Our Kingdom For A Payment Plan

Payment plans are something we hope to never use as rental investors.  Yet the reality is that at some point during your career you will have to create one.  Payments plans aren’t something you create on a case by case basis in under 5 minutes. You want a well-thought out payment plan that is easy for the tenant to execute and offers the necessary protections for you both. 

Set A Protocol

Take a few moments to create a “hardship protocol”.  A hardship protocol is what your terms are for accepting a payment plan. 

Under what circumstances are you willing to accept a payment plan?  This isn’t referring to an amount due (yet). Loss of job? Death in the family? Medical emergency?  What types of events can occur in a tenant’s life that you would be willing to create a payment plan in light of it occurring?

Next what kind of documentation do you want? If you are going through the effort of creating this hardship protocol it only makes sense to require documentation from your tenants in support of the circumstance. 

What’s the smallest amount you are willing to make a payment plan for?  Oddly enough I have had people ask to make a payment plan for $55. On the other side of the scale, what amount is too high for a payment plan?  

Write It Down

Believe it or not, payment plans are still sometimes done orally.  This is just bad protocol. For starters in some states it’s not legally binding if it’s not written.  Even if it is legally binding it only becomes a he said she said battle in court. 

You can create a template that you can fill in the blanks when the time comes. Having a template ensures you don’t miss any of the important details when creating the plan with the tenant.  

Clarify Late Fees

Make sure your payment plan covers what happens to late fees during the course of the payment plan.  Are they continued no matter what and included in the payment plan? Are they waived for every month they keep the payment plan current?  Or are they waived (in full or partial) if all payments are made on time? 

I don’t recommend waiving late fees (unless super extraordinary circumstances) because it will only encourage them to make payment plans.  Waiving late fees in full at the end can be cumbersome for your records and also make it confusing for the tenant. This all comes down to your preference however.

Note: Remember to include late fees you know you are keeping when calculating the amount and length of the payment plan. 

Length/Deadline

Every payment plan should have a set length and thus a deadline attached to it. 

If a tenant is paying you back $700, it’s not enough to say “Extra $100 bucks a month until paid off”.  Why? Because you aren’t telling them when it has to be paid. You are assuming that they will interpret it as 7 months but since it’s not expressed explicitly its an expectation on your part that can’t be upheld.

“Jason R. will pay an extra $100 a month for 7 months beginning July 1 until balance is paid off.” Or you could say “Starting July 1, Jason R. will pay an additional $100 per month through January 1.”   

Payment Frequency/Payment Days

Payment frequency is very important in a strong payment plan.  Notice that above we didn’t just say “Jason R. will pay back the $700 owed by January 1.”  If we had worded it that way, it gives Jason the right to take his sweet time and maybe pay you the $700 on December 31st.  We said every month Jason will pay an extra $100.

But let’s take it a step further.  Let’s make an expected payment date for Jason.  Since Jason’s payment frequency is monthly we’d say “Jason R will make payments of $800 on the 1st of every month starting July 1 and ending with January 1 payment.”

Have someone who wants to pay weekly or bi-weekly?  That’s okay too. It requires a little more math on your part.  “Jason R will pay $25 every Friday until January 1 towards his back rent. His monthly rent of $700 is still due on the 1st of the month.” Bi weekly?  “Jason R. will pay $50 every other Friday towards his back rent until January 1. His monthly rent of $700 is still due on the 1st of the month.” Notice that we included the language regarding the future monthly rent payments still being due on 1st?  That is very important language. 

Consequences

Spell out in your payment plan what the consequence is for missing and WHEN it kicks in.  “If Jason R. misses [1, 2…] back balance payments OR fails to pay another month’s rent in full by the 5th [grace period in all] eviction will be filed.”

From My Experience

One of the best things I did in my business was set clear guidelines for myself and my staff about when I wanted certain back balances paid. For instance, a payment plan for between $X-X must be completed in 6 weeks.  A payment plan for $Y-Y must be completed in 10 weeks. With these parameters I am NOT including late fees in the amount that determines the length of the payment plan. The parameters are only figured based on the back rent.