Tenant Screening

It only takes one bad tenant to turn a potentially profitable income property into a money pit. The key to long-term profitability in owning and managing residential and commercial rental properties is finding good tenants. Finding good tenants is accomplished through effective tenant screening.

If you’re brand new to being a landlord, property manager or screening tenants, we’d recommend you start at the top and work your way through this entire guide. Otherwise, simply select a topic of interest.

The Application Process

Once your residential rental unit or commercial office space is ready and available to rent, and you’ve identified one or more prospective tenants, have them complete a rental application. Everyone over the age of 18 who would potentially be living in a residential rental unit should complete an application and go through a complete background check. Private personal information should only be collected for adult individuals completing an application. Never request or collect the social security numbers of minors. Take precautions and implement safeguards to protect sensitive personal information of rental applicants and tenants.

Make sure you use a comprehensive rental application that covers everything you need to know about a tenant and run a complete credit and criminal background check. A good rental application will encompass financial information, employment information, personal information and rental history. Applications must also contain disclosures informing applicants that a background check, credit check and/or criminal history check will be ordered and that financial, employment and personal history will be verified. Review each application you receive for completeness before starting the screening process.

ALWAYS us the same application and application process for every prospective tenant, or you could find yourself on the other side of a discrimination claim.

Security Deposits

Most landlords will require a deposit before they will accept the rental application. Some landlords will accept the security deposit after they’ve processed the rental application but typically before they’ll allow a tenant to sign a lease. The rental deposit (1) assures the landlord that the applicant is serious and qualified, and (2) can be used as collateral to hold a rental unit for a tenant until it becomes available. A security deposit is often held the duration of the lease term and returned to the tenant—less any agreed reductions—after tenancy has terminated. If an applicant struggles to come up with the deposit, there’s a very high likelihood they’ll also struggle to make future rent payments.

When determining how much to collect as a deposit, you should not only consider the average damages done by tenants, but damages in a worst case scenario. Many landlords require a larger deposit from all tenants to ensure their interests are protected and that they’re not discriminating. Laws regulating security deposit amounts, usage and return policies often vary by state. You’ll want to check your state’s laws or consult with an attorney when developing your security deposit policies and procedures.

Application Fees

While some landlords do not collect an application, we recommend collecting an application fee from all housing applicants. The application fee covers the necessary costs of performing background checks, screening applicants and processing the application. The ancillary benefit of charging an application fee is that it weeds out applicants who are not seriously interested in renting your unit.

What a landlord or property manager can charge as an application fee is often limited by state law to actual cost of screening. Landlords cannot profit from charging application fees and should make every attempt to keep application fees to a minimum.

Conducting Background Checks

Conducting a comprehensive background check is key effective tenant screening. The basic parts of a background check include:

  1. Credit history
  2. Criminal history
  3. Financial (income, debts and employment)
  4. Current landlord references
  5. Previous landlord references

Verifying all of these areas will significantly reduce the risk of renting to a bad tenant. An applicant may be able to hide the truth or misrepresent in one or two areas—but not all five.

Goals of Tenant Screening

The entire goal of the tenant screening process is to determine if a prospective tenant is an acceptable risk. The most important qualities landlords should should look for in a tenant are:

  1. Ability to make rent payments on time
  2. Not inclined toward criminal activity
  3. Ability get along with other tenants
  4. Respectful of landlords property
  5. Willing to honor the lease agreement

An effective and properly managed screening process will save thousands of dollars in property damage, legal costs, and lost rents. When it comes to evaluating prospective tenants, their is no better indicator of future performance than past performance.

To avoid discrimination claims, use an objective screening process and don’t stray from it. Use the same screening process for all applicants—and don’t make a “gut” decision. Evaluate one applicant at a time and never compare applicants to each other. Always compare applicants to a standard “rental criteria” and rent to the first qualified applicant.

Rental Criteria

Create a list of rental criteria that defines the standards you’ll use to determine occupancy. Each prospective tenant is then compared individually—and in order of application—against these pre-determined criteria. As soon as you identify an applicant that qualifies, you should notify them, have them sign a lease and provide a security deposit within a set period of time (i.e. 24 hours). If the approved applicant doesn’t sign the lease, or produce the security deposit within the set time period, then move on to the next applicant.

It’s recommended that you create a sample rental criteria document that you can share with applicants prior to collecting an application fee or before processing a rental application. The rental criteria document should list your rental criteria along with the standards that must be met to qualify to sign a lease or rental agreement.

Rental criteria may include:

  • Application Fee – Each applicant over the age of 18 must pay an application fee. Co-signers must also pay an application fee.
  • Photo Identification – Each applicant over the age of 18 must provide current government-issued photo identification at the time of application.
  • Employment Requirement – Applicant must show they have been employed with their current employer for a minimum of 6 months. Exceptions can be made for recent graduates, current students, and self-employed applicants who can provide a CPA-prepared statement of income. An additional security deposit or an approved co-signer can be provided in lieu of current employment.
  • Income Requirement – Total combined income of tenants must exceed three times monthly rent. Strong applicants who do not meet the income requirement can still qualify for tenancy if they can provide an approved co-signer.
  • Rental History – Applicants must provide contact information for their previous two landlords, or all landlords in the last three years. Applicants will not be approved if the have previously been evicted, defaulted on prior a lease agreement, have outstanding debts to another landlord, or have a history of making late rent payments.
  • Credit Check – A credit check will be performed on each applicant over the age of 18. Applicants who have filed bankruptcy within the last two years, or applicants who have any bankruptcies that have not been discharged at least one year prior to the application, will be denied tenancy. Applicants with past-due accounts or accounts in collections may qualify for tenancy if they can provided an approved co-signer or pay an additional security deposit.
  • Criminal History – Application for tenancy may be denied if you have been convicted of a crime against persons or property within the last five years that would present a potential threat to rental property, other tenants or property owners. Applicants on a public list of criminal offenders who are require to publish their address will be denied tenancy.
  • Maximum Occupancy – 2 occupants per bedroom, plus an additional occupant for each apartment home.
  • Pets – Pets may be approved if the applicant can provide a good reference from the previous landlord for the pet’s temperatment, a complete medical history (including immunizations), an additional deposit, and an additional amount of rent. Owners reserve the right to deny the application based on the type, size, or breed of pet.
  • Security Deposit – Applicants must pay the full security deposit amount (including any additional “pet deposit”) prior to application submission. If the application is denied, the security deposit will be immediately returned in full to the applicant.
  • Renter’s Insurance – Applicants must obtain an approved renter’s insurance policy before occupying the premises.

Many states now require that housing providers disclose and explain their rental criteria to applicants before accepting an application fee. Disclosing your rental criteria upfront will save you and the applicant time, avoid wasting the applicants money, and reduce the risk of a discrimination claim.

Credit Checks

Evaluating an applicant’s credit history is a vital part of the screening process, but you can’t check someone’s credit without their written consent. Included in your rental application will be the authorization to check the applicant’s credit and criminal history. By signing the application, an applicant expressly authorizes you to pull their credit and run a criminal background check. Never accept a credit report that an applicant produces. Use a reputable third party firm to run your credit checks. A credit check can be run using either an applicant’s social security number (SSN) or an IRS issued Tax ID Number (TIN).

Why are tenants who have poor credit risky? For the following reasons:

  • They’re more likely to be unable to pay rent
  • If they fail to pay rent and owe the landlord money it’s difficult to collect from them
  • Tenants who are irresponsible with their credit are often irresponsible in other areas of their life and may become a problem tenant
  • If a tenant files bankruptcy it can be difficult to process an eviction in a timely fashion

A credit report provides many important pieces of information you’ll use to assess the risk of an applicant. It shows any debts and financial obligations an applicant has incurred, how much they owe and to whom, if they have outstanding judgments that might inhibit them from making rent payments, and how consistent they are in paying their bills. Don’t just look at an applicant’s credit score, base your analysis of their credit worthiness and risk on the types, amounts, and payment history shown in their credit report.

The credit items you should be most concerned with are:

  • Bankruptcies
  • Judgements
  • Accounts in collections
  • Evictions, foreclosures, and repossessions
  • Utility collection accounts

Landlords have the option of requiring a larger deposit or having a co-signer for applicants who do not have the best credit. If this policy is adopted, it must be implemented consistently to avoid discrimination claims.

Criminal Background Checks

A prospective tenant with a criminal history may present a risk to landlords and other tenants. As a landlord or property manager you should carefully evaluate a renter’s criminal history. However, HUD has released guidelines indicating it may be discriminatory under the Fair Housing Act to deny housing to an applicant based solely on a charge or arrest. Landlords should provide an applicant that has an arrest record the opportunity to explain any extenuating circumstances. (see Fair Housing Updates)

The riskiest types of criminal activity you want to pay attention to are:

  • Crimes of violence
  • Drug possession or distribution
  • Sex crimes
  • Property crimes

Statistics suggest that individuals who have committed one of the crimes mentioned above within the last year or two are likely to commit them again. It’s acceptable for a landlord to require that some time has passed before renting to a tenant with a serious history of criminal behavior.

Income and Employment Verification

Income and employment verification is required to make sure that a prospective tenant has the ability to meet their contractual obligations under a lease agreement—such as paying the rent on time each month. Performing a financial check to make sure a prospective tenant has enough income, and a regular and consistent income, is key to maintaining profitable rental properties. A few of the most common methods for conducting income and employment verification include:
 

  • Calling an applicant’s employer to request income information
  • Having applicant’s provide a copy of their last two pay stubs
  • Reviewing tax returns
  • Requesting CPA-prepared financial statements
Rental History Verification

If you really want to know if a prospective tenant is going to pay rent on time each month and treat your property responsibly, verify their rental history. There is no better indicator of future performance than past performance. If an applicant didn’t pay their rent on time for the last two years, it’s unlikely they’re going to start paying their rent on time with you—regardless of their assurances to the contrary. We recommend calling at least two previous landlords to verify rental history. This allows you to get a good idea of an applicant’s behavior over time, and avoids the possibility that one landlord might provides inaccurate or bias information.

When verifying rental history with a previous landlord, always ask objective questions that require a yes or no answer. Some useful questions to ask include:

  • Was the rent paid on time and in full?
  • Did the tenant take good care of the property?
  • Did the tenant display disruptive behavior?
  • Did the tenant violate any of the lease terms?
  • Did the tenant provide proper notice?
  • Did the tenant leave owing any money?
  • Did the tenant leave on time?
  • Were there any complaints of police incidents?
  • Would you rent to this person again?

If you think an applicant has provided a fake phone number for their previous landlord, there are a couple things you can do. Check online to verify that the phone number you have been given matches the previous landlord’s address. Sometimes applicants will lie about the phone number of their landlord but put the correct address of their the application. Briefly interview the person who answers the phone number for the landlord listed on the application. You’ll be able to figure out pretty quickly if the person you’re speaking with is really the applicant’s previous landlord.

It’s not unheard of for a current landlord to provide a glorious recommendation for a problem tenant just to get rid of them. That’s why it’s always a good idea to call at least two previous landlords to ensure that you’re not receiving bias or inaccurate information.

Denying Applications

Always provide an applicant written or verbal notice when denying their application. If you deny an applicant for credit reasons, you’re required by federal law to provide them a letter stating their application was denied because of credit. If you deny an applicant based on their criminal history, you need to allow them the opportunity to provide an explanation of any extenuating circumstance or an opportunity to appeal. If you collected a deposit prior to processing a prospective tenant’s application, you need to immediately refund the deposit.

Denying applicants based on anything other than your standard rental criteria can land you on the other side of a discrimination claim. While it may be tempting to select a tenant based on preference, or a “gut” feel, this could be interpreted as discriminatory. The best policy is always to choose the first qualified applicant.

What to do after a tenant is approved

Always provide an applicant written or verbal notice when denying their application. If you deny an applicant for credit reasons, you’re required by federal law to provide them a letter stating their application was denied because of credit. If you deny an applicant based on their criminal history, you need to allow them the opportunity to provide an explanation of any extenuating circumstance or an opportunity to appeal. If you collected a deposit prior to processing a prospective tenant’s application, you need to immediately refund the deposit.

Denying applicants based on anything other than your standard rental criteria can land you on the other side of a discrimination claim. While it may be tempting to select a tenant based on preference, or a “gut” feel, this could be interpreted as discriminatory. The best policy is always to choose the first qualified applicant.

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