Cleveland is a great cash flow market for investors looking to purchase property. However, there are a wide array of intricacies involved in handling the utilities for these homes.
One key issue is the difference between public utilities and City of Cleveland utilities.
Gas and electricity aren’t city utilities, so they can be put in the tenant’s name pretty easily. There’s no real issue in doing this and once the utilities are in the tenant’s name the landlord isn’t really responsible.
On the other hand, water and sewer are very different issues because— even if they’re put in the tenant’s name— they’re ultimately the responsibility of the owner. And, in the event that the tenant doesn’t pay, that can stick to the owner’s property tax.
Left unpaid, the house can be foreclosed on years later for non-payment of utilities.
So, as you can see, dealing with water and sewer— and other City of Cleveland utilities— can be tricky.
And, another important aspect of this issue is that, in Cleveland, the water bill only comes out every 90 days. Which, for a lot of tenants, can be very difficult to pay. Many of them end up getting behind in their utility payment for any number of reasons. They may not be great at managing their money and when that bill comes every 90 days it completely throws off their budget.
1. The tenant puts the utility in their name. Usually there’s a large deposit and we’ve found that many tenants can’t afford that. They can afford the deposit when they move in— they can afford their rent— but they can’t afford the large deposit required by the water department, and that can create a problem when you’re trying to get someone moved in.
Here at Realty Trust Services, we have a checklist that we use before the tenant gets the keys. They have to show us that the utilities are in their name if that’s required.
So, for some tenants, that means they thought they could afford the house, but they can’t move in until they satisfy the conditions of that checklist.
2. The second way we handle City of Cleveland utilities here at Realty Trust Services is that we have the bills forwarded to our office. We then send it directly to the tenant. We also save a copy online on their account.
The beauty of this is that we can actually see the bill. It doesn’t have a chance to rack up. We’ve seen some tenants run up bills over $2,000 that we had no idea about because we weren’t seeing it.
This method lets us see the bill; lets us know if the tenant doesn’t pay it; and we’re also able to see any abnormal usage, like what might result from a leak or someone else staying in the house and using more water than usual.
This helps us manage the property more effectively and, if the tenant doesn’t pay, it will usually get shut off sooner rather than later this way.
Which is a great benefit for the owner because we’ve seen water bills get up into the thousands. More often than not, the City will shut off the water when the bill gets to around $700. Which works out in our favor because our only way of collecting the amount due if they don’t pay is to evict them, send them three day notices, call them… But, ultimately, if they still don’t pay we have no other choice but to evict them.
Eviction isn’t really a great option or something we want to rush into doing. It’s not the best course of action for the owner or the tenant. But we’ve found that if the utility company shuts off the water, the tenant oftentimes pays it and the City restarts the service. That’s a much better alternative than losing a tenant that was otherwise paying all of their other bills except the water bill.
You might ask, “Can you, as the management company, or I, as the landlord, turn off the water?” No. That’s illegal. You can’t turn off the water because doing so is actually considered a self-serve eviction. The water company can turn off the water, but neither the owner nor the management company are legally allowed to.
3. Another option some landlords prefer is to keep the utilities in their name, they pay the water bill, and then the management company collects reimbursement from the tenant. Some landlords will go this route because they worry that— since the water bill is in their name— if it’s not paid, it will reflect badly on their credit.
I can tell you from a wealth of personal experience (I’ve seen many hundreds, if not thousands, of credit reports), that I’ve never once seen a water bill on anyone’s credit report.
The reason why unpaid water bills don’t affect your credit score is pretty simple. The water company is always going to get its money because they go in as a first lien— before a mortgage, before judgment, and before a lot of other liens— right alongside property taxes. They’ll get their money eventually.
Truth be told, unless there are some unusual circumstances— the property is worth $0 or its a toxic waste dump and it won’t sell for anything in a foreclosure sale— the water company will get their money. So they tend to not worry too much about whether or not its paid when its due.
But that’s an option a lot of landlords choose to use. They pay the bill and then we, as the property management company, collect reimbursement from the tenant. It’s handled just like rent.
But, if the tenant doesn’t reimburse the owner, the owner is out of money. That can start to build up over time and eventually the owner has the problem of, “Do I want to evict this person because they didn’t pay their water bill?”
There are times when that’s the only real choice an owner has to get the tenant to pay what they owe. It’s not a good position to be in and I personally think people should avoid ever going down that road. It can cause a needless complication. Make the tenant pay their own bill directly to the water company. It’s ultimately much easier for everyone involved.
4. The last option I want to talk with you about is budgeting.
As I mentioned, in Cleveland the water bill tends to come out every 90 days and the amount can substantially accrue in that time period.
One option we here at Realty Trust Services have for our clients is that we can set them up on a budget. On this budget, they pay a certain amount every month. This amount is based on what we think typical water use would be each month for that property.
Then, when the bill comes in, we pull from the amount the tenant has paid in.
So, for example, let’s say the bill came out and the total was $250. Well, for the last three months the tenant was paying $100 a month. So when the bill comes in on that 90 day mark, the tenant has $300 in their account. We pay the water bill out of that and the tenant has $50 left to roll over to the next water bill cycle.
This way, the tenant is happy that we provided a service to them, we can verify that the bill is getting paid, and it’s a win-win situation.
These are just some of the methods you can use to manage the water utility for a single family property. If you’re dealing with a multi-family property, there’s an entirely different set of techniques for dealing with this. We’ll look at those in another blog.
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