Few things produce as much benefit to a landlord for the time invested as thorough vetting of potential tenants. The vast majority of payment issues landlords who self-manage encounter can be directly linked to accepting marginal or unqualified applicants. Being disciplined and consistent in evaluating tenant qualifications is key to minimizing the risk of non-payment and other issues after occupancy.
First, a word about fair housing: Above all else, landlords should ensure their qualification policy is consistent with fair housing law at the federal, state, and local level. The federal fair housing law identifies seven protected classes, but states and localities can add more. Washington D.C., for example, has 18 protected traits/categories subject to fair housing law. Violations of fair housing law can result in substantial penalties and legal fees.
Professional property managers look at four key elements to evaluate potential tenants:
Income and Employment. The applicant(s) should have a reliable income stream from wages or other verifiable financial resources. Employment for a reasonable length of time at the same job or in the same field is desirable. Sources of income such as retirement accounts, trust payments, savings, etc. sufficient to cover the rent obligation plus ordinary living expenses are also acceptable. Landlords should be aware that some forms of income cannot be attached for purposes of collection.
Good credit history. Perfection is not a reasonable expectation. Applicants with spotless credit are becoming less common. What you’re looking for is a pattern of behavior that indicates the applicant doesn’t over-extend themselves and is in the habit of paying their bills on time. Credit scoring models can be helpful in producing a numeric rating based on a combination of risk indicators. However, it is still useful to be able to read and understand a credit report, since scoring models may degrade an applicant’s score for issues you may otherwise ignore. There are also certain required disclosures and resource information you must provide to applicants who are denied based on their credit history.
Prior landlord reference. Speaking with someone who has personal experience with the applicant can be useful, particularly if other aspects of their screening are marginal. Some landlords provide little more than payment history and whether the tenant left in good standing. Others will be more generous, sharing information on their working relationship with the tenant and whether there were any issues with noise or neighbor disputes. References from professional property managers are desirable, since a private landlord may provide a glowing reference for a poor tenant on the verge of removal in hopes they will relocate quickly. If you’re not contacting a business for the reference, it’s hard to know whether you’re speaking to the private landlord or someone’s Uncle Frank, which can also make private references suspect.
Criminal background. There have been some interesting changes in the last few years regarding this component of tenant screening. In contrast to other areas of the screening process where a premium is placed on consistency, property managers are now tasked to evaluate criminality on an individual basis. Recency and severity of offenses must be considered in determining whether an applicant is suitable. Generally, any criminality more than 10 years prior to the time of application is not considered. These changes came about as a result of restrictive policies regarding criminality imposed on protected classes under fair housing law, resulting in disparate impact. The premise of disparate impact is that certain populations are over-represented as a percentage of people who are incarcerated; therefore restrictive policies regarding criminality have a disproportionate impact on the ability of those protected classes to secure housing. The sole exception is for sale and distribution of drugs, in which case you can deny an applicant without regard to other factors.
Patience and consistency are rewarded when evaluating applicants for rental property. The anxious landlord who accepts a marginal applicant frequently comes to regret it and suffers a net loss from having done so. The council and expertise of a professional property manager can be an invaluable resource in avoiding the pitfalls of investment property ownership and management. Call The Real Estate Group today. We are happy to answer questions, discuss your situation and share our expertise. We would love to show you why so many landlords think TREG is the RIGHT CHOICE for property management.