

I still have not gotten the mortgage release document for the refinance that shows the original mortgage paid off. That was supposed to be mailed a while back, but apparently, the title officer's assistant had a death in the family. Now it's the end of the month, so they are swamped with closings, but hopefully, they will get the document mailed to me soon. Nothing is being held up or anything by this, but it's just another loose end that I want wrapped up. And if I forget and it never gets done, it becomes a title issue when I go to sell or refinance.

I am also still planning to post a full analysis of the profit and ROI numbers for Rental #1 now that the refinance is complete. That'll happen sometime next week.

Looking For A New Management Company

I mentioned a while back that I discovered the late fees in the lease I inherited with Rental #1 were a bit low - $35 if not paid by the 5th of the month and $3 a day thereafter. Turns out, for me, it's even worse than that.

I received my check from the property management company over the weekend and had some questions about it. Mostly, they were issues still left over from their screw-up last month of only charging partial rent to the tenant in May. But in the process of talking about this with the bookkeeper, I discovered that the management company keeps all late fees! Lee tells me this is their compensation for having to hound the tenants about paying on time.

I checked my management agreement with the company and this is all it says about late fees:

Special Charges. If permitted by applicable law, Broker may collect and retain from tenants any or all of the following: an administrative charge for late payment of rent, a charge for returned or non-negotiable checks, a credit report fee, and administrative charge and Broker’s commission for sub-leasing. Broker need not account to Owner for such charges or Broker's commission for sub-leasing.

To me, this means the management company may charge the tenant an additional fee on top of the late fees the lease imposes. This does not, in my reading, mean the management company may keep all the late fees the lease charges.

I immediately called my property manager and asked her about this. She said yes, they keep the late fees. I told her the agreement didn't seem to say that. She was out of the office and said she would look it up and call me back when she got back to the office.

I think this is crap. First, this presents a clear conflict of interest for the management company. They make more money if they allow the tenant to pay late. If they evict them, they make even more money when they put a new tenant in place. Second, this leaves them open to the whims of the investor for their income. For example, I think I may decide that my properties will attract more potential tenants if I decide to not charge any late fees for late rents. What difference does it make to me, since I don't get any money of the tenant pays late anyway?

I've contacted three other management companies and am gathering information on their services and charges.

Property Management Company Might Be Turning Around

I decided to give my property management company a call and ask why I have still not received any more money from the May rent and late fees that were collected. I was able to speak to Lee, the bookkeeper. This is a good sign for two reasons: First, he's the bookkeeper, so he is going to be able to tell me what is going on directly, rather than me having to go through my property manager, who relays my request to him, then relays his response back to me. Second, and more important, I believe Lee is a new hire to the company. I had heard that the old bookkeeper left and for a while, one of the owners was handling the books and this was what was causing the problems.

Anyway, Lee tells me my tenant is current except for some late fees. I ask for his payments and was told he paid $550 in May, plus another $100, then he paid $750 for June. Well, that means he still owes $100 for May. Lee says the May rent was pro-rated because he was a new tenant. Excuse me?! No sir! He has been there since I bought the property! In fact, he paid full rent for March to me directly. When I moved the property to them for managing, he also paid full rent for April, which Lee confirmed he saw. So Lee is going to check the lease and see what is up. If you recall, back when I first bought the place, I discovered the people who were paying were not on the lease, so I had them sign an addendum adding their names to the lease. Unfortunately, the addendum did not have a date on it when it was signed - an unfortunate oversight. However, I told Lee that since I faxed the addendum to him, it should have a timestamp on it from the fax machine. He's going to research this and get back to me.

So, the current status is the tenant has paid for June and still owes $100 plus about 3 weeks of late fees for May. The good news is that Lee said my check for June did just get mailed, so I shouldn't have to wait forever to get paid this month.

Update: Lee called back within about 10 minutes and confirmed that he received my fax on March 23rd, so the tenant definitely should have paid full rent for May. Lee said with all the late fees, he now owes a total of $230 and a bill will be going out to him today. My calculations confirm that figure is correct. Wow.. I'm dealing with someone who appears to be competent! I love it!

Another Prosper Loan Defaulted

Another one of my Prosper loans has now defaulted and been sold to a collection agency. The loan was for $100 at 23.75% interest. A total of five payments were made. I received $12.55 in principal, $10.87 in interest, $0.39 in late fees, and $2.56 from the proceeds of the sale to the collection agency. In addition to the standard Prosper service fees, I was charged and additional $0.33 service fee on the default and a $0.21 collection fee. My net loss is $74.17. Again, this borrower was classified as High Risk and I knew there was a good chance of this one defaulting when I made the loan.

I wrote off the amount of my first defaulted loan on my 2006 income tax return. Looks like I'll have one more to write off on this year's return.

I now have two Prosper loans left, both of which are still performing. One is rated A, the other is rated D. (The ratings are A, B, C, D, E, HR, and NC. HR is High Risk and NC is No Credit score.) The A rated one is at 8.85% and the D rated one is at 15%.

At this point, I am really just waiting for all my loans to be over one way or the other so I can leave Prosper for good. I've already written about why I am leaving Prosper and now that I am down to two loans, I am getting anxious to leave. My total monthly income from these two loans is under $7. You can't transfer money out of Prosper's system until you have at least $25 in your account, so that means I have to wait four months until I can get each little chunk of money back. The loans are scheduled to be paid off in March, 2009. *sigh*

Property Management Blues Part 2

When I returned from Laughlin, I was excited to stop by my post office box. Since it was June 1, I should have a check for May's rent waiting for me. Imagine my surprise when I discovered it was not there.

I was furious. I had been told the tenant paid some rent on the 14th and a bit more on the 21st. That left him still owing $100 plus a bunch of late fees. Even if he hadn't paid in full, some of that money should have made it's way to me by now! Looking at the calendar, there were three full weeks between his first payment and the day I checked the mailbox. There was no excuse for this.

When I got home, I forced myself to wait a couple hours to cool down before composing a fax. Here is what I faxed last Saturday:

Dear PM's name,

I last spoke with you on the phone on Tuesday, May 29^th. I asked for an update on the rent situation with my rental at property address. At that time, your computer showed a discrepancy between two different screens with one screen showing the tenant still owed money and another showing he was paid up. You said you would investigate and get back to me before the end of that day with either a phone call or an email. You did neither.

Additionally, I still have not received any rent for May. You told me in a phone call on May 17^th, that the tenant paid $550 of the rent on May 14^th. In a phone call on May 23^rd, you told me you had received another $100 of the rent, bringing the total to $650. As of today, June 1, 2007, I have not received any of that money from management company. It is bad enough when my tenants don’t pay rent on time. I do not need a property management company that also cannot manage to pay on time.

I’ve been using your company for two months now. Let me recap the service I have received in that time:

· The first month’s rent you collected was mailed out in April 10 days late and I did not receive it until the 24^th of the month. I was told this was because your accounting department was running behind. You said it was “only” 10 days late. As I am sure you are aware, if a tenant was 10 days late, I could start the eviction process. Why should I hold management company to a different standard?

· Management company has collected at least $650 of rent for May and has not forwarded it on to me. Perhaps even more has been collected, including all the late fees the tenant owes. I don’t know and apparently, neither do you.

· You’ve told me you would investigate these problems and get back to me and you never have.

As I am sure you can see, this is truly horrible service. I would like a written explanation of where the breakdown in your procedures has occurred and what steps are being taken to ensure these problems don’t happen again next month. You can fax this to me at my fax number listed on the first page. Unless I see some improvement in service, I see no reason to continue using management company to manage my rental property. I also want you to send the rent you have collected so far to me by the close of business on Monday.

Thank you,

Shaun

So what was the response to this fax? Not the requested written response, but a phone call, which I purposely let go to voice mail. And what message was left? All the manager said was "Your check was mailed on the 25th." That's all. No mention of if the tenant finally paid all his rent and late fees, no mention of anything else in my fax. That's pretty crappy, if you ask me.

This morning, the rent check was in my mailbox, but there are still issues. First, although the check was printed on the 25th, the postmark shows it was not actually mailed until almost a week later - on the 30th. Second, the check only was for the first $550 collected. Where's the rest of the money?

From my dealing with the company so far, it is obvious they only print checks once a week on Friday. However, I can think of no explanation for why it takes so long for the checks to be mailed after they have been printed. Nor can I explain the two week delay between them receiving the rent from the tenant and sending it out to me. Perhaps they want to make sure the tenant's check clears. However, my tenant paid me with a money order, so I would expect they would continue paying that way.

I am starting to investigate other management companies.

Wrapping Up The Loose Ends (Updated)

While driving this morning, a thought occurred to me: I don't think the refi of Rental #1 officially released the lien on the property held by my private money lender. Although the loan was paid off through the refinance, I also need to publically record a document from my company that lent me the money that states the mortgage obligation has been fulfilled. I wasn't sure that document was included in all the papers we signed the other day. Truthfully, the papers were signed in such a rush on our way out of town for the weekend, I didn't even look closely at what I was signing. I do have copies of everything, but I didn't want to wait until I got home to check, so I emailed my escrow agent. Sure enough, we did forget to include a mortgage release, so she will be sending me one today and we'll get that filed.

From a public records standpoint, the only remaining open issue on Rental #1 is the conclusion of the quiet title suit. I was originally told that would take 60 to 90 days, but later was told it could take as long as 6 months. We're around the 3 month mark now, so I'll wait a bit before asking the escrow officer for an update on that process.

Actually, there is one more issue. When I got the loan for the refi, I had to change the title of the property from being in the name of my LLC to being in the name of my wife and I personally because that was what the lender required. Once the lender's mortgage was recorded, the plan was to move the title back into the name of the LLC. I'm pretty sure I saw the paperwork for this because I was on the lookout for it but, as I said, the signing was done in a rush, so I need to go back and verify it actually was one of the papers I signed. And just to be absolutely sure everything was done correctly, when I get the recorded docs back from the county recorder, I need to make sure that quit claim deed transferring title back to the LLC was the last thing recorded.

I also finally got my $500 earnest money deposit back from the canceled purchase of Rental #2. It turns out, my mortgage broker already had the appraisal of that property done before the sale was canceled, so I am out the $350 I paid for that. Oh well.

Update: My title agency has just informed me that the attorney was able to contact the correct people to clear up the old title issues on Rental #1 and a quiet title suit is no longer necessary!

Refi Done!

While I was out of town in Laughlin, I got a call from my title agency informing me that the refinance of Rental 1 was completed. So my hard money loan (from myself) is paid off and I am now truly using OPM on this investment. My first payment is due July 1 and once I get that statement, I'll post actual numbers for this property.