Incorporating autopay into your property management process can have many benefits. It can streamline payment, minimize transaction costs, and even greatly reduce the precious time and money spent chasing after rent past due. And while all these advantages are wonderful, there is a potential downside.

There are significant risks that come with introducing autopay to your tenants. In this article we will outline possible pitfalls one might encounter and how to best avoid them.

Acceptable Payment Methods

In certain states, there are laws in place for the protection of tenants that stipulate how many acceptable forms of payment must be available. For instance, in California landlords are required to give tenants more than one option. As a part of California’s legislature in Civil Code 1947.3 “(a) (1) Except as provided in paragraph (2), a landlord or a landlord’s agent shall allow a tenant to pay rent and deposit of security by at least one form of payment that is neither cash nor electronic funds transfer.” In other words, in states such as this, you can offer autopay as the primary method; but you also must provide additional options.

Questions have also arisen around the topic of accepting cash for payment. While technically all physical U.S. currency is legal tender and therefore a legitimate form of payment, taking cash for rent can be tricky. The dangers range from issues with accounting to security risks and more. Despite the fact that it is seemingly the most straightforward way to settle a debt, there is actually no federal law that explicitly requires landlords to accept cash as a method of payment.

Ultimately, when considering your terms for acceptable payment methods, it is best to consult a lawyer or review the laws in your area around the topic.

Automation Issues

One thing that can muck up the eviction process, should you find yourself in that scenario with a tenant, is the receiving of unwanted or partial rental payments. Employing a default autopay system could leave you with less control over the acceptance of individual payments. In order to protect yourself and your business, it’s important to have a clear understanding of how the back-end works, and also a good trouble-shooting strategy for cancelling or reversing unwanted payments.

Outside of dealing with partial or unwanted payments, you’ll also want to coach your tenants on how to end the ACH rent payment on their end after the lease expires. In addition to the advance notification, they will provide you, they’ll also need to notify their banking institution at least 3 days prior to the next automated transaction.

It’s also important to remember that while a payment is automated, it is not necessarily guaranteed. The system is scheduled to attempt a transaction at a set recurring time, but ACH transfers can still fail as a result of insufficient funds. Make sure you have a plan of action, in the form of late fees or past due notices, in the event this takes place so that you can move quickly to remedy the situation.

Making Changes to the Payment Process

While rolling out autopay to existing tenants may seem like a clear benefit for all involved, there is a chance not everyone will see it that way. The process itself has more than a few barriers to entry that may not be obvious to the average landlord.

In order to successfully utilize an autopay system, tenants will need three things: regular access to a computer, a basic understanding of how to use that computer and the system itself, and a bank account. Depending on the type of tenant you are looking to attract in a new lease, this could be no issue. However, if these are stipulations you wish to introduce to existing tenants, you’ll want to make sure the acceptance of this policy is unanimous. One could argue that, by implementing this new process with its own set of new requirements, you are unlawfully forcing out tenants that can’t meet them.

Take the example set in California. A group of long-time renters sued their landlord for updating the rent collection policy, claiming it to be in violation of the state’s Rent Stabilization Ordinance. These renters saw the abrupt update in policy as a ploy to evict older residents and force them out.

If you are looking to update your leasing agreements mid-term and are wondering if you are legally protected, your best bet is to consult an attorney. They will have knowledge of local legislation and will be able to advise you of your rights while ensuring your tenants are taken care of.

Data Security

One of the biggest risks landlords take on when employing an autopay system is that of data security. In collecting the personal and private information of your clients, you are then responsible for protecting it. The NACHA, the Electronic Payments Association, has specific rules regarding businesses using ACH payments and the payment processors those businesses select. It’s best to do your own homework when contracting a payment processor. In addition to ensuring they are NACHA compliant, you’ll want to do some research on your own to determine how to best and securely handle the information in your charge.

For instance, if you are storing ACH forms or information on your computer, you will want to make sure those files are encrypted. On the other hand, if you are managing information in hard copy, you will need to keep those files under lock and key and only provide access where absolutely necessary.

If this seems like a lot of risk for one individual to take on, it’s because it is! Luckily there is an alternative to this more manual route. Enrolling in property management software will eliminate nearly all of the aforementioned legal responsibility. The tenant will be in the driver's seat when it comes to sharing and managing their personal information and you can keep your hands free of any additional liability.

Conclusion

When it comes to the common legal pitfalls associated with autopay, there really is only one way to completely avoid them. Utilizing property management software allows you to optimize your business, provide a better experience for your tenants, and fully protect both parties in the process. Without it, it’s hard to say if the additional risk and responsibility of autopay is worth the potential payoff. Based on the hazards outlined above, that’s a judgement call each landlord must make for themselves.