Getting tenant screening and selection right significantly mitigates risk. One of the first things prospective owners and property investors want to know is how to screen tenants. Whether you are a property manager or a property owner, screening tenants is a make it or break it situation. The ideal tenant is clean, quiet and pays on time. Knowing what homework you need to do (and how to do it) is top priority.
Most often, we encounter managers or owners who are sick and tired of bad tenants. Property management ultimately leads to profitable properties. Real estate investments that work help us achieve financial goals. The fun of this is to live the life we want to live because we have well-managed properties that lead to healthy portfolios.
The Outcome of Inadequate Tenant Screening & Selection
One of the most common reasons people sell investment properties is because they have a bad landlord experience. This is a clear indicator that the wrong tenants were chosen. They then throw out the baby with the bathwater and lose all the benefits of being a real estate investor because of this negative scenario.
Some people are actually built for property management. If you are:
Okay with numbers
Are also compassionate
Understand the law
...you may be perfect for property management.
Obviously, most people aren’t built this way. Don’t let the fact that “landlord” isn’t the right role for you get you out of a gig that has such high potential for profit. If you don’t want to do any of it yourself, hire a professional property manager who has a great track record of placing tenants.
Without the proper screening, property managers or owners can land a starring role in a dismal tenant scenario.
Tenant Scenario 1: Bait and Switch Tenants
In this situation, the owner of the home wanted to maximize profit and rent out another room. She was self-managing and relied on an ad in the newspaper. The owner met a potential tenant on the phone. He lied about his age. The potential tenant also had an undercover substance abuse issue. A large rottweiler was brought onto the property under false pretenses of being a foster animal.
This is a good reality check: some people are trying to get into a property and will lie or deceive to do so. Their prime target is DIY landlords who don’t have the training or know the red flags to look for. If you haven’t seen a high volume of applications, you could attract fraudsters.
Tenant Scenario 2: Destructive Tenants
Tenants moved out and had destroyed various appliances in the property. The tenants had somehow managed to put holes through the granite countertops. Even with adequate initial walk-throughs, some tenants are categorically destructive. They can cause more than cosmetic damage and rack up some real costs that end up costing an inexperienced owner or property manager a lot of money.
Tenant Scenario 3: Non-Paying Tenants
Tenants may look great to begin with. Within a couple of months, this tenant started to have issues paying rent. In this case, the prospective tenant was an older, single woman. She was sweet. On the property, the rent had already been dropped a couple hundred dollars a month and was proving difficult to fill.
When signing documents, this tenant handed over a security deposit check that was only 75% the amount needed. She said the rest would be forthcoming. The property manager should have returned the check on the spot. Instead, they agreed to it.
Sometimes, property managers operate as a nice person and not as a business, it can open the door to tenants who will end up not paying.
Tenant Scenario 4: Strange or Inappropriate Behavior
In this scenario, the prospective tenant seemed overeager and even strange during the interview. She had a third party who would be helping pay rent. The property manager made the mistake of not putting that person as a guarantor on the lease. In time, she began having a steady flow of strangers and visitors come in and out of the home. There were strong indications of regular, illegal activity. Multiple notices of speeding vehicles were mailed to the property manager, which began to cost hundreds of dollars in terms of tickets and violations.
The woman had lost her job, had children and got wrapped up in some illicit activity. She became a completely different person from the first day. In hindsight, the lease structure and some behavioral red flags could have prevented major issues.
How to Screen Tenants
There are several important steps in this process. If you put the right procedures in place, you can immediately disqualify people who will cost you money and frustration down the road.
Remember that like attracts like: if you want a high-quality tenant, have a high quality property.
Have a higher barrier to financial entry: for example, have applicants come up with a full month’s rent and full month’s security deposit.
You must have predetermined screening criteria. As long as they’re within legal bounds, these can be anything you want.
Create a screening scorecard that includes things like:
Poor credit score
DWIs or DUIs
Previous late payments
Dogs or pets (breeds, weight, how many)
Multiple people per room
Income to rent ratio
This may seem extensive but ask yourself this: how much liability are you willing to take on? Having this framework sets you up for success.
The most fair thing is to provide this to a prospective tenant. If they’re uncomfortable applying after learning your criteria, you’ll have a great answer to whether or not it’s a fit.
Fair housing is a big deal and an easy pitfall for new property managers, landlords or owners. The best rule of thumb is to describe the property and not what it is close to or anything beyond the facts. There are seven protected classes that cannot and must not be discriminated against.
One that frequently gets unwittingly violated is familial status. Landlords will think, “I’d love to rent to a two-income household.” Nope. It is tempting and makes logical sense but it is a violation. The law categorically prohibits showing preference for a class of people. Avoid doing that (and get legal advice if you have any questions) and you should find the right tenants.
Keep in mind that some states and municipalities have additional protected classes. For complete understanding, refer to legal professionals and the law in your own state.
Disparate impact cases have brought to court issues like categorically prohibing “anyone with a criminal record” from being a tenant on your property. Some court rulings have favored excluded parties due to related facts. The logic is: if minorities are more statistically likely to have a criminal record, this exclusion unfairly precludes them from renting the property. While this argument could result in a slippery slope for all screening criteria, it’s noteworthy and should be considered in the way you screen for tenants.
ESA and Service Animals
Disallowing animals en masse can severely undercut your pool of potential tenants. Whether you do or don’t allow animals is entirely up to you. What you cannot do is deny service animals. If someone applies with a service animal and has the proof, that cannot be a decision criteria for whether or not to rent to them.
Pre-Qualification for Tenants
Pre screening tenants can include strategic questions that let potential tenants self-select out. This is an exercise of transparency. Connecting with someone over the phone may be an important way to weed people out. Remember, as either a property owner or property manager, you’ll be stuck with this person for a while. People’s attitudes and behaviors at this stage tell you a lot about what they’ll be like as tenants.
There are some important agreements and documents to get in place during screening.
Records of debt, medical debt, charge-offs, late payments, money owed, etc.
Income and employment records
Keep in mind, there are laws that you can or cannot ask a tenant or in a rental reference. While some property managers think rental references are a waste of time, you can find out a lot of important information. Even while treating everyone with respect, you need to investigate and look for fraud on every application. If you don’t look thoroughly, you’ll miss red flags.
Tenant Scenario 5: Fraudulent Tenants
A woman put in an application that looked great: good credit, solid income, rental references. There was one instance on her record that implicated her in writing a worthless check. The property managers went into investigator mode. On the surface, the application looked like a slam dunk. On digging deeper, the rental reference was gleaming, but they still had a check.
They pulled tax records for the property owner. They called the company who actually owned the property inquiring about a rental verification. The person in question was not on record as living on the property. They call the property management company back up and confront them with this information. She couldn’t provide a real estate license number for the state. The story quickly unraveled, revealing intentional fraud. The prospective tenant had stolen someone’s identity and was using that to supply paperwork and identification. An enormous mess was avoided because the property managers could follow a hunch based on extensive experience, seeing the small early sign of an issue.
Prospective Tenant Red Flags
Red flags happen. Spotting them early can save you huge headaches in the future. Best case scenario, you know what red flags look like, how to spot them and how to handle them. Here are some of the common red flags:
Tenant sense of urgency
Need to move immediately
Willing to pay more up-front
Inconsistencies on an application
Unverifiable personal info
It isn’t worth it to fill a vacancy fast if you get stuck with fraud or a bad tenant.
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Selecting tenants is just one of many roles of a property manager. If you own a property and are managing it yourself or if you are a property manager, this is a great place to find vital info.
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