The brilliance of our Texas Legislature is on display again as a new law, HB 3101 which will go into effect Jan 2008, has been passed that will produce greater late fee income for landlords by ensuring that more renters pay their rent late. Undoubtedly, this is not the outcome hoped for by State Representative Rafael Anchia from Dallas, who boasted in this press release of his “ground-breaking tenant rights bill”, but in fact, the outcome will be more tenants paying more late fees. Of that I am sure.
The bill imposes a mandatory grace period for the payment of rents in Texas such that a landlord may not charge a late fee to a tenant unless the rent is more than two days late. This is in fact supported by the Texas Apartment Association as well as tenant rights groups, so what the heck am I talking about when I say it will result in tenants paying more late fee? Will it not benefit tenants to have a couple of extra days to get the rents paid? No, it won’t.
A grace period causes tenants to pay rent with less diligence than when no grace period exists. In other words, without a grace period, more renters will pay on time on the 1st and avoid late fees. With the grace period, tenants get confused about the actual due date because it’s a fuzzy date instead of the clear, hard line in the sand that the 1st represents. Let me further explain how I came to discover this.
From the time I started managing rental property in Austin in 1991 until late 2002, I wrote all leases with a grace period for rental payments. In the old days, it was a 4 day grace period (due on the 5th). Later I shortened it to a 2 day grace period (due on the 3rd). In other words, the rent was due on the 1st, late on the second but no late fee charged until the 4th. On the 4th, there would be a $40 late charge, plus $10 per day for each day after. I noticed many years ago when I went from the 4 day grace period to the 2 day grace period that the number of late payments decreased somewhat, but I didn’t fully snap to the implication of that back then.
Late fee income to my management company remained fairly constant over the years at between 8% to 12% of gross management fee income. In other words, for every $1,000 per month of management fee income, late fee income from tenants would add an additional $80 to $120 per month. This represented a significant additional annual revenue stream, but also generated a lot of extra work chasing tenants down and collecting late rents. In fact, contrary to what some may think, most good property managers would gladly trade every penny of late fee income in exchange for having 100% of rents collected on the 1st and never having to file an eviction. In other words, that late fee income is worth less than the time and effort required to earn it.
Then in the year 2002 at a NARPM Convention (National Association of Residential Property Managers), I was visiting with another property manager about how we deal with slow paying tenants and he told me that his late payments had decreased significantly ever since he did away altogether with the grace period. He told me that all his leases required payment on the 1st, with late fees starting on the second – no grace period – and that he has way fewer late payments than before.
“That doesn’t make sense” I told him. “I know”, he said. “But we have way fewer problems with late payments ever since we eliminated the grace period”. He explained further his theory that the grace period actually confuses tenants, who, as I already knew, substituted in their minds the “late date” of the 4th for the “due date” of the 1st. In other words, the grace period was mentally erased by tenants, and therefore created no benefit at all since tenants simply thought of the “late fee date” as the actual due date.
We discussed this further, and I decided to make this my new policy.
I started in October 2002 writing all leases and lease renewals with no grace period for late payments. It took a year to cycle every lease renewal into the new policy but, as my friend told me would happen, the result was a huge decline in the number of late payments. My late fee income dropped from 8% to 12% of monthly management fees to 5% to 8% of management fees each month. Gone were the arguments with tenants about how to add 2 days to the 1st, that weekends are in fact real days, that holidays are real days too, etc. It always amazed me that some tenants actually thought the grace period started on the “late fee date” that the grace period created, and would argue about it. Oh how much easier it became to have quick, short late payment discussions once the grace period was gone. This was a win/win for tenants and me.
So, it in fact worked out to be true that, given a strict “rent is due on the 1st, period” requirement to pay rent on time, more tenants did in fact pay rent on time and therefore paid less in late fees.
The new law will now force all landlords and property managers who know of the magic of “no grace period” to start writing a 2 day grace period into all leases and renewals, effective Jan 1, 2008. Tenants who rent from those landlords and property managers will in 2008 pay a higher amount in late fees than they collectively did in 2007. I’m certain of it. And they have our Texas Legislature and their tenant advocates to thank for it.
The bill does have some other important changes in Texas Landlord-Tenant law that I’ll cover in a future blog article summarizing those changes.