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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 
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Comments
Just because this has caught my attention: "twit" means "idiot" or something similar in British English, so you might want to change that to "tweet" :-P<br> Video tip: https://www.youtube.com/watch?v=MqObJtGrKaA <br> <br> It seems to me that this system is quite unbalanced, in favor of the landlord. What if something major breaks (like piping) and the landlord doesn't want to fix it or delays it (where I live, something like this is the responsibility of the landlord, just to be clear)? As a tenant, you are in a severely weaker position here. With wire transfers, required trust seems to be more balanced among both landlord and tenant. <br> <br> I can see the benefits of using checks, though, as you explained in your article. Where I live, nobody uses checks for anything (not sure if I could even get a check book from my bank).. all I can say is that it seems to work fine. But you piqued my curiosity, I want to find out the "failure path" for wire-transfer-paid rent here.
How is tenant protected from being robbed by the landlord if he has to give signed checks upfront?
This smells like some FinTech startup should disrupt the situation and prove a cheap and sane process.
Wal, The system is unbalanced. The owner gives the renter the user of an expensive piece of real estate, and the owner want guarantees that they will get the money worth back. Typically if something breaks, the owner needs to fix this within a given time, and if they don't the renter can fix this on their own and charge the owner.
And I would love to know what the failure mode for wire transfer would be for you. Also, where that is :-)
Rafal, Most of the checks are either dated in the future (rent payment) or for the utility company. The security check is usually limited to 2- 3 months rent, and depositing it will result in you being charged, but the owner also needing to explain that if you dispute the check
Rafal, Also, remember that as a renter, they are literally sitting on the owner's property.
Wal, twit does indeed mean 'silly person' or similar in British English.
I find the whole cheque based system terrifying! In England (and possibly the rest of the UK but not sure) the tenant is free to pay monthly however they like but it is a legal requirement for the "security" deposit to be held by a third party "protection" company which arbitrates disputes between landlord and tenant. There are also strict time limits - something like 10 days after moving out you have to either have your money back or be actively discussing it with the other parties.
What an interesting system! I think it would make me nervous as a tenant, but as a landlord I would love it. I have never heard of such a thing in the US, and I'm not even sure it would be legal. I don't think a bounced check gives you any particular legal rights here, so that might be part of why.
US law varies by state and even city, but the general custom is that the landlord takes a security deposit before the lease starts (1 month rent is typical, sometimes 2). Sometimes that's held by a separate agent, sometimes in a separate account (maybe with interest, maybe not), or sometimes it's all commingled - varies by state. If the tenant stops paying, the landlord gets them evicted (a sometimes long and obnoxious process, depends on location) and keeps whatever part of the deposit they can justify. Same thing after move out - the landlord keeps whatever part is needed (and can be justified) for repairs. It's a kind of weirdly non-balanced system, and you see both sides take advantage - there are stories of tenants breaking stuff and squatting in a property without paying for months as they drag out the eviction process. Contrarily, lots of tenants feel that landlords unfairly keep their damage deposit - though a lot of tenants just suck at cleaning.
I dare you to give a blank check to anyone here in Argentina. Prepare to get your account drain or have a bounced check for probably more than 10 times the amount it was supposed to be used to collect.
We have a 3rd party that holds bonds (3-4 weeks rent) which the landlord can make claims to if the need the most need for repairs due to damage by Tennant. If nothing is wrong it's returned at end of lease. 2-3 months worth seems excessive, anything that large just goes to court it should be very uncommon.
Utilities are paid for by the Tennant and have nothing to do with the landlord, if they skip out on paying the utility company chaes the individual and not the landlord.
In New Zealand we have a Government Tenancy agency, it takes the bond and holds it. It has appropriate laws to manage bonds and a tribunal process to sort out disputes. Then basically everyone uses electronic banking to pay the rent.
When I rented in Israel, my landlady took six months rent up front in cash with a cash deposit. She did seem particularly disappointed I paid in NIS. No risks to her there :) After much shouting she did eventually give us the deposit back.
In Switzerland, everything goes through banks (obviously!) and the renter has to deposit about three times the rent on a special bank account, which can be used by the landlord, in case there's a problem with the renter.
Every month, the owner either sends the renter an electronic invoice, an invoice with a payment slip or charges directly the renter's bank account with the billed amount. Easy and usually paperless...
In germany you typically have an automated wire transfer setup for each months rent and have to make an upfront deposit (3 months rent) in a special savings account. When you get the deposit back you get the interest on it as well.
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