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*