Paging Frank: Forgive or do not forgive bad debt after closing on park?

mobile home university
1

We are closing in less than 14 days and I keep chewing over this question: to forgive or not to forgive residents who owe rent? No-pay-no-stay will be enforced with an iron fist on day one - but the question is, do I forgive people who owe rent? I am considering doing so on the following basis (tell me if you think I’m wrong): The current owner has not trained his residents and has mismanaged the park his entire tenure (3 years) - taking late payments, taking payment plans, and for the last six months he hasn’t even filed evictions on late payers.

I’m afraid that the residents who are far behind on rent, owing over $500-$2,000, might be decent payers if no pay no stay was enforced sternly, but will never be in a position to come up with $1500 or more now that they have been allowed to get so far behind. Furthermore most of these people own their homes and would thus, I believe, have incentive to pay the lot rent if their debt is wiped clean when we close.

As of today roughly 50% of 70 residents are at least somewhat behind on lot rent, which is about $300 per month plus water.

Of the delinquents, about half (15) are behind more than $500, and about 2/3 of THOSE (9) are behind more than $1500.

Residents: 69
Delinquent total: 31
Breakdown:
$0-500: 15
$500 - $1000: 7
$1000 - $1,500: 3
$1,500 - $2,000: 5
$2,000-$2,500: 1

SO - what to do?

Partial forgiveness? "Pay $500 of your back rent and all is forgiven"
Total forgiveness? "Pay your rent from this day forward and all is forgiven."
Zero forgiveness? “Pay $2,100 or we evict you and then take your home if you can’t sell it.”

To be clear I do not care about the back rent I just want stability moving forward. I have been fortunate and successful in life and I do not want blood from a stone - if some poor working stiff has gotten behind because prior ownership did not enforce no-pay-no-stay I do not want to kick him onto the street or send him into some bad spiral of payday loans or hocking his mother’s wedding ring to pay back rent he wasn’t made to pay by the prior owner and now doesn’t have.

I only want him to pay me going forward. In other words I’d rather not set folks up for failure trying to make them come up with back-due money that is impossible for them.

For context, the local housing and job markets are both very strong and our roughly $300 lot rent is very affordable compared to the alternatives - apartments and SFR rents. Also there are very few if ANY vacant mobile homes for rent within a 10-20 mile radius of our park. People would be FOOLS to not gratefully accept back-rent forgiveness and then be good payers on no-pay-no-stay moving forward. Not only is there little other available housing, winter is coming and it’s rapidly growing cold. Being evicted is no fun this time of year.

I have no qualms of course hitting folks with 5 days and then evictions moving forward - I run apartments and no-pay-no-stay is the only way to succeed in that business as well. There will be ZERO tolerance for getting behind on rent after we take over. But with apartments I’ve never taken over a complex with a bunch of back rent and non-paying residents as in this mobile home park I have in contract.

Thanks in advance for your insight!

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My plan, btw, is to distribute a day one letter reading roughly as follows (although more polite):

"Hey residents, new sheriff in town. We will give you a safe, clean park to live in and you will pay the rent. There will be no payment plans, no excuses, no tolerance.

For today, you won the lottery if you owe back rent because we know the last owner never enforced consequences and took payment plans. You have been trained wrong and some of you owe substantial sums we know you do not have. But this is your last payday and your last forgiveness. We are experienced operators and will have zero tolerance moving forward. Here is the name and number of our eviction attorney. Inevitably one or more of you will test our resolve - don’t let it be you because it will be a sad day when you serve as an example to the rest of the residents that no-pay-no-stay is the new rule in town.

Sincerely,

New owner"

3

Dear Ivan,

I think either plan can work. My advice is that whichever course you choose, execute it consistently. You can’t treat one group or type of tenant different than the rest. That’s what can cause you legal pain and expense. Signs that show you follow all Fair Housing Laws, and making sure your manager understands them are good management ideas.

Good Luck!

Kurt

4

I was in a similar situation (collections were a bit better that yours going into the deal) and I forgave them and let them know I was forgiving them so that they would have a chance to start fresh… I also let them know that going forward there would be a zero tolerance/no pay no stay with a maximized late fee implemented. I still have a few late payers and you probably will as well. The key is to make sure your manager stays in front of them by reminding them that they owe rent, sending appropriate late notices and following through on the eviction process. I’ve had 100% collections and have only lost one tenant in 7 months and he was a (my only) renter.

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"Past behavior is always a good indicator of future behavior…
… or something like that.

My wife always tells me that in some form or another when I excuse debt or allow residents more than one chance to ‘get right’. Without a calculator in my hand it looks like 45% of your park is behind in some regard. If you look into the future a bit it is probably a reasonable assumption that you are looking at an eviction of some sort. There will be costs and heartache with all of that… but the upside is that you will be establishing a no BS precedent. People with bad money skills don’t change… the excuses will be the same only to a different ear. I would put them all on some form of non negotiable payment plan; take the monies owed and then use those when you need to do your eviction.

Once your residents see a trailer getting pulled out to the local mini storage yard they will all suddenly understand you are exactly who you say you are. Rent needs to be the first bill paid; not the last. I know I sound harsh but I always think about the other 55% who pay on time always. It is not fair to those who do their part to make your park successful.

6

Update:

We closed on the deal. I got the accounting software and - the park manager was definitely stealing and modifying/deleting rent payment entries. The past due balances indicated are useless - we’re zeroing everyone out as of December 1 and implementing no pay no stay. The residents are on notice - we’ll see what happens.

It’s rapidly becoming very cold outside, the job market is very strong as is the housing market, and the lot rent is quite reasonable. I’m feeling confident that the vast majority are going to start paying.

7

Congratulations…
You did your homework and it paid off

8

We had a similar situation although the most of the tenants were only behind $500 or less. We chose to forgive all the debt but we did not “notify” them that they were being forgiven…we simply started billing them as if they had a zero balance. We send out 10 day demand letters every month and every month 3-5 people will pay the late fee…but they do pay. Many of our tenants our on fixed incomes so one months rent is a LOT of money and they will have a difficult time paying it. To date, all our tenants are paid up and no evictions filed. Don’t give an inch. Late = demand letter = late fee = no payment = eviction filed = tenant pays up = eviction cancelled. Rinse and repeat.

Best wishes

Jon