One of the most important parts of being a landlord is choosing the right tenant. This will determine a huge amount of your success and happiness as an entrepreneur.
Failure to properly screen your tenants can ruin your wallet, sanitation, and business venture. Here are some of the potential risks of a tenant screening error:
- Eviction costs
- Loss of rental income
- Security risks
- Legal liability
To avoid these risks, you need to learn about six tenant screening mistakes you should avoid.
More about tenant screening from BiggerPockets
1. Come out of the screening completely
Allowing applicants to avoid the screening process is tempting, especially if you are desperate to keep the tenant (the unit was empty). Still, it is in your best interest to screen it properly, even if it means leaving the property empty for a few more weeks.
Let me give you a personal example.
I bought my first multifamily housing for, 85,250. I put 15 15,000 in it, and the renovation ended the day before Thanksgiving.
Want to guess how many people go on Thanksgiving and New Year’s Eve?
Yes, not much.
I finally got a serious search the day after Christmas from a woman named Kelly.
I decided not to charge an application fee, and I told this applicant that all he had to do was print his free credit report from annualcreditreport.com.
He emailed me saying he was having trouble getting a credit report, but he knew it wasn’t good. I asked for a phone number so we could talk, and he emailed me saying Verizon wouldn’t let him keep a cell phone because of his credit score.
I asked her what her credit score was, and she was right about not being good – it was 480.
By reference, I have seen people go through bankruptcy with a credit score of 550.
But here’s the deal: he had his first month’s rent, and a few months ago I needed someone in this place.
So I gave him a place. He promised that he would get me the deposit within a month.
It’s amazing for one of you, he didn’t pay on time and I had to evict him.
The moral of the story is this: no matter how desperate you are for the tenant, don’t get out of the screening process. Get a credit check early. In the long run, it will not only save you money but also prevent you from taking too much aspirin to reduce your headaches.
2. Selecting an incorrect screening service
Unfortunately, not all screening companies are created equal. Is it better to go with automated, instant screening results or hand-collected and verified results that take a long time?
A Princeton study found that human nature chooses instant gratification over making the right decisions. Explaining the study, Harvard University professor David Leibson said: “Our emotional brain wants to maximize credit cards, order desserts and smoke cigarettes. Our logical brain knows that we should save, jog and quit smoking to retire.
When it comes to hired screening companies, they are designed to maximize profits, which means satisfying the emotional brain of instant gratification.
A good example is if someone invites you for a meal and gives you a choice of a good home cooked dinner or a packaged microwaveable dinner. Which would you choose? Most likely, you’ll be willing to wait for a home-made dinner because you know it’s a healthy, good option.
However, when choosing a rental screening company, landlords do not have a frame of reference for instant background checks. Thus, they will choose instant gratification because it appeals to the mental brain.
Instant solutions use less data and are fraught with errors and false positives related to tenant backgrounds because there is no set of eyes to double check the work. Instead, you may want to choose a company that ensures accurate screening reports because they:
- Manually access the database
- Compile report in hand
- Check the data to verify authenticity
So, like home cooked food, your best option is to wait for that exact result.
3. Not reading credit reports
Needless to say, if you’re going through the whole process of getting an accurate credit report, make sure you’re actually reading the results.
While credit companies do this great service of consolidating an individual’s entire credit history into a single number, keep in mind that each person and their set of circumstances should be unique and not reduced to just one number.
For example, if the applicant has a low credit score because they have a huge debt that they ignore because they know they will never be able to pay it, yet they can still pay all their monthly bills, then this person is still a great rental option.
Another thing to keep in mind is that an applicant should not be trusted to bring proof of his / her FICO score. Let me introduce you to a small program called Photoshop. Yes, people use it to forge all kinds of documents. Never trust tenant paperwork-it exists for verification and cannot be used as it is.
Being a homeowner can be fun – if you do it right
No matter how great you are at finding a good rental property deal, you can lose everything if you do not manage your property properly. Being a landlord means night phone calls, expensive evictions, or daily frustrations with ungrateful tenants.
4. Not screening co-applicants
One of the most important tenant screening mistakes is not screening co-applicants. Everyone needs to be screened, not just fill out a rental application. If you do not screen co-applicants, you run the risk of having major problems with your tenants.
Co-applicants may stop contributing to the rent or leave suddenly, unable to pay the full month’s rent, leaving the initial tenant high and dry. Some landlords do not allow tenants to be contributing roommates for this reason.
Additionally, married co-applicants and adult children should be screened for prior eviction, criminal history, and low credit score. Failure to effectively screen these co-applicants may cause you major headaches in the future.
For example, I failed to screen a female tenant co-applicant boyfriend who moved into one of my apartment units. I had to deal with the FBI, the fugitive tenant and a left rear car that I had to pay to move.
Bottom line: A co-applicant must also go through the same tenant screening process as a potential tenant and always the same potential tenant.
5. Not complying with housing laws
Landlords have an obligation to examine fair housing laws in their area before screening potential tenants. Note that some local laws go one step further than federal law.
Fair housing laws exist to protect potential tenants from discrimination based on marital status, gender identity, race, religion and more.
Failure to comply with local and federal housing laws has negative legal implications for landlords. If a potential tenant determines that they are being discriminated against, you can have a lawsuit in your hands.
Make sure you check the fair housing laws for your specific city as these may vary from city to city in the same state.
6. Not verifying references, bank statements and employment history
Although all tenants and co-applicants must fill out an application drawn up by a property manager, you must have a screening process for all potential tenants. Essential components of this process include:
- References -It should include non-relative, professional references and two landlord references.
- Bank documents – It paints a beautiful picture of tenants’ spending habits, their previous rent payment dates, their pay-allowance days, how often they go to eat and where their general priorities are.
- History of employment – Do tenants have a secure job, and how long have they worked for this company?
When you fail to follow a potential tenant’s answers and claims, you prepare yourself to deal with potential fraud.
I’ve noticed that surprisingly clever applicants keep their friends ’phone numbers as their previous landlords. So, I ask open-ended questions about details like the exact date of their friend’s transfer and removal in an attempt to reveal these situations. I even check public records to make sure the owner of a property and when they bought it.
In addition, I’ve ridiculed applicants ’entire employment history, complete with the excuse why every half-dozen businesses can’t be called for every verification. The truth is that as the market gets better, so do the worst applicants – better at lying, cheating and cheating.
Tenant screening avoids mistakes
To recover, any time you have a tenant on your rental property, you want to:
- Screen them thoroughly, including eviction history and a criminal background test, even for co-applicants.
- Take a security deposit.
- Make sure they have the resources to pay the rent.
If you take someone (like Kelly in the example above) because you are desperate to fill a unit and drop your values, your eviction needs are extremely high. Always do your best before leasing.