Homeowners can unexpectedly find themselves becoming “instant landlords” due to a myriad of sudden life changes, e.g.: failing to sell an existing home; needing supplemental rental income; building or converting an ADU; purchasing a duplex; leaving their primary home for an extended period of time; or managing the estate of an ill or deceased family member or friend.
Novice landlords are susceptible to taking unnecessary risks due to a lack of experience, awareness and patience. According to Avail, 60% of landlords accept the first candidate that applies for their vacant rental property. Fortunately, there are innovative service firms available to help this large community of landlords.
As you begin to explore how to find the perfect tenant, you need to be aware of two major risks:
- Evictions are Costly
- Discrimination Fines are Costlier
Two other risks of which to be aware are: late payers; and renters who have previously skipped out on a lease. The chart below further highlights the top concerns of more seasoned landlords, from a survey conducted by Transunion.
Finding a tenant is not difficult, but finding a GOOD tenant is! Given the complexity of screening laws and the risks that a problematic tenant can present, you need to do your homework, be patient throughout the process, and rely on expert service providers (whether full-service or DIY).
We cannot over emphasize the importance of legally and thoroughly vetting prospective tenants, as it can be extremely challenging, time consuming, and costly to evict a difficult occupant. Additionally, if you are leasing a primary residence or family home, you should set significantly higher standards and requirements for prospective tenants, than that for investment rental properties. With the possibility of re-inhabiting your property, you will want to insure that your tenant treats your property with proper respect and maintains it in good condition prior to your return.
We present guidance to assist you in making sound judgements, to insure that the experience of being a landlord is enjoyable for both you and your tenant!
The Tenant Screening Process
As a new landlord, you will need to become fully versed in your local and state laws and ordinances:
- What are the laws to follow when advertising your property?
- What requirements and information are you allowed to elicit?
- How are you allowed to vet and choose your candidates?
Start by getting familiar with the Fair Housing Act (FHA) and the Fair Credit Reporting Act (FCRA). Besides understanding and adhering to applicable laws, landlords MUST treat all applicants uniformly throughout the screening process.
To get a thorough understanding of the entire process, we highly recommend taking RentPrep’s free video course, which is an excellent primer on all aspects of Tenant Screening (hosted on Udemy). By reviewing the course, you will be also allowed to join their Facebook Landlord group. The infographic below provides a helpful numerical walkthrough of the steps that make up their tenant screening process.
Be sure to understand laws that explain how to handle declined applicants. For example, landlords are required by law to notify a candidate when an application is declined due to a finding in the applicant’s background check. Legally speaking, even an informal call to a prior landlord is considered a background check. This notification process is commonly referred to as an Adverse Action Notice.
Know and understand the laws of your jurisdiction when addressing the time limits of historical negative information (e.g. bankruptcies, evictions). Landlords are prohibited from using outdated negative information to decline an applicant.
Given the seriousness, complexity and local differences of laws pertaining to tenant screening, credit reports, and background checks, we strongly recommend using an accredited screening firm (e.g. firms having FCRA Certified Screeners) that can handle this process for you.
A qualified screening service can walk you through the process to: define your screening criteria and standards; select the specifics of credit and background checks; and manage communication with applicants.
Having well-defined and legal screening standards will serve as the best protection against any discrimination claims. A stringent list will also dramatically increase the quality of applicants that are genuinely interested in your property and will strive to be responsible tenants.
Here are commonly used criteria and policies:
- Rent Amount
- Number of Persons Permitted
- Rent-to-Income Ratio
- Application Fee
- Credit Check Required
- Signed Consent for Background Check
- Pet Policy
- Smoking Policy
- Rental History Criteria
- Employment History
- Renter’s Insurance Requirements
- Late Fee Policy
- Payment Due Date
- Deniable Factors:
- Credit Score Too Low
- Past Evictions
- Late Payments
- Broken Leases
- Inaccuracy or Falsifications
- Criminal Record (varies by jurisdiction)
- “The No Blank Space Policy” Application Requirement
The “No Blank Space Policy” is an especially helpful tip from RentPrep, as it can easily weed out risky applicants that are unable or unwilling to provide requisite information.
Here is a sample list of firms that offer tenant screening services, listed in alphabetical order:
Within this group, RentPrep and SmartMove are the only vendors that solely offer screening services, so they will likely have more comprehensive options and educational content on the process. RentPrep strongly recommends understanding the limitations of alluring “instant” background checks before signing up with any service. SmartMove, on the other hand, touts their proprietary ResidentScore, which is used to provide a leasing recommendation per candidate.
The other vendors offer other valuable landlord services beyond just tenant screening, which are worth considering, especially if you have additional needs, such as marketing, property management & maintenance, or payment collections. Zeus Living, for example, is unique in that they cater to corporate renters and can fully furnish your property in exchange for a share of your recurring lease income.
Regardless of which service you choose, an imperative for any tenant screening service used is to receive findings on any past evictions, within permissible time periods. There is industry consensus that historic evictions are the single, most effective indicator of a poor tenant.
The results of a well-defined and executed screening process will be a manageable list of QUALIFIED CANDIDATES that meet all of your requirements.
Traits of a Qualified Tenant
- Requisite Credit Score
- Clean Background Check
- No Eviction History
- Stable Employment History
- Adequate Income
- Positive Reference Checks (Landlord, Employer)
- Meets Miscellaneous Policy Requirements (e.g. non-smoker, no pets, etc.)
“First Come First Served” Tenant Screening
Before listing your property and initiating a screening process, you will need to decide on your selection process. Specially, many landlords choose a “First Come First Served” selection process, which implies that the first person screened that meets all mandatory requirements will be offered the lease. The attractiveness of this approach to landlords is that it dramatically reduces the chances of receiving a discrimination claim. Screening service providers can keep track of the order of submissions, as well.
There is an outside chance that your state or local jurisdiction (e.g. Seattle) may require this type of selection process, so this is yet another reason to partner with a landlord service provider. If you have little emotional connection to the property you are renting, we would recommend this approach.
How to Choose from Multiple Qualified Prospective Tenants
If not using a “First Come First Served” screening process and receiving more than one qualified applicant, use caution on how you choose between multiple qualified candidates. Your basis for choosing the “winner” must be legally defensible, and backed with objective reasoning for how the most qualified candidate was determined. Your reasons for not choosing a candidate must be legal, non-discriminatory and business-related.
The “best qualified” candidate must be based on tangible criteria obtained in the screening process, such as: a better credit score; higher income; stronger references; longer employment history; etc. However, qualified candidates should be notified that they were not rejected, but were not selected as the top candidate. The next ranked candidate should be made aware that they would be offered the lease if the top candidate declined within a specific time period. Some property managers refer to this method as a “Non-Rejection Rejection”.
Tenant Screening Resources
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