How landlords can prevent rent fraud

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Rent fraud is a common problem with new landlords – and for good reason. No one wants to be taken advantage of and being outsmarted by a scammer can leave you feeling helpless about any future problems you may encounter collecting your rent.

However, fraud is a problem that every modern business faces and is part of managing a successful rental business. By learning about the types of scams you may encounter and how to fight them, you’ll feel prepared in case any of these issues plague you in the future.

Here are the different types of rent scams you may encounter and how to mitigate them.

Related: Payment challenges and fixes for today’s entrepreneurs

What is a rent payment scam?

Rent payment fraud varies depending on the payment method chosen by the tenant. Here are some of the most common cases of fraud related to the different types of payment your tenants may choose:

ACH hackers and scams:

ACH payments are direct transfers from one bank account to another through a network of automated clearing houses. If your employer has ever paid you via “direct transfer”, they have used the ACH network. ACH payments are popular with tenants because of the speed and ease with which they make transfers, and there is often no transaction fee.

Among the various rent payment methods, ACH payments can be one of the safest. However, you may still encounter some problems: hackers and scams. The ACH network works in such a way that all someone needs to deposit or withdraw funds from someone else’s account is their bank account number and routing number – that’s it. If a hacker got hold of these two pieces of information, he would have access to all of your funds.

While this is a terrifying prospect, keep in mind that the application process is rigorous and the ACH network also enforces transaction and volume limits. If there is a problem, understanding a few ACH return codes can help you resolve the issue as quickly as possible:

  • R01: Insufficient resources – This code means that the tenant did not have enough money in the account for the transaction to be completed. Only full rent amounts can be deducted (not partial).

  • R02: Account closed – This means that the tenant has given you a closed account number or has recently closed it.

  • R03: No account “That means the tenant’s bank account never existed.

  • R08: Stop payment – This means that the tenant has placed a stop on their account to prevent transfers from their account to yours.

Debit chargebacks:

It is also possible that the tenant may dispute the charge to the ACH account to reverse the transaction. This money recovery strategy is more likely to succeed if the tenant does not usually pay by ACH transfer as this will be seen as a shady transaction. However, by keeping accurate records of past payments, it’s fairly easy to dispute a chargeback and get your funds back.

Credit card chargebacks:

Similarly, credit card chargebacks happen when a tenant calls their credit card company to dispute a charge that appeared on their statement. It may seem easy for a tenant to become a fraudster by intentionally questioning the rent payment. If the tenant has reliably paid by credit card throughout the year, this strategy is unlikely to work — but once again, detailed and accurate records will likely save you in this scenario.

P2P scam:

Peer-to-peer (P2P) platforms (e.g. Venmo, PayPal, Zelle, etc.) have some important limitations when it comes to security and rent collection. First, these platforms are not for landlords and rent collection. You need to set up a general business account because using a personal account to collect rent violates user agreements. P2P platforms also do not allow you to set or manage late payment fees or decline payments, which is especially important during evictions. In general, P2P platforms are very risky for owners.

Bounced checks (insufficient funds)

Bounced checks are a more common type of fraud you may encounter if you allow tenants to pay by paper check. If the tenant does not have enough funds in the account to cash the check they have written, the bank will withdraw the deposit from your account – even if you have already spent the money.

Money Fraud:

Basic cash payment is also prone to fraud. If you allow tenants to mail cash or leave cash at a turning point, they can easily seal only half of the rent in an envelope, toss it in, and later claim the other half was stolen from a drop box.

Related: Don’t Become a Fraud Victim: 5 Tips to Protect Your Business When Processing Payments

Tips for preventing online rent scams

Now that you know the possible types of scams, here are the top three tips to prevent them from happening to your rental:

1. Thoroughly screen your tenants:

Tenant control is an underrated defense against all types of fraud. Tenants who have made reliable payments in the past and have sufficient income to meet your requirements should have no reason to commit fraud to avoid payment. Don’t accept a tenant who hasn’t proven their credibility through a thorough credit check, criminal background check, eviction history and income verification.

2. Collect your rent online (but not via the P2P platform):

There are many reasons to collect rent electronically, but among the most important is that digital rent collection is more secure than traditional cash or checks. While fraud can certainly happen with online payments, online options usually offer a better chance of recovering lost funds with accurate records and record keeping. The rent collection software is also encrypted, keeping both you and your tenants’ funds safe from outside hackers. It also speeds up transaction processing times so you’ll be aware of any issues that occur sooner rather than later. But if you can, avoid P2P platforms for the reasons mentioned earlier.

3. Keep immaculate records:

Careful and accurate record keeping is your best defense against chargebacks and other types of rent payment fraud. If the bank or credit card company asks you to prove that the withdrawal from the tenant’s account was reasonable, your details will clearly show what the payment is and whether the charge is reasonable.

It is likely that you will run into fraud when managing properties and tenants. However, the good news is that with the right knowledge, tools, and resources, most of these cases are easy to mitigate and won’t impact your business in the long run.

Related: Think You Can’t Win With Chargebacks? Think again.

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