How Property Managers Can Screen Tenants to Avoid Late Payments and Evictions

Start With a Standardized Application

Before you run anyone’s credit report or start running any background checks, there is a very important step that must be done first. Your rental application must ask for information that gives you valuable insight into a potential applicant’s rental history. We recommend that your rental application includes the following items:

• Full legal name, current address, and move-in timeline
• Employment status
• Employer information
• How long have you been employed there?
• Monthly gross income
• All adult occupants who will reside in the unit
• All prior addresses for at least the past two to three years
• Written authorization to run credit and background checks

Consistency is a huge part of building a rental application and ensuring that you are treating all applicants equally. By asking all applicants the same questions and requiring the same amount of documentation, you are creating a fair process that is also legal under the Fair Housing Act.

Verify Income Before You Verify Anything Else

However, income is the most predictive factor when it comes to timely rent payments. This is why a commonly accepted rule of thumb in the multifamily industry is to look for applicants who have a gross monthly income of at least three times the rent for the property that they are applying for. This does not include other monthly expenses that applicants may have, so it takes into account the fact that applicants will have to pay for other things, such as food, utilities, and transportation.

Verify Consistent Income for the Past 2-3 Months. Request bank statements to confirm the rent payment can be made on a consistent basis. For self-employed individuals or freelance workers, 2 years of tax returns and recent 1099 forms will give you an idea of their past earnings and help determine if their stated income will be consistent in the future. If you can’t verify their income, that is a screening decision, not something that can be explained away.

Screen Applicants Using a Defensible Application Framework

While credit reports are reported with credit scores, the reports actually detail the payment history of an applicant. This is very important for managers to understand. A credit score of 600 is considered below average, for example, but a 600 with a history of on-time payments for rent and for utilities is certainly a stronger candidate than a 700 with recent collections from prior landlords.

Key items to flag during credit review:

• Prior eviction filings or judgments
• Unpaid balances for previous years for electric, gas, water, cable, etc. These demonstrate a renter’s inability to pay for previous needed services and strongly indicate a renter’s inability to pay on time for rent.
• Patterns of late payment across multiple accounts
• Active bankruptcies or recently discharged debt

When conducting background checks on applicants and tenants for existing rental properties, there are many different items to consider. As with any aspect of landlord-tenant relations and screening, each state has its own laws. Make sure you are complying with all local, state, and federal laws, specifically regarding tenant screening. Even though you are documenting all aspects of the screening process, you must ensure that the manner in which you screen applicants complies with applicable laws.

Rental Application Questions to Ask Prior Landlords and How to Verify Information

Rental history verification is consistently underused. Many property managers call a prior landlord and ask only whether the tenant paid on time. That question is too narrow. A more useful set of questions includes:

• Did the tenant provide the required amount of notice prior to vacating?

(Example: If a lease ends on Dec 31, did the tenant move out on Dec 31 or before Dec 31)

• Complaints from neighboring tenants or other people in the building.
• Was the unit returned in acceptable condition?
• Would you rent to this person again?

At the end of the day, past landlord relationships provide property management with the best indicator of how a tenant will behave in their next tenancy. Many Property Management firms, such as Red Brick Property Management and Priority One, incorporate rental history verification into their process for this reason.

Verify the relationship of prior landlords or owners. In many instances, applicants list a “friend” or “family member” as a prior landlord. The prior landlord verification should include a verifiable relationship to the property owner.

Identify Red Flags That Predict Future Problems

Each “red flag” does not necessarily mean an applicant is automatically disqualified, but some combinations of negative items could have serious consequences for future tenancies by a prospective renter. Here are some examples of patterns that you should scrutinize carefully:

• Income that cannot be documented but significantly exceeds the stated threshold
• A history of multiple short-term tenancies, with little or no information provided as to why the tenant left each prior rental unit.
• Prior filings for eviction, even those that have been withdrawn.
• Pressure to move in immediately without a full application on file.
• Reluctance to authorize a background check

Use information provided by the National Apartment Association regarding the screening process and fair housing. Develop written criteria for screening and use this information for making decisions regarding applicants. Apply the same criteria to all applicants to help protect against a fair housing issue and to help ensure that decisions are made consistently.

Consistent Standards Reduce Portfolio Risk Over Time

Screening is a process that can be used for each rental property that you own. But in the end, it is a process that compounds over time. All of the time that you put into a rental property’s screening process will be lost if you have to evict a tenant. And an eviction can cost anywhere from $3,500 to over $10,000 in lost rent, repairs to the rental property, and legal fees.

The only way that you can ensure that your rental properties are run in a manner that will bring you the highest return and will result in the fewest number of problems is to establish a set of screening criteria and apply those criteria consistently to all of the applicants for all of your rental properties. By doing so, you can increase the amount of time that you have tenants in your rental properties, which will result in a reduced number of turnovers. This, in turn, will save you money in the long run in terms of both lost rent and the cost of preparing a rental unit for a new tenant.

Remember that the screening process does not have to be perfect in order to serve the purpose for which it was created. Screening simply aims to allow a property manager to gather enough information regarding a tenant applicant in order to make the smartest decision regarding the placement of that applicant in a particular rental unit. When screening is built and operated effectively, it will drive positive financial results for a property management portfolio.