Here’s a sad tale we recently heard—an evergreen story in the residential real estate investing world.
“I was so thrilled to buy my first investment property, a single family home I could self-manage,” the investor began. “My first tenant applicant fell through, but the second fell into place pretty quickly.”
Great, right? Who doesn’t love an almost-immediate first rental?
The investor went on. “A few weeks after she signed the lease, she asked me if she could pay some of the rent on the due date and the rest, a couple days later. What was I supposed to do? I let her.”
“When the next month’s rent was due, she said she ‘forgot’ that she wouldn’t actually be paid before the rent was due, and how could she pay the rent Monday when she wouldn’t be paid until Friday?”
The story ends that the investor put up with tenant manipulations on payment for less than nine months, and then evicted her because the tenant didn’t make the money she claimed she did. When the investor asked us what she could have done differently to avoid having to evict her first tenant, it prompted a reminder for us all about the importance of applicant screening.
Of course, as an investor or property manager you can’t predict every situation, and we don’t know of a paid screening process that can spot a manipulating tenant. But screening is a must, and the only question is: how much screening works for you?
From a property manager’s perspective, we know that good managers will at least order a screening report on applicants and then call references. But if the report consists of only credit bureau data, that may not show the whole picture. Post-recession, property managers are frequently turning to resident screening services that provide a comprehensive view of an applicant’s credit, eviction history, criminal history and other data.
A prospect’s prior rental history is a predictor of future rental behavior, so past evictions are relevant to a leasing decision. However, many court filings will never appear on the credit report. It simply makes sense to know whether an applicant’s former landlords have taken court action, and nationwide eviction database records that include initial filings and judgments can help managers and investors identify potential poor residents.
Many property managers go one step further and order a criminal background check and sex offender check. Whether you do this depends on many factors, including the type of property you manage (such as public housing), your state requirements, and legal advice you may have received.
When you’re reviewing the data, fair housing laws require that you consistently apply your screening criteria. You must also ensure that the information you use complies with the Fair Credit Reporting Act and the consumer’s right to privacy. Of course, eviction and criminal data, just like credit data, has the potential for error. You must make an effort to confirm information to weed out potential inaccuracies.
At Panzera Realty, we run a tight ship. Our tenant applicants must:
- Prove gross income of at least three times the monthly rent;
- Be in good standing with all utility companies;
- Have a zero balance due on any past eviction and two years of post-eviction rental history;
- Have completely discharged any bankruptcies; and
- Have no criminal record of any felonies or misdemeanors of a violent or drug-related nature.
The bottom line is that real estate investors have a bottom line. They must understand how to manage the risk on their investment, and one solid way to do that is to employ extensive screening processes for prospective tenants. Paying a few dollars more for in-depth screening is almost like carrying a low-cost insurance policy against bad debt and low occupancy. It just makes sense.