FORBES — Addressing Junk Fees In The Multifamily Industry

Tyler Christiansen, CEO of Funnel, on the role of regulation in housing affordability.

Leaders in the multifamily industry are currently discussing major issues like housing affordability, proposed rent control regulations and junk fees. This isn’t a partisan issue; housing impacts everyone. As a vendor serving customers in the multifamily space, my opinion isn’t popular with everyone in my industry.

Rent control has been proposed as a possible solution in the election cycle—even though data shows rent control doesn’t always doesn’t drive the desired long-term housing affordability outcomes.

However, the second piece of proposed regulation aimed at a quicker fix to housing affordability is doing away with “junk fees.” While some within multifamily dismiss junk fees or lump them in with broader “rent control” legislation, they are not one and the same. Junk fees are real and have no business in our industry.

If the multifamily industry wants to help with affordability, we can’t just say, “The only solution is to build more apartment buildings.” While increasing supply and building more housing is the correct long-term solution, we also need to think short-term and call out things that aren’t right, like junk fees.

The multifamily industry has an opportunity to establish equitable practices around fees.

What is a junk fee?

Junk fees are hidden, surprise fees that companies (both within multifamily and in other industries) sneak into consumer bills. Examples of common additional fees can include trash removal, pest control or credit reporting. In and of themselves there is nothing wrong with these services. However, when they are mandatory and buried into a 50-page lease, thus often going unnoticed, you cross into junk-fee territory.

When should property managers disclose fees to renters?

Late or lack of disclosure of additional fees is problematic. Often, renters and renewing residents learn of the additional fees when they are ready to sign their lease, shortly before move-in (if not after). At this point, the disclosure is too late. They’ve already given notice at their prior place of residence, invested in moving expenses or don’t have enough time to find a new apartment before they must renew or move.

If renters are interested in these fee-based services and choose to opt-in, that sets proper expectations regarding cost and the renter experience at a property. I want to be clear: It’s not that many of these fee-based services are bad services, in my opinion; the problem is that the fee is often disclosed to the renter too late.

An example of how fees should be disclosed is airline insurance. Before you click “purchase,” you check a box saying you understand you’re opting not to buy insurance for your flight. A clear opt-in or opt-out step for additional fees when renting an apartment early in the customer journey is an easy solution to align the expectations of renters and management companies.

Suppose we, as multifamily leaders, don’t solve for junk fees and affordability. In that case, it wouldn’t be far-fetched for people unfamiliar with multifamily operations to make uninformed decisions about what you can and can’t charge for at a property level.

A nuance: Application fees have real costs.

One fee I often hear discussed in the context of junk fees, where the blame feels particularly misplaced, is application fees. This is a nuanced discussion. I believe a universal application for all apartments or allowing renters to provide their credit history isn’t the answer.

There are real costs to screen applications in software and in teams’ time reviewing applications. Unlike junk fees, the application fee is disclosed upfront as a one-time charge. With the rise of fraudulent applications, I believe it’s up to housing providers, just as it is up to any other business owner, to assess and decide on their risk tolerance for approving or denying applications. Because of the rise in fraud, housing providers are screening for credit, identity and verifying income.

According to a survey by the National Multifamily Housing Council (NMHC) fraud is a real and growing concern for housing providers.

• 93.3% experienced fraud in the past 12 months.

• 70% experienced the use of some form of identity theft.

• 84.3% reported falsification of income/employment documentation.

• 70% saw increased fraudulent activity in the last 12 months.

Respondents to the survey also wrote off an average of nearly $4.2 million in bad debt and a median of $800,000 over the past 12 months. Nearly a quarter of this bad debt was attributed to the non-payment of rent due to fraudulent applications. Fraud hurts everyone by limiting the supply from good, qualified renters to inherently making renting more expensive as companies work to recoup costs on their bad debt.

What responsibility do vendors have?

To add more gray area and complexity to this issue, I would like to take some of the onus of the current junk fee dilemma in multifamily off the shoulders of housing providers and share it among the suppliers servicing the industry. Early in the world of multifamily software, vendors learned that there were margins to be made from the payments of renters. Often, they offered discounted software, which was essentially subsidized by the profits they made by offering rent payment portals.

Some vendors also sell services typically disclosed late in the lease, resulting in junk fees for renters and residents. Often, the business model for these companies is to split the profit on the fees charged with the management company, garnering ancillary revenue for the management company. This practice of splitting costs for property management companies and suppliers is ethical—only if it is clear to the renter that they are opting in or out of this service and they can make an informed financial decision early in the process.

With the way the single-family housing market is going, more renters will be lifetime or at least long-term customers. None of their other purchasing decisions are more important than where they call home, so it’s time to start treating them better.