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Rent fraud is a common problem among new landlords—and with good reason. No one wants to be taken advantage of, and a scammer can make you feel helpless in the face of any future problems you may face in collecting your rent.
However, fraud is a problem that every modern business has to deal with and it is part of running a successful rental business. By learning about the types of scams you may encounter and how to deal with them, you will feel ready for any of these issues to bother you in the future.
Here are the different types of rental fraud you may encounter and how to mitigate them.
Related: Payment Challenges and Solutions for Modern Entrepreneurs
What is rent fraud?
Rent fraud varies depending on the payment method the tenant chooses. Here are some of the more common types of payment scams that your tenants may choose to:
ACH hackers and scammers:
ACH payments are direct transfers from one bank account to another through a network of automated clearing houses. If an employer has ever paid you through “direct deposit”, they have used the ACH network. ACH payments are popular among tenants due to the speed and ease of transferring them, and there are often no transaction fees.
Among the various payment methods for rent, ACH payments can be among the safest. However, there are still some problems you may encounter: hackers and scams. The ACH network works in such a way that all someone needs to deposit or withdraw funds from another person’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 daunting prospect, be aware that the application process is rigorous and the ACH network also enforces transaction and volume limits. If there is a problem, understanding multiple ACH return codes can help you resolve the issue as quickly as possible:
R01: Insufficient funds – This code means that the tenant does not have enough money in the account to complete the transaction. Only full rental amounts (not partial) can be deducted.
R02: Account closed – This means that the tenant gave you a closed account number or closed it recently.
R03: No account “That means the tenant’s bank account never existed.
R08: Stop payment – This means that the tenant has blocked their account in order to prevent funds from being transferred from their account to yours.
It is also possible that the tenant can dispute the ACH debit in their account in order to reverse the transaction. This money back strategy is more likely to work if the tenant does not normally pay via ACH transfer as this will be seen as a suspicious transaction. However, by keeping an accurate record of previous payments, it is fairly easy to dispute a chargeback and get your funds back.
Credit card chargebacks:
Similarly, credit card chargebacks occur when a tenant calls the credit card company to dispute a charge on their statement. It may seem easy for a tenant to become a fraudster by deliberately contesting the rent. If the tenant has paid reliably with a credit card all year long, this strategy is unlikely to work, but again, detailed and accurate records will likely save you in this scenario.
Peer-to-peer (P2P) platforms (like Venmo, PayPal, Zelle, etc.) have some significant limitations when it comes to security and rent collection. First, these platforms are not designed for landlords and rent collection. You will need to set up a shared business account, as using a personal account to collect rent violates their user agreements. P2P platforms also don’t allow you to set and manage late fees or decline payments, which is especially important during an eviction. In general, P2P platforms are very risky for landlords.
Rejected checks (insufficient funds)
Checks are a more common type of scam that you may encounter if you allow your tenants to pay by paper check. If the tenant does not have enough funds in their account to pay the check they have drawn, the bank will cancel the deposit from your account, even if you have already spent the money.
Basic cash payment is also prone to fraud. If you allow tenants to mail cash or leave it at a pickup point, they can easily seal only half of the rent in an envelope, leave it, and then claim the other half was stolen from the mailbox. .
On the subject: Avoid becoming a victim of fraud: 5 tips to protect your business when dealing with payments
Tips for Preventing Online Rent Collection Fraud
Now that you are aware of the types of scams that can occur, here are three top tips to help prevent them from appearing in your rental business:
1. Check tenants carefully:
Verification of tenants is an underestimated protection 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 paying. Do not accept tenants who have not proven themselves through a thorough credit check, criminal record check, eviction history, and income verification.
2. Collect rent online (but not through a P2P platform):
There are many reasons for collecting rent electronically, but one of the most important is that digitally collecting rent provides more security than traditional cash or checks. While fraud can certainly still occur with online payments, online options generally offer you a better chance of recovering lost funds with accurate data and record keeping. The rent collection software is also encrypted, so you and your tenants’ funds are protected from outside hackers. It also speeds up transaction processing times, so you’ll be aware of any issues that do arise sooner rather than later. But if you can, avoid P2P platforms for the reasons mentioned earlier.
3. Keep perfect records:
Careful and accurate record keeping is your best defense against chargebacks and other types of rent fraud. If the bank or credit card company asks you to prove that the withdrawal from the tenant’s account was legal, your records will clearly state what the payment is and that the payment is legal.
It is likely that you will encounter fraud while managing your property and tenants. However, the good news is that with the right knowledge, tools, and resources, most of these cases are easy to fix and won’t impact your business in the long run.
Related: Think you can’t win against chargebacks? Think again.