The new normal

National credit trends are changing rapidly and the impact has been even greater for young adults. This is particularly alarming for the multifamily industry which has a younger than average demographic. Management professionals and their collection agencies that are adapting to these trends will have a larger positive impact on Net Operating Income (NOI).

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A recent survey by the National Foundation for Credit Counseling found 26 percent of American households reported that they do not pay all of their bills on time and eight percent did not make a payment at all during the past 12 months. Aside from the unemployed and under-employed statistics, stricter lines of credit standards resulting from regulatory restrictions on predatory practices by credit card companies have eliminated many traditional sources of borrowing to make ends meet. Young consumers just starting to establish credit are facing these challenges and, as a result, many management professionals have noticed an increase in delinquency and more difficulty in recovering bad debt.

Occupancy demands and less qualified applicants have resulted in lowering credit approval standard in many markets as the focus has changed from economic occupancy to physical occupancy for many owners. The consequences are already evident in increased delinquencies. The lower standards also present a greater challenge for the collection agency.

It is important to understand the direct correlation between the initial screening standards and bad debt. Too often these are viewed as separate instead of as two parts to the same credit life cycle. Even with all of the available sophisticated analysis and research on reducing bad debt, there remains two simple steps that management professionals can take; (1) quality resident screening – including a credit risk model that does not rely on the traditional FICO score and mitigating higher risk approvals with a surety bond or higher deposit, and (2) reduce the lapse time between move-out and file placement with a professional third-party collection agency that specializes in multifamily collections.

Collection agencies, especially those that specialize in multifamily collections, should prepare for younger adults by embracing the way they like to communicate and do business. One change is that many of today’s consumers only have a cell phone instead of a landline, which makes them more difficult to reach. Some collection agencies have successfully responded to consumers that prefer to communicate electronically instead of directly with an agent by adopting a system that allows consumers to negotiate arrangements and make payments online with pre-set agreeable term limits. The result has been higher collection returns which translate to a positive NOI impact for the management portfolio.

Author: Jorge Baldor is president of ResidentCheck and ResidentCollect