Monthly Archives: July 2013

Managing Delinquency and Collections

July 15th, 2013

Written by Charlie Fritts. This article appeared in the May 2012 Mini Storage Messenger magazine.

Certainly the first objective of the storage operator is rentals and income generation.  Hiring people who are good communicators can go a long way toward achieving those objectives.  Good communicators tend to be considered “people persons”.  Surely you know the type, these are the people we come across in our lives that immediately greet you with a smile, are always friendly and helpful.

Among the next most important responsibilities of the storage operator is collecting the rents and late fees.   In most cases our customers make payment as agreed.  But there are always a certain percentage who fail to do so which requires special attention from the operator.   Anyone with a year or two of storage experience under their belt probably feels they have heard about every possible excuse for missing a scheduled payment.

As a professional operator we then put on our “collections manager” hat and start the process.  Typically we initiate this process by attempting to contact the customer by phone.  Most operators also mail a late notice too at this time.  That notice informs them their rent was not paid on time and a late fee has been charged to their account.  In most cases the person who honestly overlooked making the rent payment will contact us immediately to apologize and arrange for immediate payment.   Too bad we are unable to clone these people!   We all love those who agree to go on auto-pay!

The more difficult people to collect from are those that are well experienced with dodging collection efforts.  They have often developed strong avoidance skills never answering phone calls, never accept or sign for certified mail and sometimes seeming to fall off the face of the earth.  These people are probably barraged by bill collectors each and every day so there is nothing new with your calls, they are just more of the same.  It will require a real threat to their goods to get action, a threat such as an impending lien sale (auction).   I’ve actually heard new renters ask managers “when do you cut locks?”  Certainly a bad omen for that manager – how do you spell deadbeat?

What I have found over my three decades in property management is the best sales people are often reluctant to be strong collectors.   Sales people love people and want to be loved in return.   They see enforcing the collection of delinquents as being the bad guy and often find it a very undesirable responsibility.  Perhaps, but collecting the rent is critical to survival.  After all, the operator contacted with the customer to provide a certain amount of storage space for a set payment every month.   Operators generally live up to their part of the agreement.   It’s the delinquent customer who has not performed as agreed to in writing.  Most rental agreements make the amount and due date very clear, no ambiguity there.   These customers have created their own problems.

The best collectors are the no nonsense operators who sometimes run the business like a military operation.  While they are relentless in their collection efforts they can often turn off rental prospects when reciting the rules rather than selling during the sales presentation.

My choice in operator selection is to choose the best sales person and help them accept their collection responsibility.  I often present the idea that someone who hasn’t paid has created their own problems, is an insult to them and should not be tolerated.

In my company our managers make collection calls starting at twice weekly but quickly elevate to three or more calls per week.  The old adage “the squeaky wheel gets the oil” remains true.   Some of the best times to call are early morning.  It seems that sleepy people are not as much on guard and often answer the phone.  The delinquent customer likely owes others as well.  Our objective is to make the most noise and be the biggest annoyance so we can get paid.

In addition to calls we mail late letters, send email notices, over lock the storage unit and deny access at the gate.  Of very high importance we document all of our collection efforts.  This is accomplished by making notes in the customer’s account in our management software.  These serve as a permanent record and can be very beneficial if the customer spoke with the manager to arrange some form of payment schedule but comes in when the manager is not there.  Our manager might agree to accept some payments but access is denied until they are paid up.  Every once in a while the customer arrives when the assistant is working and offers some story about having an agreement with the manager to pay a small amount but be allowed access to retrieve just one very important item.   Often they say they plan to sell the item to pay the rest of the rent.  Please don’t fall for that baloney!  With the notes the assistant can see the exact terms of any agreement.  Any experienced manager will tell you that someone who wants just a few things is likely to cherry pick the unit removing what they value most and leaving behind the stuff they really don’t care much about.  Certainly not a situation you want.

An important aspect of collections is to listen to the debtor.  Sure you’ll hear many made up tough luck stories but try to get beyond them.  I usually disregard the crazy story and bring the focus of the conversation back to the issue at hand.  “We are sorry to hear that your grandma died for the second time this year – now how are we going to get your account paid current?  We really don’t want you to lose everything”   Often when the debtor sees their smoke screen is not working they realize their best interest is to work out some form of deal with us.  Remember while this process can be a nuisance and is additional work it’s not personal.  Some folks simply are their own worst enemy and fail to manage their affairs very well.  On the other hand those who are habitually late help to increase the income via their late fee contributions.

I detest waiving late fees.  Certainly the cable TV, phone company and your bank are very unlikely to waive such fees.  Why then do some operators feel it’s necessary?  I assure you that most of the customers who complain about late fees would be the first in line to demand some form of rent credit if the gate was broken one day and they could not get access.

When dealing with delinquents before cutting locks we never know the relative value of the contents.  After the locks are cut and we’ve seen the stored goods we can better assess if there is real value, hopefully too much for the customer to lose at lien sale.

I’ve found that in some situations where the customer clearly does not have much money and the contents are of low value it’s best to simply collect as much money as possible and have the customer move out the same day.   We require the customer to show up with a truck to move out when they come in to make the cash payment.  We accept only cash at this point, no checks or credit cards.   The end result is the unit becomes available for re-rental and we’ve collected far more than we might at lien sale.   Let me qualify that last statement – under normal auction sales we know the value is relatively low.  This may not be as true considering the current frenzy created by the storage auction reality shows.  However I predict this will not last as auction bidders discover that unlike cracker jacks there is not a prize in every box.

When it’s time to cut locks I caution you to act very carefully and follow the laws in your state exactly.  You may wish to go above and beyond the law and follow other protective procedures such as filming the lock cutting, sealing the unit with a numbered tag in addition to a red lock, and always have a witness.  Shortcuts in the lien sale process can create real legal problems for you.   In my company we video tape the entire process of cutting the lock including writing the date and unit number on an erasable white board then placing it in the front of the unit to be included in the filming.   We also take still photos of the contents to be placed in the customer’s file.  We further film closing and locking the door plus application of the numbered seal.  The day of the sale that seal must be in place.  This provides some assurance that no staff member could have opened the door and removed any of the contents.  On occasion we hear from someone who paid up then claims they are missing something of a high value.  With a numbered seal and photos plus video of the unit’s contents we can show that big flat screen TV that was allegedly in the unit was not actually there.  Evidence usually trumps phony stories!

Another issue that arises from time to time is a request to make payments to get caught up.  The decision to allow this or not is a classic judgment call.  If we believe the situation warrants this concession we will often establish a short term repayment plan.  The first indication of good intent I look for in these situations is the customer in the rental office with some cash in hand ready to pay.   Otherwise anyone can walk in just before the lien sale and say they will be able to pay the day after the sale.   Show me the money now!    We typically require a 50% initial payment and 25% of the balance in addition to the regular rent for the next two months.   This customer will only have one opportunity to do a payment plan.   Establishing strict collections protocol will set the tone for all customers.

I recommend you establish a lien sale calendar noting the event and the date it must occur for compliance with the law.  It’s a good idea to build in a few extra days as it’s not unusual for the newspaper to misspell a name or fail to run an ad on the specified date.  Be sure to buy the newspaper on the publication dates for your ads so you can clip the hard copy plus the date and name header of the paper.  Carefully review for accuracy.   If there are errors have them fixed and run the ad again the next day.  If you’ve allowed some extra days in your schedule this should not cause any issues.

The day of the sale you will review every document related to the customer’s account and the sale.  Be sure you have mailed them all notices, the required ads were published, and names are correctly spelled including accurate unit numbers.   I’ve heard of a situation where the customer had two units, stopped paying on one and the operator sold the wrong unit.  Can you say lawsuit?   Next verify their account transactions looking for any transactions that may have occurred.  On occasion a new assistant may have accepted a small payment which really throws a wrench in the works.  Your only choice then is to start over!   If anything is questionable or in doubt I strongly suggest you hold the unit out of this lien sale to allow more time to resolve that issue.  If you allow a sale to proceed with technical errors you may be helping some attorney pay for their vacation this year.  Not getting sued is a good motivator to being cautious and accurate.

Once the sale has been held you need to vacate the units sold, apply the sale proceeds to the account as a payment then write off any balance to uncollected rent and fees.   We refer anyone with a balance in excess of $100 to a professional collection service.  It takes just a few minutes to submit the information.   The best services make an entry on the customer’s credit record.  This may cause them to settle up if seeking a loan sometime in the future.    On occasion we receive a check from the collection company – it’s found money.

In closing I recommend you do as much as possible to settle bad debt accounts as opposed to lien sale.  But remember sometimes the customer has already removed their items of value and have abandoned the rest for you to deal with, perhaps their idea of providing souvenirs of their stay with you.  These units are pretty easy to spot because they mostly contain junk, dirty clothes, etc.  But you must treat them the same as a unit with valuable contents.

With regard to personal effects such as photographs, documents, and other personal items it’s best to ask the buyer of the unit to return those items to you.  They are of no value to the buyer but probably have sentimental value to the customer.  Send the customer a letter advising you have personal effects they can claim at the rental office.  There are differing opinions as to how long to hold these items.  Check with your attorney for guidance here.

How to Find Hidden Income

July 1, 2013

Written by Charlie Fritts. This article was published in Self Storage NOW – May 2013 edition.

The number one priority for all owners, operators and managers must be the endless pursuit of how to increase income year over year.   That’s what business is all about – the money it can generate.  A business is an investment similar to purchasing stocks or bonds.  The investor is willing to put in capital and in return expects that money to make them more money.  The difference in a business versus a pure investment is the business usually requires more active involvement and oversight.

Why the never ending appetite for more income?  A few reasons are the drivers for that. If you review your financial statements you will see that regardless of your best efforts, many expenses increase every year.  As your vendors and suppliers raise their prices to cover the increases forced on them – so must you increase your income to offset that impact.  Failing to do that will erode your net income and profits.  Working equally as hard for less reward is not how we define success and could lead to financial disaster.

Another reason is the reward for the risk associated with investing your capital.  Generally speaking the higher your risk, the greater the reward must be.  Otherwise why take any risk at all if the reward is the same?  In business we measure success in terms of income and consider achieving more income than the year before as success.  The larger that increase is relates to the level of success we believe we have achieved.

Income growth creates value.  Simply stated when a business earns more money its worth more.  This benefits the investor when it’s time to refinance the mortgage and be especially beneficial if they sell the investment at a profit.

So we all know “why” increasing income each year is so important, how do I achieve it?

There are a number of methods to achieve more income.  Some of the most obvious are to increase board rates, the rate you charge new customers when they rent.  Then there are rent increases, when you charge existing customers more next month than they paid this month.  You could also build more units which will increase income as they lease up but that also requires a significant capital investment and takes time to accomplish.

Have you really considered the potential hidden income opportunities?  And I don’t mean looking under the chair cushions in your office for lost change.  If I am responsible for success I am going to turn over every rock and investigate every possibility that could lead me to my target.

The Secret Sauce

Now my recipe for the secret sauce: how do I start and where should I look?   Get yourself a beverage, a quiet place to work and a calculator.   Gather every management report your software can produce and a year’s worth of financial statements.  Sit down in a comfortable chair, now let’s get started.

Each management software developer has its own names for their reports but they usually contain the relevant information within a few reports.  For this article I will use fairly generic terms.  Idea: if you have never printed every report available – do it.  Some will not be of value but many will surprise you with the wealth of info they can provide.

Storage Rates

Being competitive is important when in lease up but if your property is stabilized and very full overall or even on some sizes yet your rates remain competitive – you are missing an opportunity.  Hotels and airlines consistently use supply and demand pricing to enhance their income.  Book a room 6 months from now and you’ll probably get some type of discount.  Walk in tonight and ask for a room – be prepared to pay full rate.

Carefully review the full unit inventory on an Occupancy Report.  Consider increasing rates on sizes which are very full.  Now look at the sizes which have high vacancy.  If your rates are competitive maybe you just have too many of that size.  Consider making high demand sizes by converting vacant lower demand sizes.  It’s quite easy to remove a partition to make a 10×10 out of two 5×10’s, etc.  You might also substitute units for sizes that are very full.  Many customers have no objection to having two 10×10 units if a 10×20 is not available and the 10×10 units are nearby each other, provided they pay the 10×20 rate.  It’s always advisable to manage your vacancy reserving side by side vacant units of the same size for such situations.  Better to rent a single vacant unit elsewhere in the building rather than break up a pair.

A quick story about grabbing opportunity that I’ve heard a few times over the years;     A guy drives up to a southern storage property driving a y’all haul at 5 minutes before closing.  When he walks into the office he asks “Do you have a storage shed?” The manager nods his head yes.  The man asks “How much does it cost – I’ve got to return this truck tonight”.  The manager who knows opportunity when she sees it but also knows this will be a late night for her responds “Well how much money do you have in your pocket?”  The man replies, “a few hundred dollars”.  The manager says “That’s just right, (thinking why not sell this $150 unit for $200) please sign here, initial there, etc.”

 Storage Rent

If you never increase the rent for existing customers you are missing opportunity.  When and how to increase rents is both a mixture of art and mathematics.   Be sure the risk of losing a few customers due to the increase is worth the reward of the new income they will generate.  Many expenses are going to increase – you had better keep increasing income to stay ahead.

Fees Waived

Sometimes it’s tempting to waive a late fee when a customer tells you a sob story about why they were unable to pay on time, especially when they are great story tellers.  I just never realized that some people have three grandmas and then to hear they all passed away this year – gosh that’s devastating!  Another time we are tempted is when an irate customer yells at us and infers we are heartless storage people who always want money.  So we waive a few fees for what we deem good cause.  However it can be eye opening when we review a “late fees waived” report and realize we’ve not collected an average of $200 per month or about $2,400 annually.  In most markets that’s about the same income as an additional rental or two each month.

Discounts

Here are two myths that need to change; It’s always good business to automatically give a rent discount to every prospective customer right?  NO!  It’s always price that is the deciding factor.  NO!  Storage customers all have their own reason for renting and their own concerns or requirements that will determine where they rent.  The best sales people listen to the prospect to determine what their hot buttons are then explain how their property can fill those needs.  Sure there are some people that would drive across town to save $3 per month however there are fewer of them than you realize. Believe it or not statistically price is third or fourth of the top reasons someone rents where they do. Location is usually #1, Staff is #2, Property condition/appearance/safety is often #3 then price for sure.

Certainly price will always be a factor at some point but let’s not feed that dragon by tossing out a discount right up front.  As I indicated price is not usually the #1 reason for renting – except of course for the price shoppers.  You will rent more units if you sell them what they want.   I often hear of operators who assume an all or nothing posture.  Either everyone gets a discount or no one. Anyone who is prepared to buy and is offered a discount would be foolish to say, “oh no thanks”.       If you are selective and offer discounts when the conversation indicates it as a hot button you will achieve more income and at least partially offset those units that must be discounted to secure the rental.

Locks and Boxes

Most operators offer locks for sale and many offer boxes and moving supplies.  The majority adopt a passive sales approach.  They have a display in the corner of the office but never sell much.  Try switching to an active approach for your merchandise.   You should be able to sell a lock to the majority of renters.  If you use a typical 100% markup that $10 sales nets a $5 profit.  If you rent to 30 units per month, selling a lock to 20 of them, after a year you have realized new income of about $1,200!   Sell to 25 of your rentals and its $1,500 per year.  But you have to “sell” the locks to do this.  Talk them up, remind people they need a lock and a nice new all brass padlock is a good investment to secure their goods.

The same goes for boxes, just by asking “How many boxes will you need today?” you will sell far more than a quiet rack of boxes can sell themselves.  In this case, discounts can be good if they sell more products.  Why not adopt a “bundle discount” offering maybe a 10% discount off all full bundles a person buys?  It’s a bummer when you’re packing at 9 pm and run out of boxes.   This opens the opportunity to discuss why they do not want to use super market or liquor boxes (unless they are fond of critters).  Offer a buy back policy, allowing any unused and clean boxes to be returned for a refund.  Customers are often more willing to buy more when they can return something for a refund.  In reality you will see very few ever returned.  An active merchandise sales program can produce $4,000 or more additional annual income.

Customer Insurance

If you are not offering this product and receiving an administration fee in return you should.  First adding a layer of insurance for the customer’s property helps protect your business.  We know and customers are told we do not assume responsibility or insure their goods.  That’s fine until they have a loss then it’s our fault and they usually expect us to pay for their loss.  Once I managed a property which suffered a flood, four feet of silt and water went onto every unit.  More than one customer told me in no uncertain terms the flood was my fault.  This didn’t faze me as the same thing occurred after hurricanes, tornadoes and fires which damaged buildings.  Second reason – there is income to be had.  An average 40,000 SF property can earn $4,000 or more annually

Lien Sales

Staging units with “lost and found” property can generate additional income and eliminate the need to dispose of them.  The better things that customers leave behind qualify for this purpose.  Simply take a vacant unit and put those items in there over a few months.  When you think it’s time include the unit in your next lien sale/auction.  You may not earn big money but you do eliminate the expense of disposal.