By Jamie Borodin
Property management rentals can be a lucrative investment, but return on investment is put at risk when you rent to the wrong applicant – one that won’t pay the rent or who may pose a safety risk to you or the neighbors living around your property. Effective applicant screening is the key to managing that risk and optimizing your investment opportunity. Familiarizing yourself with these tips can help to accomplish these goals.
Good resident screening accomplishes these important goals:
1) Is the applicant’s income sufficient to cover your rent?
2) Does the applicant’s rental and credit history point to the applicant reliably paying your rent?
3) Does the applicant have a history that jeopardizes your safety or the safety of neighbors living around them?
Before you can address these goals, it’s important to get the basics out of the way.
First, have the applicant complete an application. The application helps provide a foundation about your applicant’s background, and equally importantly, it gives you the authorization required to run a thorough background screening report. Make sure that your application includes appropriate consent language, and make sure it includes the right questions to help you understand your applicant’s background, including:
- Key demographic information about your applicant
- Employment and income information
- Prior residency experience
- Important considerations like history of criminal activity, history of lease problems, history of credit problems, etc.
Remember that an application, while important, should be taken with a grain of salt. Applicants are not always honest or forthright with volunteering information. While some applicants will be up front about negative history, more often applicants tend to omit negative information about themselves. That’s where the screening process comes in.
That said, before you get to the point of screening, you should verify that the individuals applying are who they say they are and can provide some evidence about their finances.
Documentation and Income Verification:
When you check into any hotel, the first thing the hotel requests is a copy of your photo ID and your credit card for payment. If a hotel is concerned that guests are who they say they are for a few nights’ stay, you should certainly be concerned about the individuals who will be living with you for a year or more.
So, make sure you obtain a photo ID – a driver’s license or passport – and make sure that the name and DOB on the ID matches the information provided on the rental application. For non-US citizens, if the applicant doesn’t have a permanent resident (green) ID card, then a Visa is required (with a valid through date past your lease end date) as it shows that the applicant has legal status to be residing in the US.
Next, obtain proof of income, which can be pay stubs or an offer letter. This is the key to understanding if the applicant really makes enough to afford your rent. Carefully review the pay stubs for authenticity. While relatively rare, there is an ever-increasing amount of pay stub fraud. If the stub looks like something that was generated from a simple computer or if it shows any signs of alteration (like numbers out of alignment, dates with inconsistent formatting, numbers that don’t add up), then follow-up; independent verification is critical. That follow-up can include obtaining bank statements showing consistent deposits that match the net pay shown on the pay stubs, or independently verifying employment directly with the employer. If you do contact the employer, don’t rely on the phone number or contact information supplied by the applicant; independently search for the company’s phone number and HR contact online. Good screening companies also offer verification services, so consider having the screening company handle it if verification is important to you. Look for gross income that exceeds 2.5 times your rent amount at minimum, although 3 or even 4 times rent is recommended, particularly for higher end properties.
Be careful about accepting W2 or prior year tax returns. These documents can also be altered, and even if they are legitimate, they represent historical income, not current income. You need to know what the applicant is earning today, not what they may have been earning several months ago.
Background Screening Reports:
A good background screening report helps you understand whether your applicant’s past performance points to the applicant being a good rental risk. The financial risk assessment generally includes an overview of the applicant’s credit history, and a search of landlord-tenant court records. The social risk assessment includes a criminal background search and terrorist (OFAC) background search.
Credit reports can be difficult to understand and inherently subjective – and due to more stringent credit bureau rules designed to mitigate the risk of identify theft and fraud – are much more difficult to obtain than they used to be. An experienced, professional screening company will offer a report that assesses the credit information with or without displaying the sensitive credit details. Look for a company offering a rental score, which is like a credit score but is a scoring model designed specifically to assess rental risk rather than more general credit risk. Also, look for a model that can be set to exclude credit items that tend not to correlate to rental risk, like medical bills and, potentially, education loans.
Most reputable screening companies will include a review of landlord-tenant court records, which is important as it tells you if your applicant has ever been taken to court – generally for non-payment of rent. LT records are based on limited information, so make sure you work with a screening company based locally – one that understands how records are sourced and matched. Beware of instant reports; these instant reports rely on computers to match or omit records, and due to the limited identifiers on court records, this often results in missed records or records that don’t necessarily involve your applicant. Also, an LT record may not have resulted in a monetary or possession judgment, and it’s recommended to be more reasonable with dismissed or settled cases.
If you run criminal reports, make sure you work with a screening company familiar with criminal reporting and relevant state laws – and look for a multi-state report, which offers greater coverage than a single-state report. Keep in mind, there is no report that covers the entire country. While records are available in NJ, CT, and PA, records are not comprehensively available in states like DE and NY, and again, some states have more restrictive reporting laws, including NY. Also, be aware of HUD’s guidance relative to disparate impact effect and criminal reports; be mindful to only deny for conviction records and time periods that are reasonable and serve the purpose of protecting public and property safety – and make sure your policy takes into account any rehabilitative effort from the applicant. Again, a good screening company can help advise you – another reason to make sure you are working with a local and experienced company.
Fair Housing Compliance:
Remember, it’s important to treat all applicants fairly and equally, regardless of race, creed, color, national origin, gender, etc. To that end, make sure all applicants are screened the same way, and an objective policy outlining your qualification criteria is strongly recommended. A good screening company with an effective rental scoring qualification model can help keep you compliant by providing a rental assessment based on an objective analysis of the credit, income, and court record information.
In summary, rental properties have the potential to offer a strong return on investment, but the wrong tenant can short circuit that goal. Proper screening with the right screening partner can help you minimize risk and maximize your return.
Jamie Borodin, VP of Operations for National Tenant Network. Mr. Borodin has been working in the multifamily industry for over 10 years, and has extensive experience in background screening, public record information, and applicant qualification modeling.