Landlords evaluate property managers by their results. Let’s face it, they are focused on one thing and that’s the bottom line. Investors who hire property managers either do not want to spend their time on the day-to-day challenges or they want to rely on the expert opinion of an experienced manager. The best way to produce great results is by implementing excellent tenant screening techniques. This not only improves the quality of the tenant but it can also make your life as a professional manager a lot easier. Who doesn't want a smaller amount of phone calls, less evictions, and fewer complaints?
How can you really know who is moving in based on what can be seen on paper?
You can’t. Unfortunately that is what makes this business so challenging. A tenant can have the best rental history, great financial background, clean credit, and excellent referrals, but there is no guarantee that a tenant will fulfill all of their lease obligations. Property management is a form of risk management and tenant screening is comprised of various tools to help reduce the amount of risk a landlord takes on when leasing out a home.
Some people rely solely on craigs list and their gut feelings while others run their tenants through a gauntlet of tests from calling referrals to criminal background checks. Here is a list of the commonly used screening techniques:
Do the make enough money? Many companies look for the tenant to make at least two and a half too three times the monthly rent in gross income. The higher the requirement, the lower the risk. This is usually verified through tax returns, bank statements, paystubs and/or contacting an employer.
Criminal background checks
What have they really been up to the past couple years? Some tenants may have a reputation of violating local laws and while other people may have an extensive history of going in and out of jail. There are some places that offer different tax advantages or subsidies for allowing convicted felons to lease out a property. While this may be an indicator of past behavior, its not always a great indicator of whether or not a tenant is qualified. Let’s face it, landlords are worried about the bottom line. Does the tenant’s criminal history really tell you whether or not they will be able to meet their obligations? After all, everyone needs a place to sleep and in most cases, would a drug dealer really want people stopping off at their house where their kids and family sleep? Let’s be honest now, does the property owner really care where the rent money comes from? They might, but they might not. Just something to think about especially considering the type of tenants who are attracted to the property based on the area.
This is probably one of the more important areas because this tells you directly how the tenant has performed in the past. Some companies and landlords will share more the others, but this generally gives you an idea of what to expect. There are some cases where rental history is not available. Whether its a person or business who owned their owner property previously or this is the first time renting, this has to be taken into strong consideration and it may warranty additional security deposit.
There are different types of debts; voluntary and involuntary. Someone who willfully enters into an agreement such as a loan or credit card generally did so intentionally. If their credit is riddled with poor payment history or some of the more applicable items such as outstanding utility bills show up, these are red flags that should be considered. After all, how can they turn the power or gas on if they have an outstanding balance? Alternatively, the most common form of involuntary debt is medical expenses. Tenants can’t control if they get sick or caught up in an accident. They do have an obligation to pay them, but property managers often times give these types of debts less consideration when comparing them to loans or credit cards that a tenant knowingly signs up for.
The score is directly impacted by what is on the report. Some management companies do not factor in involuntary debts such as medical expenses, but they do factor in the score. So while they may not increase the required deposit based on the items listed in the report, they may require it depending on the score.
Bankruptcies, evictions and judgments
These are another area that will shed some light on the person or companies past behavior. An eviction or outstanding judgment for money owed to a landlord is an obvious sign to pass on the tenant, require a large deposit, or request them to pay a year in advance. Some states or countries regulate the amount of money that can be paid when leasing out property and for tenants, this can be challenging if there are strict laws limiting the amount that can be collected. If your limited in the amount of deposit that is required, then the landlord is less likely to rent to a high risk tenant since they cannot offset this risk with a high deposit.
The “gut feeling”
As technology advances, many companies have shifted away from face to face screening methods. This is done for a variety of different reasons; efficiency, concerns over discrimination, and a general worry that staff members may not be able to get a good read on someone. While these are all legitimate reasons not to rely on a person’s “gut feeling” it can prove to be a valuable too. After all, you can’t always predict how a person will be on paper and meeting them face to face may shed some light on who that person or company is which may set off some red flags that could help you avoid a bad tenant.
A well balanced screening method can help manage your clients risk while making your life easier. Be careful not to be too strict to scare tenants away, but firm enough to weed out the undesirable tenants. In another article, we will discuss what to expect from the tenant based on the area that the property is located in which can impact your screening techniques.
August 14, 2013