Due Diligence: It Applies Equally To Properties And Prospective Tenants

You wouldn’t invest in a property without first investigating the premises, comps and details of the deal. So don’t count on the performance of that investment without conducting some due diligence on the people who will be providing the revenue: your future tenants.

Thorough tenant screening is critical to protecting your investment, helping you treat everybody equally and avoiding a potential fair housing inquiry or violation. Large property owners do it, and singe-family rental owners should too, especially since people who know they have a credit or rental history problem will look for properties from independent investors hoping you won’t check to find out the sordid details.

There’s no way to be certain whether a tenant-landlord relationship will work out, but that doesn’t mean you should simply flip a coin or “go with your gut.” People who seem personable and responsible in an interview can turn out to be difficult renters. Giving somebody a break could mean they just became your newest charity case, or reveal a pattern of inconsistent decisions you’ve made that could lead to a fair housing complaint. That’s why you have to perform your due diligence on people you are considering renting to, just like you would on a property you are considering buying. Fail to do so, and you increase your risk and jeopardize your rental revenue stream.

Require An Application

Accepting a new renter on faith because someone you know (a friend, family member, current tenant, etc.) recommends them is very risky. Yes, they may turn out to be prompt payers who take great care of your property and live up to the recommendation. Or, they may not. Trust is something that should be earned, not granted at the request of a third party.

Consequently, you should require every prospective tenant who will live on the property (not just one member of the household) to complete an application. Showing preferential treatment to someone who was recommended to you by allowing them to complete a shorter or “easier” form can open you up to legal problems.

Require every applicant to provide employment, financial and personal information. Also, make it clear that by applying, they are agreeing to let you request things like a credit check and criminal background check, and to contact their previous landlords.

The application should ask questions about things like:

• Current and past employers going back three to five years, including how long they worked for them. Obviously, if someone has had many jobs in that period and doesn’t explain why, this is a red flag.

• Current income level. It’s important that they can cover their rent plus normal living expenses.

• Past landlords with contact information. Where did they live previously? How much rent did they pay? Why did they leave? Have they ever been evicted?

• Personal references. While you may not know these people, the fact that an applicant has a few friends or family members who will vouch for their character is a good sign.

Run A Credit Check

The Fair Credit Reporting Act (FCRA) allows landlords to obtain credit reports for prospective tenants as long as they have a “legitimate business purpose” and the prospects have given their consent. Some states allow you, as the landlord, to charge the prospective tenant for the cost of the report. In other states, you bear the expense. Your rent is likely their largest monthly expense, so either way, it is important to get applicants’ financial details, such as their credit history and current debt load.

Over the years, a number of people have obtained credit reports for reasons beyond permissible purposes, and that has resulted in very tight standards by the credit reporting agencies. This has made it difficult for investors with small portfolios to obtain credit reports, but there are tenant screening services that cater to the small investor market and will verify you are operating a legitimate rental business and conduct further investigation into your prospective tenants.

Keep in mind that if information in a credit report prompts you to take negative action, you must provide the applicant with written notice about where you got the information that resulted in you making the decision. These actions include declining the application, requiring a larger-than-usual deposit or requiring a co-signer on the lease. The applicant must also be provided with a copy of the credit report.

So, while a credit report is a powerful tool you can use to your advantage, it is important that you understand your obligations under the FCRA before you order one.

Use A Tenant Screening Service

While conducting tenant screening is not difficult, some landlords choose to let a tenant screening service handle that task for them (your local rental housing or real estate investor association is a good place to find these services). These services get credit reports, perform income estimates and obtain criminal background and prior rental history checks. Some companies provide you with the raw information, and others take all the information into consideration and give you a score for the applicant (similar to the credit score everybody is familiar with). This approach can be a time-saver for you and convenient for your prospective tenants, and will assist in helping you document that you make consistent, neutral decisions.

Whatever way you choose to screen your tenants, just be sure you have established your screening standards and you have all the information you need to make a well-informed decision about each application. The time and effort you invest in this process can keep you from having to deal with difficult tenants. It can also save you thousands of dollars in legal fees for a fair housing violation or if you are forced to evict a tenant.