Tenant Screening Services
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Why do I need to screen a tenant?

Tenant screening is a process used primarily by residential landlords and property managers to evaluate prospective tenants. The purpose is to assess the likelihood the tenant will fulfill the terms of the lease or rental agreement and will also take great care of the rental property in question. The process culminates in a decision as to whether to approve the applicant, approve the applicant conditionally (such as requiring an increased deposit or cosigner) or deny tenancy. Source: Wikipedia

Successful tenant screening is among the most important items that a property manager or landlord can do to ensure the success of investment in rental property. Cash flow (Rent) fuels every investment in rental property. It covers mortgages, property maintenance, taxes, insurance and modernization of the property. Effectively placing quality tenants in rental property insures that these expenses continue to get paid. Vacancy on a single family rental property is costly, but an occupied property with a non-paying tenant is disastrous. In addition to continuing to accumulate expenses, the landlord now has to go through the legal process of removing an adverse, non-paying party from the property. This process usually takes at least 30 days and in some cases can take over a year. Often an eviction ends with malicious damage to the property during the eviction process. Many investment properties become foreclosures when a tenant stops paying rent.

There are two critical factors that a tenant must do to increase return on investment for a rental property: fulfill the terms of the lease (Pay rent ON TIME), and care for the property (Cause limited financial damage to the property). A landlord must do as much diligence as possible to increase the odds that these two items will take place.

Luckily for landlords and property managers, the same tools employed by most lending institutions are available in some form to property managers and landlords. These tools can help answer whether or not a tenant is likely to pay their rent on time. A lease is basically an extension of credit to a tenant. A more difficult task for landlords is to determine whether or not a tenant will cause an acceptable amount of damage to the property (All tenants cause some damage).

Benefits of RentScreener

  • Secure online application
  • We handle the sensitive data
  • Customizable application
  • Electronic signatures
  • Document uploading
  • Signed addendum
  • Built in payment processing
  • Direct Bureau Reports
  • Criminal and Eviction Reporting
  • Make an informed decision

I used RentScreener.com when I rented out my investment property in Colorado Springs last summer. It was amazing! The first time I rented out the house I had to go with blind trust...using RentScreener made me have a far better idea of who was going to be living in my house and helped me make a really good descision.

- Dave M. on Linkedin.com

How much risk can I handle?

This is an important question that is made up of many factors including:

Number of properties managed – The more properties a landlord manages, the more risk he can take on each tenant as the level of risk is divided by the number of properties in the portfolio. Those with only a few properties or only one, have to make decisions that involve less risk. One default on a small portfolio of properties can be truly devastating.

Strength of the Rental Market – In strong rental markets, landlords can be more careful as housing is in greater demand. In weak rental markets, landlords might need to take greater risk to fill their properties.

Quality of Property – Generally, more expensive rental properties can attract more qualified, and less risky residents. The opposite is true of cheap or run-down properties. Well qualified applicants will generally avoid these types of properties.

Factors to consider when screening a tenant

  • Credit
    Worthiness

  • Income to
    Rent Ratio

  • Income
    Verification

  • Criminal
    Records

  • Eviction
    Records

  • Landlord
    References

Credit Worthiness

Credit history is the single biggest factor in determining the risk involved in renting to a prospective tenant. A consistent record of paying one’s debts is an accurate measure of their care and concern regarding their financial reputation. To determine credit worthiness property managers (Usually there is a 100 unit minimum) can apply with the major credit bureaus to gain access to a prospective tenants credit reports with a tenant’s permission. Property managers can use the data to determine the probability that a tenant will fulfill the obligations of the lease. Of the three credit bureaus (Transunion, Equifax, and Experian), it is our opinion at the time of this document that Transunion has made the biggest investment in creating a model specific to the rental industry. The “Resident Score” available through their credit retriever product employs millions of records to predict a tenants’ probability of fulfilling their rental obligations based on their score. This is the single most effective tool in determining the probability of paying rent. Other variations of FICO scores and financial modeling only predict an applicant’s probability of paying their general bills.

For landlords and smaller property managers this information can be difficult to obtain. The three credit bureaus will not approve individuals, small property managers, or those that manage their businesses out of their homes to obtain consumer credit reports. This means that these parties must find a way to obtain the necessary information to make this decision. There are a number of third party services including RentScreener that can give landlords information to make a better decision, but they cannot provide the actual credit reports to a landlord. The key is determining the probability of the tenant paying their rent and determining the risk associated with extending credit to each applicant.

Once a property manager knows which score thresholds translate to which probability they are comfortable with, they can create a tenant screening policy that they can use to power their tenancy decisions. No model can eliminate risk. Sometimes even the most qualified applicants have problems, and don’t pay rent. The key is understanding the risk involved in renting to every applicant and making a decision based on that risk.

Income to Rent Ratio

Income to Rent ratio, often incorrectly called rent to income ratio is the amount of income a potential tenant earns as a ratio to the advertised rent. For example, if an applicant earns $6000 per month and is applying for a property that rents for $2000, her income to rent ratio is 3:1. While this measurement is important, many companies use it incorrectly.

Many companies set a strict requirement of at least 3 to 1 income to rent ratio. This policy immediately eliminates 18% of the most qualified applicants based on risk. In a study of over 15 million rental records conducted by TransUnion, they found that credit score was much more important than income to rent ratio. In applicants with high credit scores, but low income to rent ratio the default rate was significantly lower than those with high rent to income ratios and mediocre or poor credit. Many of these higher risk applicants would be accepted under most tenant screening policies with additional financial consideration.

Even though some applicants have lower income to rent ratios, they are a significantly better risk than those with better income to rent ratios but poorer credit scores. The fact is that applicants with higher resident scores have demonstrated a consistent ability to pay their debts on time. Applicants with great credit scores figure out a way to pay their bills. Don’t let great tenants get away because of some arbitrary ratio.

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Income / Employment Verification

Verifying an applicant’s income can be challenging. A landlord usually needs a release to contact an applicant’s employer and get this information. Often the HR department can be very difficult to track down, and their call back rate is usually abysmal. This reality can prolong the screening process from seconds to days. Often applicants are self-employed, contractors, or even unemployed. Sometimes they give contact info of a friend that will fraudulently vouch for their income. That is why income verification is a secondary screening criteria used to partially offset an average or worse credit score.

It is perfectly acceptable to ask an applicant for proof of income when making a rental decision. Most applicants have an employer that provides them with periodic pay statements. If that is the case ask to see their most recent W-2’s to verify their income.

If an applicant is self-employed, or a contractor, ask them to provide recent bank statements and/or their most recent tax returns. Sometimes these are easy to fabricate, especially tax returns so beware.

What if an applicant is unemployed? This is a great question, and can usually be answered by the resident score. If an applicant has consistently demonstrated the ability to earn money and pay bills, they are still probably still a decent risk. In the event of unemployment it always a great idea to get extra financial consideration in the form or a higher security deposit, or pre-paid rent. The best way to offset poor credit, or sketchy income is always with additional financial consideration.

Criminal Records

Determining an applicant’s criminal past is difficult. Most bureaus offer the ability to check most national and state criminal databases. This sounds great, but much of our government infrastructure is pretty outdated technology wise. The bureaus can only provide the information that they get from the local, state, and national authorities. It is estimated that 60% of criminal activity does not make it into a criminal report from a credit bureau or background check. A clean criminal or background check means that there were no records found, not that the applicant has never committed a crime. Ordering these reports is significantly better than doing no diligence at all, but the information contained is definitely not perfect. In order to get all criminal activity one would have to visit the thousands of court jurisdictions that do not report to the national databases. This process is impossible.

Severity of the crime. If an applicant of yours has a criminal record, now you must determine if the crime is severe enough to deny that applicant tenancy. A criminal record shows a history of disregard for the law, property, authority, and even the personal safety of others. Know before you rent to anybody what your stance on criminal records will be and publish it in your tenant screening policy. Generally, those who have committed and been convicted of committing felonies and/or violent crimes are not good risks as applicants. While some people certainly change, many do not.

We recommend discussing with the applicant any misdemeanors to determine if you can get comfortable with the severity of the crime or the likelihood they will commit further criminal activity.

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Eviction Records

Other than credit history, this is the most important item to check. Unfortunately the data on eviction history is not very good. Most landlords and property management don’t report eviction activity. Also, most non-paying tenants do not go all the way through the eviction process before leaving the property, so it will not generate a public record. If your applicant has an eviction on their record, DO NOT RENT TO THEM. This is the single best indicator that they will default again. If someone goes all the way through the court proceedings, and actually has an eviction filed, they are a very high risk.

A full eviction proceeding means that they forced the landlord to make court appearances, hire attorneys, and get the local sheriff involved. 95% of non-paying tenants will not make it to the full eviction. They will voluntarily vacate the property when they see that their removal is imminent. Those that stay to the bitter end are a special kind of bad tenant. Tenants that are familiar with the eviction process will know just how long they can stay for free before being forced to move, and are probably preying on landlords. Evictions often end up in foreclosure for the landlord. Don’t do it.



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