One of the ways to attract tenants to your South Florida rental property is to collect rent online. Not only does it provide tenants with a convenient way to pay rent (and in turn, encourages them to pay on time), but it also enables you to practice proper book-keeping. At times, your tenants can also schedule rent payments so they don’t miss their due dates. These are only a handful of the pros of online rent collection.
However, there is a downside to online rent collection. Rent payments, particularly those paid with credit, can bounce. Tenants and would-be tenants can claim that the credit card charge was fraudulent – in other words, that they weren’t the ones who initiated it. In turn, the bank reverses the payment and you’ll be left without a penny. These are also known as credit card chargebacks.
In this article, we’ll talk about why credit card chargebacks occur and what you can do to protect yourself from chargebacks.
What Is a Chargeback?
A chargeback or “friendly fraud” is when a bank charges funds back to the credit card owner because they’ve claimed a transaction to be fraudulent. It can occur when a customer uses their credit card to pay. After a while, they will call their credit card company to tell them that the transaction wasn’t theirs and that they should cancel the transaction.
In property management, chargebacks occur when a tenant pays for their rent, application fee, etc. with their credit card, and then asks their credit card company to reverse the transaction. Below, we’ll break down a few situations where chargebacks can occur.
Common Instances of a Chargeback in Real Estate
Here are a few common situations where a tenant can claim that a payment related to the rental property was fraudulent:
Denied Rental Application
It’s not uncommon for tenants to pay their rent application fee with their credit cards. Unfortunately, when things don’t go their way (i.e. they get denied) they can be tempted to claim a fraudulent credit card charge. In this scenario, all they’ve got to do is call their bank, report the transaction as a fraud, and wait for the funds to be charged back into their account.
Inability to Pay Rent
Tenants who’ve recently been unemployed may be tempted to pay for rent via their credit cards. In this situation, they will pay for their rent for around a month (they’ll want to move out before you catch them), and once they’ve moved out, they’ll claim fraud with their credit card company.
Using Another Person’s Card
Renting to student tenants? There’s a good chance that they’re using their parent’s credit cards to pay for their rent. This is fine if their parents are aware, however, if they aren’t, you risk facing a credit card chargeback as the credit card owner be surprised to find the transaction in their credit card bill.
Pro Tip: If your tenant is a student, their parents, grandparent, or guardian should be a co-signer. That way, in case they can’t pay their rent, you’ll be able to collect it from their co-signer. A property management company can draft an agreement for this specific arrangement.
Change in Living Arrangements
Let’s say you have two tenants. One tenant has been paying for rent with their credit card. But the bad news is that your two tenants have gotten into a huge fight, and now the rent-paying tenant wants to move out. Out of spite, they call their credit card company to cancel the transaction.
What Can You Do To Protect Yourself From Chargebacks?
Chargebacks are bank-initiated, so in the event that the bank reverses the transaction, you’ll have to challenge the chargeback.
Partner With a Property Management Company
With a property management firm by your side, you’ll be able to fight a chargeback. They’ve been in the business longer than you have, so they know how to work with banks to challenge chargebacks. They will also keep up-to-date records of all tenants, transactions, etc. so you can prove to the credit card company that the transaction wasn’t fraudulent at all.
Keep Up-to-Date Documentation
In case a credit card company reverses a rent payment, you can challenge the chargeback as long as you’ve got “evidence” against your tenant. This can include rental applications, rental application fees, credit reports, and signed documentation showing that the tenant did pay you the said amount.
Explain to Tenants That Fees Are Non-Refundable
If you’re collecting a rent application fee, inform your tenant that the fee is non-refundable. You should also get them to sign a document to show that they’re aware the fees are non-refundable. That way, they won’t attempt to claim a fraudulent credit card charge in case you don’t greenlight their application.
Screen Tenants Strictly
A property management company can help you weed out bad tenants who’ll be problematic down the road. Be sure to conduct background checks and to screen tenants following a strict process (that follows the Fair Housing Act, of course).
Require Online Payment Authorization
Require tenants to set up an alternative and automated payment method. In case of a chargeback, their other payment method should be able to cover the reversed money.
Are Chargebacks Legal?
Yes. The Fair Credit Billing Act (FCBA) gives customers the right to dispute credit card charges that they believe have been made fraudulently. Common examples of chargebacks include being charged for a purchase more than once, being charged for a purchase that never arrived, and more.
At Luxury Property Care, we know that chargebacks can be a massive headache. That’s why we provide full-service property management to our clients. In case your tenant claims that their payment was fraudulent, we’re here to help you dispute the chargeback and get your well-deserved rent back. When you partner with us, you’ll have peace of mind knowing that your property managers are well-prepared for the unlikely event of a chargeback.