Welcome to San Diego Blog | August 28, 2018
Handy Guide for Tenant Screening
Purchasing a rental property can be one of the most exciting and nerve wracking times in any real estate investors life. One of the biggest recommendations we can provide is setting up a formal screening process and consistently following it before you find your first tenant. Not only will this help keep you free from any Fair Housing complaints, it will help to streamline your process and help find the best candidates for your rental home. Follow these tips to aid in your screening process.
What is Tenant Screening?
First lets explain a little about what tenant screening actually entails and what you should be looking for. Tenant screening is the process of looking into someone’s rental and financial history to determine their past patterns of payments, whether that be to a creditor or landlord. This process will identify any potential red flags and at the same time allow you to serve your tenants better in the future as you learn more about them. You may set any parameters you would like for your screening criteria as long as you do not have any policies that discriminate against any of the following protected classes: Race, color, Ancestry, national origin, Religion, Disability, mental or physical, Sex, gender, Sexual orientation, Gender identity, gender expression, Genetic information, Marital status, Familial status and Source of income. If you have any questions about this at all please consult a legal professional before you get into trouble. Having an established system will also help you keep your emotions out of your decision as at the end of the day you purchased an investment property, not a charity and you want your screening process to be as objective as possible.
What Should You Look At?
A credit score is a great place to start, but do not just look at the score as this can often be misleading and not give you a true picture of what your tenant will be like. While it will show you their payment history and an unbalanced credit to income ratios which equal low credit scores, it can also show someone who is becoming responsible and making on time payments. On the other hand, you can see someone with a high score who has started to miss payments and is headed for financial disaster. You may also run into a case where an applicant claims that they have been the victim of identity theft as LifeLock reports there have been over 60 million Americans affected by this so be careful if you see a frozen credit report. This does not mean the person has bad credit so ask for supporting documentation and ask your applicant to unlock their credit temporarily and allow you to make an inquiry. This is especially vital as applicants can commit fraud on all fronts, but a credit score is very hard to manipulate.
Criminal Record and Background Checks
Some states have passed legislation preventing landlords from denying a rental application based on criminal history and California is no exception to that rule. Denying an application for any criminal record will almost certainly be looked at as arbitrary discrimination. In order to deny an application you must be able to show that the past crime will limit the applicant’s ability to meet their obligations under the law or pose a direct threat to the community. This policy must be applied evenly across the board, so if you accept someone with a specific criminal history you will have to accept all people with the same record. Some crimes (drug manufacturing, burglary, rape, murder) are much easier than to deny than other crimes.
At one time the best judge of someone income and job stability was the amount of time they had been with their current employer. However, in the modern workforce patterns are rapidly changing and this is no longer the case. The 1990s DotCom boom created thousands of small businesses and a new way for people to look at employers. After the recession and housing market bubble of a few years ago employers are now struggling to recruit qualified candidates away from each other, making tenure not as important as it used to be. As the US job market transfers away from making things to doing things this is even more common. Indeed.com conducted a poll recently and found that 70% of the labor force is either actively pursuing a new position, or would consider a job change if presented with an opportunity. This does not mean that checking employment is not important, but it does mean we need to change the way we look into employment.
- Accurate employment information is essential for any qualified candidate. This will give you an idea of how much they can realistically afford and give you a way to follow up with someone if you do not receive rent on time. When you speak to their employer we always recommend asking if the person will be employed 12 months from now. You would hate to rent to someone who is on a 3 month contract and has no plans to honor their 12 month lease.
- Do a verbal check of employment. The simplest way to do this is by Googling the company the applicant works for and calling their HR department. Explain why you are calling and let them know you are trying to get a verification of employment. Most companies will release at least this information for you, even though they may require a signature from the applicant. Another way would be to check LinkedIn.com as most professionals keep this updated.
- Maybe you found yourself one of the entrepreneurs mentioned above who does not have a regular paycheck. For these individuals we recommend collecting 2 years worth of tax statements and also collecting bank statements to confirm they have an income and will be able to pay you the rent you deserve.
Accessing these eviction reports is essential to any tenant screening process as any tenant can easily check the box that says no evictions and you could be stuck with them! We do not recommend renting to anyone who has an eviction filing in the last 7 years and potentially ever! In California an eviction filing and a completed proceeding are extremely different so keep this in mind and do your homework! Always try and speak with the landlord that was the filing party and get their side of the story as you will be in their shoes soon if you accept the tenant.
Rental History and Verification
One of the best indicators of a tenant’s intention to complete their portion of a lease agreement is their rental history. It is possible for someone to have a questionable credit score, but have excellent rental history as keeping a roof over one’s head should be the most important payment anyone makes. We recommend checking with at least two previous landlords. Unfortunately not everyone is honest and will say anything to get rid of a problem tenant! Professional management companies will require a signature before they release any information about their tenants so be prepared for this as well.
How Do I Stay Organized?
By following these tips you should be able to screen tenants using your preferred criteria, but consistency is the key. Write down what your criteria is and show it to applicants before they apply so there are no surprises down the road. Create a checklist for you and the applicant so you can collect everything you need from each tenant, and stay consistent to adhere to Fair Housing Laws. Here is a sample checklist of the basics that we recommend collecting from your applicants:
- Applicants Full name
- Applicants Social Security Number
- Phone Number
- Previous Address and Landlord Contact information (at least 2 previous)
- Employment verification (2 most recent pay stubs, tax returns, bank statements, signed offer letter, etc.)
- Employer contact information
- Personal References
By collecting tese from all of your tenants and making your criteria very clear it helps you find a qualified tenant and at the same time will keep your emotions out of your decision. Create a score system to assign points to make it even easier to qualify or deny a tenant.
Sound like a bit to much?
This whole process can be very time consuming and overwhelming if you do not know where or how to collect any of this information. If this is how you are feeling, then contact a professional Property Management company such as Welcome to San Diego Management. Our in-depth screening process will give you a fantastic look into your applicants past and will be a good judge of their future intent to pay and honor their lease agreement in full. Your time is far too valuable to spend screening tenants, you should be focused on your next deal. Let us do the screening for you, call today!