ASK THE LAWYER
MARK TSCHETTER | TSCHETTER HAMRICK SULZER
Common Questions about
Collecting Rental Debt
WHAT IS MORE IMPORTANT THE
COLLECTION PERCENTAGE, OR
THE LIQUIDATION RATE?
WHAT IS THE MOST IMPORTANT
ISSUE ABOUT A COLLECTION
AGREEMENT?
The term of the agreement. Everyone in this
business knows you’re only as good as last month’s
performance. For this reason all vendor contracts
can be cancelled, without cause, upon thirty days
notice. Most collection agency agreements contain
this provision. Yet, many collection agreements
contain other provisions, which nullify your right
to cancel on thirty days notice. Specifically, collection agency agreements contain buy back or
cancellation fee provisions.
For example, over the last ten years you have
placed $20M in debt with a collection agency. The
collection agency is not performing, so you give
them thirty days notice of cancellation, and you
request return of your debt (the collection files
placed). The collection agency then informs you
that you must pay them a 10% cancellation fee, or
$2,000,000 to get back your own debt. The debt
is yours. Never sign a collection agreement that
requires you to pay for the return of your property
if the agency is not performing.
WHAT IS A COLLECTION RATE,
OR COLLECTION PERCENTAGE?
Almost, without exception, all rental debt
is collected on a contingency percentage, also
known as a collection rate, or collection percentage. You pay nothing if no money is collected.
If an agency is successful in collecting money, the agency’s fee is a percentage of the amount
collected. If a collection agency rate is 40% and
they collect $100, you get $60 and the agency
gets $40.
www.aamdhq.org
WHAT ARE COMMON
COLLECTION AGENCY RATES?
Rates vary significantly. Rates range from 20%
to 60%. However, collection rates are like anything
else in life. You get what you pay for. Most established national agencies have collection rates that
are 40 % or higher. If a collection agency has two
piles of debt, one that they get paid 20% on, and
one where they get paid 40% or 50%, which pile
of debt do you think will get the most effort? Low
introductory rates often are misleading because
you never get the benefit of the low rate. For example, some agencies offer a low rate up front (20%
for money collected in the first 30 days) and then
go to 40% or higher. Because collection agencies
are legally required to give debtors thirty (30) days
to dispute a debt, typically not much money is
collected in the first month.
WHAT DOES LIQUIDATION RATE
MEAN?
The liquidation rate is a percentage determined
by dividing the total amount collected by the total
amount placed for collection. If you place $100,000
for collection, and $15,000 is collected, the liquidation rate is 15%. Liquidation rates vary significantly among collection agencies, and are driven
by many factors, including resident demographics.
Liquidation rates for rental debt of 5% or less are
below average, 5% to 10% are average, and 10% to
15% percent are above average. Liquidation rates
for rental debt above 20% are outstanding. You’ll
never know your true liquidation rate if you’re not
getting enough information from your agency to
accurately determine liquidation rates, and if you
don’t take the time to really drill into and evaluate
the information.
Most people think that the collection percentage is the most important factor in collections, and
believe they have received a great deal when they
get a collection agency to agree to 20% or 30%.
However, it’s the liquidation rate that is the most
significant factor in determining how much money you receive. Assume $100,000 is placed for
collection. If your collection rate is 20%, but an
agency only collects 5%, then you receive $4000
(80% of $5,000). If your collection rate is 50%
(2.5x higher than the 20% rate), but 15% is collected, you receive $7500 (50% of $15,000), or
87.5% more money in your pocket even though
the collection rate was 30% higher.
DOES CREDIT REPORTING
SIGNIFICANTLY INCREASE
COLLECTIONS?
Credit reporting does benefit collections, but
its overall impact is not well documented. Credit
reporting’s impact on collections is more anecdotal (somebody wanted to buy a house so we got
paid), and probably grossly overestimated. Most
collection agencies report to the credit bureaus. If
credit reporting magically collected money, collection agencies reporting 100% of the debt referred
to them would be liquidating at phenomenal rates.
However, ACA International, the leading trade
association representing credit and collections professionals, reported in 2008 that just 18% of all
money referred to collection agencies is eventually recovered.
Based on our experience with clients, collection
agencies often liquidate rental debt at substantially lower percentages. Credit reporting is just
one tool to collect money; it should be done carefully, and at the right time to avoid significant
potential legal liability, and only after other significant efforts to collect have been made.
Credit reporting should never be used as a
substitute for continuous work effort. Hard and
consistent work effort, focused by constant analysis of debt to deploy multiple treatments of debt,
including legal treatment, always outperforms frontend credit reporting collection models.
Mark Tschetter is a partner of Tschetter Hamrick Sulzer, P.C.
who acts as Colorado Council to the NAA. He routinely
teaches classes to multifamily housing professionals. His specific area of interest an expertise is Fair Housing Laws and
speaks to professional organizations on landlord/tenant and
legislative issues.
AUGUST 2014 • TRENDS | 37