Where do you stand when a vendor defaults?

Debt collection expert, Roger Mendelson from the Prushka debt recovery network has revealed that they have noticed a significant increase in debt referrals from the industry, with a number of agents being ‘burnt’ on advertising by vendors. Roger has some tips for managing this problem, plus some other pointers for effectively managing your cashflow!

In an ideal world vendors would fully fund their advertising costs. However, as every practicing real estate agent knows, obtaining listings is always difficult and insisting on full pre-payment of advertising expenses can make it even more so.

The reality is many vendors are cash poor but asset rich (at least to the extent of their equity in the property to be sold). The debts which we manage usually occur up front or during an extended campaign, when additional advertising is required.

Many vendors either simply lack the funds to finance a campaign in advance or are reluctant to outlay the money and will switch the potential listing to an agent who takes a more tolerant attitude to
vendor-funding. So to be competitive, the agent probably needs to be flexible.

If you find yourself in a situation where you have chosen to take the listing, but the vendor cannot pay upfront, there are some very simple steps – which if taken – will avoid agents being left out-of-pocket and enable you to recover all debts owing at nil cost.

My top tips for not being caught with these costs are:

  1. Add an additional clause to your authority form. Most agents’ authority forms that I have seen (and they differ often from state to state) have been deficient.
  2. The clause will provide that in the event of default, all collection costs are to be borne by the client.
  3. Never expend money on advertising unless it is fully authorised in writing by the client.
  4. If you are placed in the position where you need to recover monies from the client (usually, in the event where the property is sold by another agent or is withdrawn), advise the client, without delay, that unless they pay the fully amount owing to you within two (2) working days, you will be outsourcing the recovery to a collection agency and pursuant to your terms and advise the client will be liable for all collection costs involved. This additional penalty will provide a real incentive to the client to pay you, in order to avoid the additional costs.
  5. Unless you receive payment within a short time, refer the account to a collection agency or lawyer and instruct them to also recover collection costs. It is a big mistake to delay because at the point of default, you are aware of a significant asset owned by the vendor (being the property) but this could be sold and the funds dissipated.

We have found in the past that recovery rates on these accounts can be high if handled in the correct manner.

Some of my other top tips for managing your cash-flow:

  • Be proactive in your own debt recovery, do not wait until tax time or when it begins to pile up – get ahead with your finances.
  • Ensure your trading terms are set up so that any debt recovery costs are covered by the debtor, this will make it far easier for you to recover money owed.
  • Go through old written off accounts and refer them to a collection agency which is prepared to take them on.  The longer a debt is left the harder it is to recover!

Roger Mendelson is the CEO of Prushka Fast Debt Recovery.

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