Paying the rent online
This twit caught my attention:
This is interesting, on several levels. Mostly because there isn’t any limitation here from the point of view of the bank. It is more an issue of how it always worked, and the implications of the payment method in question.
Now, I’m not sure how renting works in California, but I do know how it typically work in Israel. So just to make sure that we are on the same page, let me explain a typical lease for an apartment.
The lease contains a lot of legalese that probably matter a lot, but from a financial point of view, the typical method used are checks. In particular, for each year you typically give the owner 16 signed checks.
- 12 checks – dated for each month, to the owner, for the rent each month.
- 1 security check – typically 2 – 3 months rent, to the owner, undated, marked as “security”.
- 3 checks – undated, blank amount, for the electricity and waters companies and to city hall.
Assuming everything works out, only the rent checks are ever deposited. The others are held and returned to the renter at the end of the lease.
So far, so good. Now let us talk about the failure scenarios here.
The reason that the owner require the additional checks is to cover exceptional cases. The renter not paying utilities, causing damage to the apartment,refusing to evict the apartment at end of lease, etc.
Now, let us talk about the error handling for a lease. Assume that you have rented an apartment, and the renter has skipped town, left utilities bills unpaid, etc. The idea is that you can use the checks to pay utilities and cover at least some of the costs, maybe suing the renter afterward for additional costs.
Of course, that does create a different set of problems. If the rent check bounced, it is very likely that the other checks will bounce as well.
An alternative to this is a bank guarantee from the renter to the owner. Basically, we have a trusted 3rd party, the bank, in this case. Which promise to pay up to the specified amount if the owner demands it. The idea is that this turn the can’t pay issue from the owner’s problem to the bank’s problem. In most cases, this cost the renter 2% – 5% of the total guarantee. That is a relatively new concept for leases, and most people still use checks.
More to the point, most renters that can afford to use a bank guarantee are also ones that you probably won’t have to use it on.
So why the long explanation?
Consider the business implications of having an un-deposited check. Until I actually deposit it, it isn’t much. But when it is deposited, one of several things will happen. Either it is honored, in which case you have the money, or it isn’t, in which case you have a proof that money that was owed to you wasn’t paid. In Israel, you can take a bounced check to the Collections & Enforcement Agency, and without needing a trail, start the process of collecting on the debt. This is a much short process, and typically it has a lot more teeth. For example, freezing bank accounts, etc.
Now, let us consider the alternatives. A bank guarantee is still the best, because you get the money from the bank, and you are pretty much done. But those are expensive. Assuming that you require a 3 months bank guarantee, that typically mean that the renter need to pay the bank 15% of the monthly rent to get that guarantee, and the bank will typically freeze some amount of money (stock options, savings account, etc) in trust for that.
Assuming you don’t have that, let us talk about the actual rent payments. Both renter and owner likely have easier time with wire transfers, but there is no good failure mode here. The problem here is that unless you use a check (which has a well define failure path), you don’t have a good recourse for getting your money short of going to trail. Those are expensive, and you want to avoid them.
There is a way to pay the rent via credit card, in some situations, but that usually cost around 1.5% of the rent (for the owner), and only up to certain amount. And it doesn’t cover utilities / damages that the renter may have caused.
In short, I think that a large part of the reason why paying the rent via wire transfer is that the error handling around it sucks .