In this first of a nine-part series on “Mobile Home Park Perfectionism” we’re going to review how collections would work in a perfect world. We’re going to discuss the theories and policies that provide perfect receipt of all rent by the due date – or at least before you have to file eviction. Since we all strive to be the best at what we do, “perfectionism” is not a bad goal, and thanks to past experience and experimentation, it’s also not impossible to attain.
Episode 76: Perfect Collections Transcript
Perfection is defined as the condition, state, or quality of being free or as free as possible from all flaws or defects. In this, the first of our nine part series, on Mobile Home Park perfectionism, we're going to talk about how to try and have perfect collections in a Mobile Home Park. There are basically two goal in collections with a Mobile Home Park. The first is to train our residents that the rent must be paid on the due date. The second is to not let anyone live in the community who has not paid their rent. We call this system No Pay/No Stay. It's very simple. If you want to live on the property, if you want to enjoy the amenities, the great location, everything it has to offer, you simply have to pay your rent every month. There is no payment plans. There's no way you can live a month and then pay twice the rent the following month.
That kind of system is not fair. It does not work. It does not give you good paying residents. They're an essential and integral part of the community. So what are the action steps to attain perfect collections? The first is to educate all residents of exactly when the rent is due and where to pay it. So, in most of our communities the rent is due on the first, and it's either paid in one of two ways. It's either given to the manager, either by hand or in a drop box at the office, or it's mailed into a predesignated PO box. To also help the residents attain this, we send invoices promptly and accurately each month typically in the 15th of the month prior to remind people exactly what is due, when it is due, and where to deliver the rent.
The third item is you send demand notices always on the sixth of the month without fail. The rent is typically due on the first and late after the fifth. That means on the sixth if you do not have the rent you need to notify them that you do not have it and that if they don't pay you you'll start the evictions process. This is called a demand letter. Every judge seems to have his own take on what exactly it resembles and when it goes out. It's typically normally falls under state law that you should always check with the judge that handles the evictions to find out you do it exactly as they want. That should always go out as soon as legally possible. Then, anyone who does not pay by the fifth you also charge them a late fee, so they have a financial punishment for not paying you when the money is due. That helps to urge them every month to pay you when the rent is due.
Next, you file evictions on the first date after the end of the demand letter. If the demand letter says you have 10 days to pay as it does in some states and you mailed it out on the sixth, that means the 10th day would be the 16th, and on the 17th you could then file the eviction in court. Finally, you're going to go to court. When you go to court you almost always win, because A, person didn't pay the rent and has no proof that they did, and B, they normally don't show up in court. It's one of the strange things about Mobile Home Park evictions is residents probably only show up in maybe 10 to as much as 20% of all cases. Now, once you've won in court what happens? Well, the court will tell you exactly what happens. Normally, there's a period where the person can appeal the eviction. It's not common, seldom success, but nevertheless the right is theirs.
Now, to appeal an eviction in most courts you have to post a bond, which is the same as the rent that is owed. If they had that money, they would have obviously paid you, so I don't think I've ever seen over 20 years anyone ever appeal an eviction. As soon as the appeal process ends, on that date you can now file for what's called a right of possession. So, you then file for the right of possession and the constable goes out and notifies the resident within so many hours he will return to supervise the removal of all that person's belongings, which is a process most people do not obviously want to be involved in.
So often when you file for the right of possession, this final, final action, what'll happen is when the resident gets notified they're about to be thrown out of the home, they will then call and make arrangements to pay. Bear in mind that throughout the process any time a resident wants to pay you they must pay all the costs of your actions to that date. The rent is due on the first and a grace period through the fifth. That's simply the rental amount. Starting on the sixth though, now they have a late fee based on whatever the state allows. If you then have to file your eviction you have the filing cost. If you have to go to eviction you have the legal cost, and you may also have the legal cost of filing.
Then, if you had to file for the right of possession then that's another cost, and if you have to hire a mover to go out there to help move the things out with a cost, well you have another cost. All these costs that the resident has incurred by their failure to pay on time they must also pay all those costs to call the whole thing off. So, if they want to go ahead and pay you off in full after the eviction they'll have to pay late fee, filing cost, legal cost, whatever other cost you had to go to court. If they want to get out of it after you've already filed for the right of possession they'll have to pay, again, all of those fees plus the right of possession fees.
As you can see, it can get very, very costly. The average lot rent in the U.S. is about $280 a month. If you add on all those costs you could be at double or triple that amount. Obviously, it's definitely the resident's best interest to pay you on time. Here are some other things to talk about as we all strive for perfect collections. First, don't think that you will be the first to make payment plans work. I tried it, Dave's tried it, other operators have tried it, and we all had the same conclusion. It simply is an ineffective and improper way to run your property. What happens is the resident, if you give them the payment plan, they then promise to pay you, for example, this month's rent next month, which means they're going to pay two months of rent at one time. Well, they don't have the money to do that. It's clearly not going to work.
By you forgiving them and letting them do that next month, what will happen is the next month you'll need another payment plan to roll part of those two months into the next month. It just doesn't work for anyone involved, so payment plans are a bad idea. In fact, I will tell you from experience if you want to have your tenant get in real trouble, give them a payment plan. It's almost a certain way that they will lose their home. If they had to pay you rent each month they'll try and find a way to do it. They might even borrow money from friends and family, but if you let them build up the big balances that typically payment plans entail, then they are lost and they'll never be able to get caught up.
Another thing worthy of consideration is cash for keys. How does cash for keys work? Well, cash for keys is an interesting concept. What you do is you go to the resident and say, "Okay, you can't pay your rent, so I have a plan. If you can be out by Monday, for example, I will give you $300 in cash in exchange for the keys. All you have to do is pack up your stuff, clean up the home, don't do any further damage to the home, come to the office, hand me the keys, and I will hand you $300." Why is cash for keys effective? Well for several reasons.
One, it typically makes the resident not damage the home quite so much. Sometimes a resident in anger may break windows, break mirrors. Who knows what they might do? Number two, it speeds up the process, and it actually saves you money. Let's just model this for a minute. Let's assume I had a park owned home that I'm renting out for $800 a month. The resident hasn't paid me. Now, if I file the eviction, I will start incurring costs of my own. The eviction costs, perhaps legal fees. Let's say that's $500. The resident still isn't going to pay. They don't have to get the right of possession. That's, let's say, another $200. Now I've got $700 in legal costs, but the resident isn't going to pay me anything, so I've lost $700 out of my pocket.
Meanwhile, I have the opportunity cost, because I'll lose $800 a month for this month's rent and by the time I get all those things done, maybe next month's rent too. So now I'm at $1600 in rent, and I'm out another $700, so I'm out $2300 so far. That doesn't even include what extra damages they'll do. If I can swap that money for nothing more than a few hundred dollars in cash, I am definitely smart to do that. I'll also tell you it often eases the situation for everyone if you simply do cash for keys, because that is going to then give the resident at least a lifeline to move out of the property and get back on their feet. So cash for keys is great if you can pull it off.
However, it doesn't always work. Some residents, they know that the longer they sit there the more they'll save, because your $300 isn't going to get them very far. If they do and use that in a hotel it's going to get them, what, three days, six days? They'll figure they can camp out in your property for maybe a month or more without any serious issues. So, cash for keys kind of works both ways, but if you can do it, it's great. Next thing to think about is you can never, ever forgive late fees, because if the late fee is truly warranted and you forgive that, you will start training people not to pay their rent on time.
This is where most of your mom and pops get in trouble in our industry is they have trained people that it's not important that they pay each month, and when you do that, what happens? You simply don't get paid. If you ever go into most mobile home residents' homes, you'll see a vast quantity of bills spread across kitchen table or counters, and those bills are like a stock exchange. They're sorting them constantly based on how much money they have to spend. You'll notice at the top left corner that's the bills that have to be paid. If there's car payments, things where they don't pay it terrible things will befall them like losing their car. Then, the bottom right of the stack, those are things that they don't care if you ever do anything or not, magazine subscriptions, maybe even some Rent-A-Center items they decided they don't want anymore.
The people in the bottom right, they never get paid. The people on top left always get paid. If you have a late fee, you'll be in the top left, because you're their housing. You're their shelter. Top of that, they don't want to pay the big late fee. If you do not charge the late fee or you start forgiving late fees, guess where you end up, you're going to be right down there on the bottom right corner never getting paid. And don't forget that for most of our residents it's not an economic issue of they don't pay you. With an average lot rent in America of $280 a month and a minimum wage of $7.25 an hour, and probably going up in the future, that means that our rent actually still falls under complete affordability even at minimum wage, so it's not a money issue. It's a priority issue.
People don't want to pay rent. Why would they? There's way more fun things you can do with your money than pay rent, but if you don't force them to pay, if you don't charge them a late fee, and if you don't get the whole process of eviction, you're going to train them that rent is optional. Why pay rent when you have all those other bills to pay, many things that you enjoy much, much more? One final item on perfect evictions and the goal of having perfect collections is try and find ways not to spend so much on legal fees. Not to offend lawyers ... my brother's even a lawyer, but the problem is lawyers are not always exactly in tandem with your goals, because when they're charging you the fee, you're the person who has to pay it. That goes against your net income and the net income for the park.
Often, you will find that in many courts you don't have to use lawyers on as many steps as you thought. For example, you can typically file the eviction without being a lawyer, and you can file that from afar. That starts the whole process. We have found that many, many of our customers are going to pay the rent if they get served by the constable and you can get them served if you simply mail in the action, the filing of the eviction, with the appropriate fee. So why have an attorney take that step unless they have to? Also, see if it's possible for you to represent yourself or your manager to represent you in those cases. If you plan on going out and visiting your property every so often, and you don't have that many evictions, you may take the opportunity when evictions fall to use that as your trigger to go visit the property, and you'll pay for the whole trip in the legal cost that you save.
Many judges will allow the owner of the property to represent themselves. However, many will not. But just be smart with your evictions filings. Some park owners will in fact file the evictions themselves from afar, because you can do it from your home. Then, they won't have an attorney show up in court, and in some courts if the Mobile Home Park resident doesn't show up, then the park wins by default. At least simply have the manager show up and say, "Here." You never even have to approach the bench. You don't even have to be an attorney, so just check, all the angles and find out that there's not lesser expensive ways that you can utilize to file those evictions to save you money and improve your net income.
That's how you get perfect collections. It's not a complicated process. It's relatively simple. What's predicated on success is you sticking and adhering to those principles over and over every month. Follow those key days. File those items on time. You are the entire time training the residents to pay the rent. The minute you stop, they lose that training. They stop paying, and you have no way to ever attain perfection in collections. Hope you enjoyed this, the first in our nine part series on Mobile Home Park perfectionism. Up to bat next we'll be talking about how to achieve perfect occupancy.
This is Frank Rolfe for the Mobile Home Park Mastery Podcast series. Talk to you again soon.