Operating any business involves managing risk, and in the property management industry, a very large risk is the interruption of revenue flow due to late rent or lease payments. The process of proper (and legal) applicant screening is critical to filling rental vacancies with tenants that meet established standards for credit and background attributes for the property.
In a nutshell, this process assures that your tenant recruitment efforts are directed well-qualified prospects, which will reduce expenses in all kinds of ways. Of course, this process must adhere to federal, state and local regulations regarding fair housing and fair credit reporting and inquiry while giving front-line rental and management staff guidelines for establishing the kind of relationships from the beginning that foster community from the outset.
Here are several key areas of tenant screening that have varying levels of importance:
Credit Report
A credit inquiry from any of the major credit reporting agencies is standard practice in the rental industry, The credit report allows you to establish the applicant’s past payment history and credit-to-debt and income ratio. It is your first look into the credit-worthiness of a potential tenant.
Some complicating factors in evaluating the credit report include the occurrence of identity theft and, in some markets, identification of individuals with backgrounds in illegal activity involving financial transactions. Both of these situations require detailed due diligence to establish the factual identity of an individual and their connection(s) to foreign or illegal assets.
Criminal Background Check
Like credit reporting, criminal background checking is an important tool in the selection and approval of potential tenants. Also like credit checks, background inquiries are subject to regulatory oversight. Be sure that the process used to obtain criminal background information follows federal, state and local laws.
Also make sure that the guidelines used are clear to front-line staff and that the interpretation of reports they obtain is straightforward in meeting the specific requirements for the property and community, that is, be sure that the nature of the reports requested is specific to the key information required to make an approval or denial. Often, property management computer software offers features that automate background checking.
Verification of Employment
Hand-in-hand with credit and background history is the establishment of an applicant’s employment and income history. For traditional workers, this is pretty straightforward. A call (some employers offer automated access) to the applicant’s employer to establish and verify employment and length of service, etc. These days, though, ‘employment’ may mean contract work, entrepreneurship, and other aspects of the ‘gig’ economy.
In these cases, it is no less important to establish a potential tenant’s ability to meet their obligations. It may mean, though, that some new standards be established in regard to verifiable ‘employment’ and ‘income.’ Remember that non-traditional employment has become prevalent, so keeping up with such changes is important. New methods of determining income, such as regular bank deposits and previous tax returns may be the best way to establish regular patterns of income, and a recurring check on income stability (every six months or so) may become the norm.
Past Evictions
Tenant applications ask the right questions, but it is incumbent on the property manager to independently and objectively verify applicants’ responses. It is only good business to establish the protocols necessary to protect against known risks. Depending on the state and locality in which a property operates, property managers may have access to an applicant’s past history of evictions.
As with all aspects of background checking, the inquiry and reporting/evaluation of this information should be specific and easily interpreted by rental and management staff. Remember that each component of a report must be interpreted critically to establish how an applicant meets with your approval/denial standards. In so doing, pay close attention to dates of filings and how they were resolved. A long-past eviction should not necessarily disqualify an applicant, and keep up with state and local laws regarding how such information must be used to evaluate applicants.
Previous Addresses
An applicant’s previous address history is an important aspect of establishing applicants’ work history, financial habits, and relationships with past landlords. This information, along with the data on financial, criminal, and employment background, gives a complete picture of a potential tenant’s background and overall ‘fit’ to a property’s/community’s standards.
Background checking is a critical aspect of tenant recruitment and, as such, should receive its due attention in the application process. Establishing consistent standards, adhering to applicable laws and regulations, and following property-specific criteria will help in simplifying the process for front-line rental staff. Applicants will also appreciate the efficient and transparent procedures for applying and of informing them of approval/denial as quickly as possible. Property managers and applicants have the same objective as an outcome: safe, comfortable and welcoming communities!
Related Resource
appfolio Property Manager Tenant Screening: Everything Property Managers Need to Know