Rental Payment Fraud and How to Avoid It

Fraud in the world of online rent collection is nothing new. But in the age of the internet, the scams have become more complex and seem to increase in number by the day. Security risk is at an all-time high and for landlords left to their own devices, it can feel impossible to maintain an adequate safety net.

But there is something you can do about it. The most insidious aspect of fraud is that it is happening right under your nose, when you aren’t aware of it. In these instances, scammers take advantage of the fact that the average landlord isn’t privy to their common schemes. But knowledge is power and we have it. Read on to learn about all the ways fraudsters might take advantage of you and how to avoid it.

ACH Basics

The ACH, or Automated Clearing House, network is the primary system for electronic funds transfer. This allows for the direct deposit of funds from one party to another. You are likely interacting with the ACH network on a daily basis without even realizing it. Think “direct deposit”, “direct pay”, or “electronic check”. These are all ACH payments.

Typically, utilizing the network is a positive for all parties involved, as the easy flow of payments makes monthly transactions much more seamless. However, that convenience comes at the cost of increased exposure to fraud.

ACH Hacker Scams

Landlords with a business account can apply for ACH Network access through their bank. The application and screening processes are rigorous, but once approved, you are afforded a great deal of power. With the right info, you can forcibly pull funds from an account and send them to your own, and vice versa. This might seem like a pro, but just imagine if your credentials were to fall into the wrong hands. That level of access used against you would most definitely be considered a con.

ACH Tenant Scams

ACH payments can always be disputed, sometimes wrongfully so. Clever tenants could manipulate the system by strategically making a payment from a card not in their normal repertoire in the hopes that it would play to their own claim of fraudulent activity and ultimately result in a debit chargeback. While it wouldn’t be too difficult to counter this with your leasing agreement, it does present a possible nuisance.

Cracking the ACH Code

There are hundreds of ACH return codes that exist to help tell the story of why a transaction could not be completed. Below are a hand-picked few that could come in handy while managing your business.

R01: Insufficient Funds. Let’s start with the most common for a return. When the account used by the tenant doesn’t have enough money to cover the entire amount.

R02: Account Closed. The account linked to the information provided by the tenant is closed. It could be that the tenant was aware of this from the beginning, or that the change happened recently without his or her knowledge.

R03: No Account. In this scenario, the network is unable to locate an account associated with the numbers supplied by the tenant.

R04: Invalid Account Number. Similar to R03, the account number is bad; but, in this case, for a different reason. The digits entered do not meet the standard criteria for this particular pattern.

R07: Authorization Revoked by Receiver. When the agreement is first established, the tenant authorizes the collection of funds from their account. This notice indicates that the party has since revoked authorization. They have 60 days from each payment date to flag a transaction and claim as unauthorized.

R08: Stop Payment. This indicates that the tenant has placed a hold or “stop payment” on his or her account to halt the transfer of funds from their account to yours.

While a return code doesn’t necessarily indicate foul play, it’s best to be well-versed in their definitions and ready to take action appropriately.

Credit Card Scam

Credit Card companies are getting better and better all the time with the security features they offer customers. One of the most helpful and convenient services they provide is the swift handling of fraud. This is great if you are an unsuspecting cardholder whose security has been comprised. However, the safety feature itself can be used for the purpose of scamming.

Corrupt tenants who wish to evade payment might try disputing a charge for rent made on their credit card. If their bank finds the claim to be legitimate, based on their interpretation, they will authorize a chargeback. This will result in the loss of funds on your end. As a landlord, it’s convenient and cost effective to accept credit card transactions as a form of payment; however, it’s important to understand the risk involved. 

Peer on Peer Crime

Online platforms like Venmo and Paypal have given rise to a whole new way of managing your finances. By creating a peer to peer (P2P) transaction, they have changed the game when it comes to how we exchange money. And while this “at your fingertips” method might seem super attractive for the property manager on the go, think again. There are strict guidelines in their policy that prohibits the use of their technology for property management payments.

If the allure of app-style banking is too strong for you to resist, you do have the option of registering a business account; however, this is still not advisable. These platforms offer very little control to landlords when it comes to accepting payments. Meaning you could fall victim of a partial or unwanted payment – something that is sure to muck up an eviction process if there were to be one. The companies also tend to lean strongly in favor of the tenants, which could not bode well for your business.

Fraud IRL

Even if you are doing business the old-fashioned way, that is to say “offline”, you could still fall victim to fraud. Whether it’s a bounced check or a real-life stop-payment, these types of scams have inspired their online counterparts.

One common vulnerability landlords have with rent payments is around money orders. Many consider them to be a safe alternative to checks, as checks can bounce. The difference between the two is that money orders are prepaid, and as such, seemingly guaranteed. But as we’ve learned by now, nothing is quite guaranteed. The sad reality is that, like any other paper form or doc, money orders can be faked.

Even cash payment can get you in hot water. While it might seem like the most legitimate way to do business, there will always be people looking for an opportunity. With cash, the danger lies in the accounting. Unless you are accepting, counting, and providing receipts for all cash payments in person, it can be difficult to fully account for every dollar. That gap in security makes it easy for someone to take advantage of you and your business. For that reason alone, it may be time to reconsider accepting cash as a payment option.

Preventing Fraud

Invest in digital. Despite all of the ways fraudsters can strike online, there are some true advantages to taking your rent collection online. Not only does it provide convenience for yourself and your tenants, but their advanced security features and ever-improving customer service can give you invaluable peace of mind.

Screen your tenants. Perhaps this should have been at the top of the list, as the crucial, and often overlooked step can truly nip any fraudulent activity in the bud. The screening will deter any career scammers and even first-time fraudsters from trying any funny business.

Know the risks. As the way we do business continues to change, so do the ways of the con. Stay up to date and informed on payment methods and platforms available and you are one step closer to securing your business from potential manipulation.

Fraud is a reality. But that doesn’t mean it has to be inevitable. With the examples outlined above, your awareness alone makes you that much more protected. As we said, knowledge is power. And now you have it!