What Is Rent Payment Fraud and How Can Landlords Prevent It? Here Are 3 Expert Tips. Managing properties and tenants can leave you vulnerable to rent payment fraud. Learn what it is, the common pitfalls and three ways to protect yourself.
By Dave Spooner Edited by Chelsea Brown
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Rent payment fraud is a common concern among new landlords — and not without good reason. No one wants to be taken advantage of, and being outsmarted by a fraudster can make you feel helpless toward any future issues you may encounter with rent collection.
However, fraud is a problem every modern business must contend with, and it's part of managing a successful rental business. By learning about the types of fraud you may encounter and how to fight them, you will feel prepared should any of these concerns plague you in the future.
Here are the various types of rent fraud you may face and how to mitigate them.
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What is rent payment fraud?
Rent payment fraud varies depending on the method of payment a tenant chooses to use. Here are some of the most common instances of fraud across the different payment types your tenants might choose:
ACH hackers and scams:
ACH payments are direct transfers from one bank account to another through the Automated Clearing House Network. If an employer has ever paid you via "direct deposit," the ACH network is what they were using. ACH payments are popular among renters due to the speed and ease with which they transfer, and there's often no transaction fee.
Among the various rent payment methods, ACH payments might be one of the most secure. However, there are still some issues you may encounter: namely, hackers and scams. The ACH network works such that all someone needs to deposit or withdraw funds in another person's account is their bank account number and routing number — that's it. If a hacker were to get ahold of these two pieces of information, they would have access to all your funds.
Although this is a frightening prospect, keep in mind that the application process is strict, and the ACH network also enforces transaction and volume limits. If there is a problem, understanding a few of the ACH return codes can help you address the issue as quickly as possible:
R01: Insufficient funds — This code means the tenant did not have enough money in their account for the transaction to complete. Only full rental amounts (not partial ones) can be deducted.
R02: Account closed — This means the tenant gave you the number of a closed account or closed it recently.
R03: No account — This means the tenant's bank account never existed in the first place.
R08: Stop payment — This means the tenant placed a "stop" on their account to prevent transfers from their account to yours.
Debit chargebacks:
It's also possible that a tenant could dispute an ACH debit on their account to get the transaction reversed. This strategy to recover money has a higher chance of working if the tenant does not normally pay via ACH transfer, as it will be seen as a suspicious transaction. However, by keeping accurate records of prior payments, it's fairly easy to contest the chargeback and recover your funds.
Credit card chargebacks:
Similarly, credit card chargebacks occur when a tenant calls their credit card company to dispute a charge that has appeared on their statement. It may seem easy for a renter to become a scammer by intentionally disputing a rent charge. If the tenant has been reliably paying via credit card all year, this strategy isn't likely to work — but once again, detailed and accurate records are likely to save you in this scenario.
P2P fraud:
Peer-to-peer (P2P) platforms (think Venmo, PayPal, Zelle, etc.) have some substantial limitations when it comes to security and rent collection. For one, these platforms are not designed for landlords and rent collection. You'll need to set up a general business account, as using a personal account to collect rent violates their user agreements. P2P platforms also don't allow you to set up and manage late fees or reject payments, which is especially important during an eviction. Overall, P2P platforms are highly risky for landlords.
Bounced checks (non-sufficient funds)
Bounced checks are a more common type of fraud you may encounter if you allow your renters to pay via paper check. If a tenant does not have enough funds in their account to fulfill the check that they wrote, the bank will reverse the deposit from your account — even if you've already spent the money.
Cash fraud:
A basic cash payment is also susceptible to fraud. If you allow tenants to mail cash or leave it at a drop-off location, it's easy for them to seal only half the rental amount in an envelope, drop it off, and then later claim that the other half was stolen from the drop box.
Related: Don't Fall Victim to Fraud: 5 Tips to Protect Your Business When Dealing with Payments
Tips for preventing online rent collection fraud
Now that you know the possible types of fraud, here are the top three tips to prevent them from occurring in your rental business:
1. Screen tenants thoroughly:
Tenant screening is an understated defense against all types of fraud. Renters who have made reliable payments in the past and have enough income to meet your requirements should have no reason to commit fraud to avoid paying. Don't accept any renter who hasn't proven their reliability via a thorough credit check, criminal background check, eviction history and income verification.
2. Collect rent online (but not through a P2P platform):
There are many reasons to collect rent electronically, but among the most important is that digital rent collection offers more security than traditional cash or checks. Although fraud can certainly still happen with online payments, online options tend to offer you more of a chance to recover your lost funds with accurate data and record-keeping. Rent collection software is also encrypted, such that both you and your tenants' funds are safe from outside hackers. It also speeds up the processing time of transactions, so you'll know about any problems that do occur sooner rather than later. But if you can, do avoid P2P platforms for the reasons mentioned earlier.
3. Keep immaculate records:
Diligent and accurate record-keeping is your best defense in case of chargebacks and other types of rent payment fraud. If a bank or credit card company asks you to prove that a withdrawal from a tenant's account was legitimate, your records will clearly show what the payment is and that the charge is rightful.
It's likely that you will run into some kind of fraud during your time managing properties and tenants. However, the good news is that with the right knowledge, tools and resources, most of these instances are easy to mitigate and won't affect your business in the long term.
Related: Think You Can't Win Against Chargebacks? Think Again.
