Down With Self-Storage Delinquency! Practical Strategies to Minimize Bad Debt and Manage Collections

Every industry has persistent challenges that can never be fully eliminated. In self-storage, one of these is delinquent rent. Every operator faces the task of preventing late or missing payments and efficiently managing collections when necessary. Establishing a robust procedure for this and being aware of legal ramifications are crucial aspects to the process. Let’s explore some practical strategies you can implement to control delinquency at your facilities and actionable advice to help you collect past-due rent more effectively.

Reasons for Late Payments

First, let’s examine the most common reasons self-storage tenants fail to pay their rent on time, so we can begin to formulate processes to prevent or minimize these occurrences.

With these delinquency causes in mind, we can now piece together collection processes to keep the rent coming in on time.

Preventive and Protective Measures

The best place to begin when working to control self-storage delinquency is to make it easy for tenants to remember when rent is due and pay you. Enrolling them in an autopay program is the most surefire way to accomplish this. With some effort, most operators can successfully increase the number of customers who participate. Following are some other best practices you can implement to protect your business from bad debt.

Communicate. Send payment reminders and collections-related messages via multiple channels. For example, you might write the rental rate and payment due date on a card for the tenant, send reminders via email and text, and make reminder phone calls. Your property-management software as well as many third-party service providers can help you automate this process.

Control unit access. Revoking or limiting unit access is an extremely effective reminder that rent is due. Some operators choose to deactivate the tenant’s gate code days before overlocking the space to encourage them to come into the office. Laws about limiting access in this way can vary by state, so make sure you’re familiar with the regulations in your area before barring a tenant from their space.

Be prompt. If you generally wait until rent is 15, 30 or more days past-due before you ramp up your collection efforts, start sooner. The Urban Institute, a nonprofit research organization that provides data regarding upward mobility, has studied the effects of debt on American households. It found that acting promptly when a bill becomes past-due can significantly improve your chances of a successful collection. The longer a bill remains unpaid, the harder it becomes to recover the debt.

Get commitments. If a tenant is unable to pay now, ask when they expect to be able to do so. Obtaining a promise to pay is a simple way to help the customer feel increasingly obligated to make good. Following up on their agreement also helps you stay in communication with them. Keep in mind that a promise to pay doesn’t negate your ability to exercise other remedies, such as a lien sale, that are afforded by your rental agreement and state law.

Train your team. Ensure that all staff understand and follow your collections process. A tenant should receive consistent messaging and results from every employee. For example, if one manager denies the request for an extension or late-fee waiver, so should the next.

Hire help. Secure a collections agency through which you can refer accounts that aren’t paid in full or are in the lien-sale process. Though selling the contents of a delinquent unit is a primary way to recover unpaid rent, if the sale proceeds aren’t sufficient, you can still pursue collection of the remaining balance.

Leverage collateral. Include a cross-collateralization clause in your rental agreement, so customers who rent more than one unit have their rent obligations collateralized with each space, even if only one becomes past-due. This increases the potential loss to the tenant and will incentivize them to pay on time.

Considerations for Small Operators

Small, independent self-storage operators may have a greater ability than those with large portfolios to adjust their collections efforts on a case-by-case basis. In addition, segmenting your past-due customers based on their payment history and other factors may increase the amount you’re able to collect and decrease the number of units that need to be auctioned. Considerations can include the size of the delinquent unit, your occupancy in that unit size, and the customer’s responsiveness to collections communication. This process can help you target different strategies to specific groups.

In contrast, larger self-storage operators typically have processes to which they must strictly adhere, with less flexibility to weigh solutions individually. This is understandable because with so many customers, it becomes difficult to evaluate each case, and training every facility manager to exercise good judgment isn’t practical.

This isn’t necessarily a bad approach for small operators, either. After all, a programmatic method is the simplest way for a business of any size to deal with delinquency. You can do this by setting up a schedule of actions that occur in advance of the due date, such as inviting tenants to enroll in autopay as well as sending invoices and reminders. In addition, establish a roster of collections actions to take after the due date, such as charging a late fee and a sending notifications via snail mail, email, text message and phone.

Legal Considerations

While delinquency-prevention strategies are completely up to your discretion, once rent is past-due, many of the actions you take next must be guided by the self-storage statutes in your state. In most places, these laws dictate when to assess late and lien fees, when you can deny a tenant access to their unit, the types of notices you issue to delinquent customers, and when you must send required notices.

Because legal compliance adds complexity, it’s wise to engage proper counsel to review your rental agreement and collections processes. Be particularly mindful of the following:

Knowing the laws within each jurisdiction in which you do business takes time and specialized training. Obtaining help from an attorney when creating your standard operating procedures can save you thousands of dollars in potential damages. Skirting your legal responsibilities isn’t an option.

While fully eradicating tenant delinquency may be impossible, self-storage operators are smart to deploy practical strategies and best practices to minimize the impact of late payments. This helps protect revenue as well as maintain a stable and successful business. Combining proactive measures with legal compliance will help you navigate the challenges of delinquency effectively and provide peace of mind.

Kenny Pratt is a principal for Crescendo Properties, which operates the Shield Storage portfolio throughout the western United States. The company also sources, underwrites and finances self-storage investments. Its management arm is Crescendo Self Storage Management. To reach him, email [email protected].