For many managers and landlords, they think that accepting rent through direct bank deposit at the bank is the easiest way to collect rent each month.
Little do they know the hidden dangers of giving their bank account info to a tenant, and telling them to “Go to my bank and make a deposit.”
Most experienced managers avoid giving out their bank account information by using a property management tool like Cozy. But if you are not open to the idea of online rent payments, then you could work out an arrangement with your tenant(s) and the bank and still have the money show up in your bank account – that is, until it doesn’t.
If not structured properly, direct deposits can be huge mistake.
But Direct Bank Deposits Are So Easy…
Direct deposits are easy, but it’s foolish to give out your bank account information. If you don’t take precautions, it will certainly come back to bite you.
You wouldn’t give out your bank account and routing number to a complete stranger; yet, many landlords do this with new, and possibly unscreened, tenants.
The common excuse is, “But your account info is on the bottom of every check you write!” Yes, that’s true. But as a property manager, you rarely write a check to a tenant.
If you don’t use a third-party service, like Cozy, which hides your account number from a tenant, you could open yourself up to all kinds of issues.
The biggest issue is that you can’t stop them from depositing money. You’ve lost control.
Why Is This a problem?
By giving a tenant your account information, they could stop an eviction by depositing as little as $1 – thereby forcing you to start the eviction process over!
A tenant could thwart an eviction by depositing as little as $1.
If you have started the eviction process, your tenant could use your account number to deposit a partial payment to your bank account.
Accepting any amount during the eviction process could void your eviction thereby requiring you to start over! The deposit could be for any amount, even $1, for this to happen.
Tools like Cozy prevent this from happening because your bank account info is always hidden from the tenant. Best of all, you can prevent payments on leases when you are trying to evict tenants.
How This “Deposit Scheme” Works
If your tenant fails to pay the rent, you can evict them – but there’s a formal procedure you must follow.
States differ in the exact procedure, but they all require that you give your tenant a notice of the delinquency.
1. Tenant Intentionally Falls Behind on Rent
If your tenant is late with rent and you want them out, you typically issue a “pay rent or quit” notice, which gives the tenant between three and five days to pay the rent, depending on your jurisdiction.
2. Tenant Fail to Pay or Leave
If your tenant pays the rent within the pay-or-quit time frame, they get to stay. But tenants who are trying to put one over on you might refuse to vacate or make a payment. Then, you must file an unlawful detainer action (aka, an eviction case) with your local courts.
3. Tenant Waits and Then Deposits a Small Amount
The tenant then waits until he/she has been summoned, and then makes a small payment into your bank account.
After all, you gave the tenant the means to do so.
If you accept cash, checks, or money orders, you can simply refuse to accept the partial payment. But you don’t have that option if the tenant, like an aunt who slips unwanted money into your pocket, direct deposits the money into your account because they have all your bank information.
4. Your Eviction Is Cancelled, and You Must Start Over
By depositing money into your account, you’ve essentially accepted partial payment, and it usually will void the eviction proceedings. You have no choice but to send another “pay rent or quit” notice, and start the process over!
5. The Tenant Lives Rent-free For Another 2+ Months
The tenant then pretends like they didn’t know any better, but still won’t pay any significant amount. You must send the notice all over again, and re-file the eviction action with the courts.
Meanwhile, the tenant is living for free for multiple months, and you are forced to change your bank account number just so the tenant can’t “do it again.”
What You Should Do If It’s “Too Late”
If you’ve already made the mistake of giving your bank account and routing number to your tenant, here are some steps you can take if you think a tenant might be gaming you.
Remember, it’s always wise to talk to an attorney when you have a question about legality.
1. Check Your Bank Account Regularly for Any Deposits
Some banks are good about notifying you when a direct deposit has been made, but not all of them are. You can check your account daily, but that’s not ideal or convenient.
2. Notify Your Tenant of Their Noncompliance
If you’ve given a “notice to pay or quit,” and you receive the full rent amount, then the tenant gets to stay … until this happens again.
But if you received a partial payment, “Contact the tenant as soon as possible to let them know that [you] are not accepting the payment,” says Sydney Williams of Alabama Rental Managers.
As soon as you find out, send a letter to your tenant telling them that you reject the partial payment. Send this letter with tracking, and refund the money.
Open two-way communication is the key. Assume the worst, but verify.
Note: You might want to wait until the three-to-five-day period is over to send the letter with the money back in case your tenant pays the entire rent in two or more partial payments within the specified time.
3. Add a Clause to Your Lease
In order to protect you, add a clause that states something to this effect:
The direct deposit method of paying rent is for tenants in good standing. A lease termination or eviction filed renders the tenant no longer in good standing, and any monies paid through direct deposit will not be accepted and will be a violation of the lease.
4. Place a “Note” on Your Bank Account
This advice comes from Danielle Watson of DealPoint Merrill, a Las Vegas property management firm. “The issue is that we cannot stop their end of the transaction credit but rather only put a ‘return to sender’ note on our bank account,” she says.
Check with your bank to see if it offers this option and how it works. Even at its best, it’s not ideal or guaranteed.
The Bottom Line
“While the ease of use in direct deposit is great, it can be problematic for the eviction process and leave the landlord doing extra work with the banks and their accounting,” says Danielle Watson.
However, if you really love allowing your tenants with uncontrolled access to your bank account, by all means, have at it. There are certainly ways to beat the partial payment scheme.
The easiest way is to switch to online rent collection, which provides for an automatic direct deposit, without all the trips to the bank. Switch to Cozy for rent collection, and give it a try. Your tenants will thank you.
Best of all, if you have to terminate a lease, or start an eviction, Cozy allows you to accept partial payments, but it also lets you “stop all payments” with the click of a button.