If you were to step back and look at the self storage industry, you would see a specialized real estate service that covers over 2.3 billion square feet of rental space and creates a combined annual revenue of over $38 billion. . For such a young company, it remains one of the strongest sectors in real estate.
As the industry grew and matured, it began to use some of the techniques learned over the years by commercial and multi-family property owners to improve their operation and improve revenue collection. One is to use a point-of-sale credit check and report system to weed out customers with a history of bad debts and lease defaults. This system can also be used to report payment activity to credit reporting agencies, potentially motivating fast and reliable payments by tenants who are focused on maintaining their credit score.
Credit check as a condition of rental
Initially, self-storage operators should ask themselves, “If I know a tenant poses a credit risk, will I still rent to them?” The answer would usually be “no”. Why? Because they recognize that time spent managing late payments and enforcing the lien process diverts facility managers from the more profitable side of the business, which is renting units to tenants who can pay.
It is true that if a tenant fails to pay, there is legal recourse to remedy the default. However, if you have a choice between renting to a good paying tenant and a tenant for whom you may need to invoke your lien rights, the answer seems obvious.
Although there has been very little effort to integrate credit checks into the self-storage industry so far, the main reason was that the verification process was time-consuming, paper-intensive and cumbersome. expensive. Essentially, the use of a credit check in the housing rental process has driven up the cost per lease.
Nowadays, with the capabilities of the Internet, a credit check can be almost instantaneous and the cost is negligible. It is certainly low enough to offset the potential costs of dealing with a delinquent tenant and possible lien sale. Not to mention that there is the “contingent liability” associated with the sale of tenant units.
It is now possible, with the client’s consent, to obtain a credit score and determine the risk of payment. Subject to an operator’s discretion, a system could be implemented where a credit score of 720-850 would be clearly “green”, a score of 620-719 would be “yellow” and a score of 450-619 would be “red.” These traffic light colors signify the potential risk of renting to that person. Based on the information provided and the corresponding credit score, you could still decide to rent to them even if their score is low; but you retain the right to adjust the rental rate accordingly.
This concept of “risk-based pricing” is already used in many companies, such as those specializing in credit cards, mortgage rates and car loans. With its use, you could balance its risk of a rental based on independent information. In other words, rather than potentially turning away a customer on the basis of the belief that they are homeless or appear to be a payment risk, which can open the door to discriminatory rental practices, the third-party credit check method creates a consistent and unified approach. to measure the risk, all tenants being treated in the same way on the basis of this financial data.
This is separate from the benefit of weeding out customers who might offer false identification when signing their lease. You could know immediately if a name, address or social security number is valid. With all these benefits of performing a credit check as part of the rental process (immediate verification, low cost, risk-based pricing, and increased validation of renter identity), why not take advantage of this service? ?
Monthly credit reports
A tenant’s understanding that the timeliness of their self-storage rent payments will impact their credit rating has been shown to significantly reduce defaults and associated costs, including intangible costs such as manager frustration and stress resulting from tenant defaults. Facility operators who report their tenant’s monthly payment activity to credit reporting agencies elevate the importance of these payments to the same priority as mortgages, car loans and credit cards, because the credit rating of the client is threatened in the event of default.
The data clearly shows that monthly landlord credit reports influence the payment behavior of tenants who want to avoid a negative credit history. It also allows you to determine at the point of sale if a requestor has ever generated an overdue account. The use of credit reports reduces bad debt due to the effect of late payment reports on customer credit scores.
Under the current system, a tenant of self-storage can wait indefinitely to pay, even until the lien is sold, with no impact on their credit. In the end, applying a lien on his stored goods and even selling them may not have as much of an impact on him as a lower credit score. By understanding that their rent payments are reported, a tenant can avoid default to protect their credit.
Adding credit reporting to a self-storage operation should increase operational cash flow, which directly increases the company’s net worth. Likewise, there are benefits for customers, namely higher credit scores for those who build a record of timely payments. On-time payments are rewarded with positives, while late payments have a negative impact.
An additional benefit of the credit reporting approach relates to past uncollected debts. If you have unpaid rent after making lien sales, these can also be uploaded to the credit system. This improves your ability to collect outstanding debt, especially when these tenants are looking to update and improve their credit history. A customer cannot apply for a new credit card or obtain a car or home loan with a bad credit history. He might even be refused a job. Your credit report may motivate him to pay off his self-storage account and get a release letter, which would clear the business line for a delinquent report.
As a model of success, we can consider the impact that credit reports have had on other industries, such as homeowners associations. Associations using continuous credit reports have identified a decrease of up to 58% in overdue member balances in the first three months, and a decrease of up to 74% over a 12-month period. Obviously, providing monthly payment statements to credit reporting agencies can have a positive impact on the bottom line of a self-storage facility.
Scott Zucker is a partner at the Atlanta law firm Weissmann Zucker Euster Morochnik & Garber PC, specializing in business litigation, with a focus on real estate, landlord-tenant law and construction law. He is a frequent speaker at self-storage industry events, author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers”, first and second editions, and partner of the Self Storage Legal Network, a service legal by subscription for storage owners and managers. He is also the Deputy General Counsel for the Self Storage Association. For more information, email [email protected]; to visit www.wzlegal.com.