Rent Collection

What Landlords Should Know About Online Rent Payment Fraud

August 6, 2020

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Everything You Need To Know About Online Rent Payment Fraud

Getting scammed by a fraudster is, at best, infuriating, and at worst, terrifying. Let’s be honest: If you get scammed in the course of doing business, the consequences could be devastating. Unfortunately, while rent payment fraud can be scary stuff, it’s a part of the reality of doing business, and it’s something everyone deals with on some level at some point.

Let’s review how fraud can happen with online payments so you know what to watch for and you have the information you need to make the right decision about collecting rent online from your tenants. What makes online fraud noteworthy isn’t just that you are being scammed — it’s that it happens when you don’t think that it is. In other words, you think that you are being paid, but, in fact, you are not.


ACH payments are made through the Automated Clearing House (ACH) Network , and these transfers enable the direct deposit of money from one party’s account (your tenants’, for example) to another’s (yours). You may participate in ACH payments without realizing it. The ACH Network is likely the means by which you receive direct deposits from your employer and submit (or receive if you’re lucky) payment from the IRS during tax season. Some landlords use the ACH system to automatically draw funds from their tenants’ accounts, others use it to enable their tenants to initiate rental payments themselves.

Generally, ACH payments are secure and present landlords with the convenience of receiving payments from their tenants online without the hassle of processing cash or checks. Nevertheless, it’s important to be aware of the ways in which ACH payments can be problematic and can expose you to scams from a malicious third party (i.e., a fraudster) or from your tenants.

Hackers and ACH Scams. Some landlords access the ACH Network through their bank directly. If you have a business banking account with your financial institution, you can chose to collect rent payments through your bank. The low cost per transaction, control over the process, and prior relationship with your banker may all contribute to the decision to go this route. However, the ACH Network can be a dangerously powerful tool. Once permitted to access it, all you need is a account number and routing number to forcibly take funds out of an account and send them to yours. This may in itself sound a bit scary, but the application process is strict and requires significant personal information in order to just get started. There are also limits on transactions and volumes.

But, with great power, of course, comes great responsibility. You can use the ACH Network to collect funds, but you can also use it to send them. If you are not careful with your online practices, your login credentials could easily fall into the hands of a nefarious ACH scammer. Before you know it, funds could be issued from your account to theirs. If you don’t catch these transactions quickly, they will be completed and, once sent, funds are difficult to recover.

Tenants and ACH Scams. As a landlord, you probably know all too well that delinquent tenants have no shortage of excuses. Likewise, if there’s a way to dodge a payment, they’ll find it. With ACH, there are a couple different schemes they can employ:

Debit chargebacks. It is always possible to dispute an ACH charge and, as long as the funds are still in the receiving account and the dispute is ruled in their favor, those funds will be returned. If your tenant submits a payment, particularly if they do not have a history of paying you in that manner, they may be able to successfully dispute the charge and pull the money back out of your account. Of course, if you have a lease agreement, this can be fairly easy to contest, but it’s a headache nonetheless.

Deposit schemes. While it’s common practice to give your account and routing number to businesses with which you do work professionally, we don’t recommend you share this info with your tenants. No, bank account numbers are not confidential like your Social Security Number, but coupled with a few other key pieces of information, an account and routing number can be used to grant someone access to your online banking account (and, as noted above, if you have ACH Network access, that can be quite dangerous).

Putting this info in the hands of someone that is not trustworthy is likely ill-advised. What’s more, if you arrange to have your tenants deposit their rent money into your account each month, you are losing control over rejecting their payment. This might sound trivial, but keep in mind that if a tenant deposits as little as $1 into your account, it may compromise your ability to evict them.

ACH Return Codes

When ACH transactions fail or cannot be completed, the ACH Network will issue an ACH return code, which will help the parties involved in the transaction understand the nature of the failure.

Hundreds of ACH return codes exist, but some are more common than others. Here are some that could come up in your relationship with your tenants:

ACH Return Code R01: Insufficient funds. This is the most common reason for an ACH return. You’ll see this when your tenant does not have enough money in his or her account at the time of the transfer to cover the full amount. Partial amounts will not be deducted.

ACH Return Code R02: Account closed. It could be that your tenant gave you information to an account that the tenant knew was closed, or it could be that the account was active, but for whatever reason, the tenant recently closed it.

ACH Return Code R03: No account, or not able to locate account. In this case, the account numbers provided are the proper number of digits, but the accounts do not match the person identified or the numbers link to a closed account.

ACH Return Code R04: Invalid account number. Like R03 codes, this is the result of a bad account number. But more specifically, R04 codes appear if the account information is improperly entered (for example, a five-digit number is provided for account strings that have six digits).

ACH Return Code R07: Authorization is revoked by receiver. In this case, the tenant revokes previously approved debits from his or her account. A tenant has 60 days from the date of the payment to claim that it is an unauthorized transaction.

ACH Return Code R08: Stop payment. This is exactly what it sounds like. The tenant has placed a “stop payment” on his or her account to stop payments from their account to yours.

Each of these return codes indicates a situation that has its own timeline. That is to say, some of these return codes mean that a transaction is not possible. For others, the return code could indicate a transaction occurred but is being reversed. Others come with specific windows within which the tenant or the landlord must act (Return Code R07, for example). If you accept payments through ACH transfers, check online not just to see what a specific return code means but how long you or your tenant has to act to make sure you don’t miss key deadlines.

Credit Card Chargebacks

Any chargeback is the process of returning funds to the consumer. A credit card chargeback happens when a consumer calls the bank to dispute a charge to the card. This option affords credit cardholders the opportunity to dispute payment for something that someone else bought using their card. Scammers take advantage of this process and dispute charges for things they purchased or used. If you accept credit card payments, you should know that tenants can call the bank to dispute the charges for having paid you rent. If the bank goes ahead with the chargeback, you lose the money the tenants paid you. Credit card transactions are incredibly convenient and are often in high demand from tenants. But it’s also important to understand their risks and what you can do to mitigate those risks before accepting them. 

P2P Fraud

Be aware of the limits and dangers of using platforms like Venmo. Mobile technology has given rise to eCommerce and peer-to-peer (P2P) transactions, so using apps like Venmo and PayPal to share the cost of group expenses, pay a friend back for a movie ticket, and do just about anything feels as standard as taking out your wallet and paying in cash. So it’s not surprising that platforms like Venmo and PayPal seem like an attractive option for collecting rent. However, these tools are not designed for property-management payments, and using them for your renting business is a direct violation of their user agreements.

Let’s say you do right by the user agreements and register a business account. P2P tools are still risky for landlords for a few reasons. For one thing, you don’t have much control over the payments. For example, you don’t have the option of rejecting payments, which is invaluable if you are trying to evict a tenant for overdue rent. These platforms also heavily favor the buyer (or tenant) and funds that you thought had been paid can easily be pulled out from under you.

Offline Fraud

Fraud is older than the internet, so sadly, you can still be the victim of fraud, even if you take all your business practices offline.

Bounced checks. Lots of landlords accept rent payment in the form of checks, for example. Landlords may deposit the rent check only to have it bounce, which happens when the person who wrote the check has insufficient funds in his or her account (the identical, analog version of the R01 code above). When a landlord deposits a check that bounces, the bank reverses the deposit from the landlord’s account even if the landlord has already spent the money. The bank will reverse the deposit and the account will show a negative balance. So, if you accept checks, be aware that tenants may knowingly write you checks that are bad or that could bounce.

Stop-Payment. Insufficient funds returns are not the only commonality between ACH payments and paper checks. Account holders can dispute any transaction, or deny it, regardless of the method by which it was initiated. Sure, their signature may work against them, but a tenant can easily use a fake signature to corroborate their story (or, gasp! copy and mimic your signature from the lease to make it look like you perpetrated the fraud). 

Money-order problems. Because checks can bounce, many consider money orders a safe alternative. The problem with that mindset is that it can leave landlords in a vulnerable position as they then expect they won’t ever have problems with this alternative. Money orders are like checks in that they are paper documents used for making payments. They are different from checks in that they are prepaid. Your tenant can go to a bank, credit union, post office, etc., purchase a money order, and deliver it to you. Seems like a sure bet.

But like all paper documents, money orders can be faked, and faked well. In some cases, these money orders are so well counterfeited that they are initially accepted by the bank, only to be reversed later. Your best bet is to contact the issuer to verify the funds before cashing it.

Cash payments. We get it. Cash is uber convenient; there’s no waiting for payments to clear or worrying if checks will bounce. And, once you have it, you have it. Of course, money can be counterfeited too, but it’s actually incredibly uncommon and, once in circulation, is not a major risk.

However, it might be time to reconsider accepting cash payments. Cash can be difficult to effectively account, can be dangerous to have in large quantities, and can leave you vulnerable to a he said / she said dispute. For example, your tenants could claim they’ve sent the full rent payment, but in fact they’ve skimmed off the top. If you or an employee aren’t present when the payment is delivered to count it out and provide a receipt, you get stuck in a difficult to resolve fight. If you’re going to accept cash as a form of rental payment, we strongly advise you issue receipts to avoid this issue.

How to Prevent Rental Fraud

Lean into digital. It may seem like no method of rent collection is safe, but there are actually advantages to choosing the digital route. As outlined above, any payment method can be manipulated by a fraudster, but some online options do provide additional resources and data points to help ensure your funds are delivered on time, appropriately, and without risk of any returns.

Always screen your tenants. We can’t stress it enough; proper tenant screening is critical for any landlord worth their salt. A comprehensive identity verification, criminal, and credit check will root out repeat scammers, and scare away those that know they would be caught. And be wary of the miracle tenant that shows up offering above market price for your rental. Once you give them keys, it is more difficult than you might imagine to take them back.

Know the risks of each payment method and what you can do to make them more secure. You can’t avoid fraud all the time, but it helps if you are aware of the risk of each payment method and you make your choices fully informed. There may be ways to increase the security of the method you’ve selected. For example, some property management software can enable direct deposit payments without requiring you to give your account information to your tenants, preserving the convenience of direct deposits while retaining your ability to reject payments.  

In the end, we can’t promise you won’t run into trouble with one of your tenants at some point during your tenure as a landlord. But the good news is that you can avoid most trouble most of the time by being diligent in understanding common fraud techniques and smart about your business practices.

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