How to Vet Tenants…Even If You’re Too Nice

Posted on | Education/Informing, Marketing, Property Management Blog

First of all, it isn’t about “nice” it’s about putting your needs first.  A rental home is a business, and you must treat it as one.

Most people can understand that before you look out for others, you must look out for #1.  Protecting yourself means protecting your rental and in-turn, your wealth.  There is no point in owning investment property if you take risks that negate your value and the income your home generates.  This doesn’t even consider your peace of mind. 

Since most leases are for a year term, tenant selection is the single most important decision in determining if you have a good year or bad. 

Put your game face on!  The one you use on the car salesman, but with a slight smile.

Set the tone early so that you don’t have to do it after you have already pet the puppy.  I say “pet the puppy” to mean the time after you have met your prospective tenant and started liking them, imagining them living in your home, and discussing the plan with them. 

Fun fact – Scammers and bad renters go out of their way to charm prospective landlords with promises of taking care of the home as their own – yada yada yada.  This makes it harder for you to refuse someone you’ve already bonded with.  That charm disappears once the honeymoon (contract ink dries) is over.

Another Fun Fact – If you get a bullying prospect, that also can be a method of getting what they want through the use of aggressive behaviors that can make you feel that you have to rent to them.  Be on the lookout for both types. 

Be clear in your listings about applicant requirements.  Once you’ve touted how fabulous your home is, very clearly state your application process and tenant selection criteria.  Have a firm understanding of fair housing laws and the spirit of fair housing. This is not ONLY to avoid discriminating, but to avoid even the appearance of it.  

Many people unintentionally discriminate, and when they do, statistically it is against tenants or prospects with a disability and/or special housing need.  It’s true–Google it.  Landlords must be ready and willing to make exceptions and changes to their home to accommodate those tenants.  

Be ready for applicants by having a good application process before you advertise.    

In my experience, in addition to not being familiar with fair housing practices, many private owners do not perform a quality review of their prospective tenants like property managers do. 

Planning to go with your gut?

More often than not, I hear from owners that they always “go with their gut.”  While it sounds crafty and a bit magical, your gut isn’t qualified to make rental decisions. 

Recently I had a prospective client tell me to determine his recent tenants worthiness, he visited her home to inspect how she “keeps it”. I cannot begin to tell you how many ways that could result in a lawsuit. She met at least 2 fair housing protected classes.

Use your head and review actual facts and figures gleaned from a good application process, and check them twice just like Santa.

Our Criteria:

– Credit (Account standing w/out judgments/repo’s/collections/open bankruptcies) 
– Beacon/FICO/credit score (600 or higher) 
– Debt to income ratio (Should be below 40% including prospective rent) 
– Employment history (submit paystubs/Employment Letters/LES) 
– Rental/mortgage history/utilities (Payment history – no late payments or balances owed) 
– Eviction proceedings records (Should be none – you can owe no landlords or be breaking a lease) 
– A Deposit equal to 1 month’s rent due upon approval PLUS pet deposits – if applicable 

Risky prospects are easy to identify early.  You must ask about qualifications from the start.  If you have listed the minimum standards in your advertising, it’s no shock to bring it up and ask about their ability to meet your listed criteria.  Don’t be shy, dig right in their business.  You don’t want to waste anyone’s time – yours or theirs. 

Most people have a general idea of their credit score, so ask them for the digits like it’s 1995.

If they have a good score, they will proclaim in proudly.  If they get annoyed or begin telling you a tale of some sort, start taking notes. Reinforce your requirements and be firm.  There are plenty of people renting homes who don’t vet prospects…let them go find those people.  Vacancy loss is always cheaper than court battles and evictions.   

Get landlord references and ask the right questions 

Landlord references are extremely helpful in knowing what you can expect from an applicant

Bonus Tip – If you are giving a reference for someone, make sure you have a signed release from them with their reference request.  Answer questions asked only.  Don’t delve into opinions or personality concerns. Give actual facts and data. 

Ask landlords if there is any additional information that may be helpful in determining rental eligibility.  They may offer up something that you didn’t even know to ask.  If something doesn’t add up, don’t be shy to ask questions of the landlord and the applicant

Check all info given on the application to ensure it matches up with what the landlord states.  If you have information that doesn’t add up, it could be a red flag.  Check the credit report for addresses not listed on the application.  This is usually an attempt to cover up negative data that they don’t want you to find.  Use Zillow to find past listings and landlords – check those references even better than disclosed ones. 

Fun Fact – Sometimes you get more info verbally than landlords will give in writing. I won’t, but some will. :)   

On credit reports, look for tenants who have historically done what they agreed to do with other creditors.  I learned from watching Dr. Phil that you can predict future behavior by looking at past behavior. This is very true in credit worthiness and the entire premise on credit scoring practices. This is how banks determine statistically who is likely to do what they agreed to in all manners of lending.  It works. 

Put the most weight on credit items that are associated with housing.  Sometimes people accidentally make a late payment, but avoid applicants that stiff utility providers and landlords — things that you need to live.  If you make exceptions, you may be next on that list.

Court filings are a matter of public record.  Check the city courts for any filings against your applicant.  You may find hidden landlords there too. 

Employment income isn’t the only income that people receive.  If they are employed, look at history as if you were hiring them, such as longevity, gross earnings, and time in profession.  If they are taking a new job, you should find out the particulars and strength of the offer. 

Collect current paystubs and confirm employment is ongoing.  If they get bonus or overtime pay, find out how often and if it will continue.  Tenants with businesses should supply tax filings for at least 2 years.  If it’s a new business, you could end up being an unfortunate repercussion in a failed venture, so consider that a higher risk applicant. 

A debt-to-income ratio is used by most lenders to determine if someone can afford the credit they are asking for.  Housing providers generally stick to a 40% debt-to-income ratio.  Calculate the debt-to-income ratio by adding up your applicant’s monthly debt payments (including the rent) and divide them by their gross monthly income.  Check debts that they have disclosed and the ones that came up in the credit report. 

Fun Fact – Not everyone is employed or has monthly income.  Some people (not many) just have a large amount of money in the bank.  This can be somewhat risky (think wild week in Vegas) but when you consider the application as a whole, someone who historically makes good financial decisions, particularly in housing they are typically a safe bet.  Consider (if you are worried) asking for a large amount of advance rent or a higher deposit. 

Bankruptcy doesn’t have to be a dealbreaker, but avoid applicants who are mid-bankruptcy as they may toss you into the mix with other debtors.  Bankruptcies should be discharged–ask for the documentation.  You want to see good financial decisions being made since the discharge was final. 

Prepare yourself for the possibility of applicants who have had late payments or collections from medical providers and student loans.  If you plan to avoid all of those folks, you may find that you don’t have many left to choose from. 

This is a fact of life and sadly, very common.  Typically this doesn’t have to be a disqualification from tenancy by itself.  The fact is that the medical system and education lending practices in this country affect millions of people who still need homes and will pay the rent.  Landlords (including me) put less weight on those things when other qualifying criteria are solid. 

Random Bonus Rental Tips

Accepting pets is a good way to increase your interest and prospects of finding a great tenant. Pay attention to number of pets listed on landlord references. If they have two pets there, but only report one to you, they could be hiding a pet to avoid paying higher deposits or for some other nefarious reason.

Tenant education is the key to successful results.  Applicants applying for a home with a yard that have only rented apartments will need clear instruction on the extra responsibilities of home maintenance.  Education comes in the form of a good lease with clear expectations.   

Inspect regularly.  Aside from selecting a well-qualified applicant, inspections are key to ensure that they are fulfilling the lease in more ways than just paying the rent.  Inspect regularly to ensure your home is being maintained.  

Family rental references on a tenant application are unlikely to be solid indicators of rental behavior.  Try to get references from independent landlords in writing, if possible.  If not, take careful notes on what they say verbally.  

Service animals and emotional support animals are not considered pets.  Don’t even call them “pets” and don’t ask for a deposit for them, because you can’t charge one.  If you advertised a no-pet home or live in a no-pet community, you must still accept them, but you can request certain documentation of proof.  That’s another blog post entirely.  

Non-Employment Income – You are going to have applicants that have different types of income other than work income such as:  Retirement income, pensions, disability, alimony, child support, lawsuit payouts, GI Bill housing income, and even lottery winnings.  All income for consideration should be proven.  Bank statements showing regular disbursements can be helpful.  

Go higher risk – without all that risky-risk.

  • Accepting large pets/higher risk pets is a good way to rent a home that is struggling, especially if it’s struggling because of old carpet.  If you know the carpet is about to need replacing anyway, consider taking a higher risk pet to avoid vacancy loss.  You can charge a higher deposit for the higher risk pet, or even monthly pet rent.  Folks with higher risk pets are generally understanding of the additional costs that come along with them. 
  • Accepting higher risk applicants isn’t always a bad idea with a built-in safety net.  Consider requiring prepaid rent – maybe even the full lease term.  Get the maximum deposit permitted by law.  In Virginia, that means a maximum of twice the rental amount including pet deposits.  Get a good co-signer.  Your co-signers should be EXTREMELY well-qualified and if possible, related to the applicant.  Friends come and go, but relatives are forever.  Sometimes people are higher risk because of a life event that has long passed, like the death of a loved one, serious illness, divorce, job loss, and even a natural disaster. 
  • Co-Signers can help.  Student renters can be higher risk, but generally come with parents willing to co-sign.  Your co-signers should be EXTREMELY (I mean extremely) well-qualified.  They should be able to handle their own bills and those that they are co-signing for.  Have a separate co-signer for each student.  A well-meaning parent co-signing for their student’s BFF is unlikely to actually be able to answer for the fulfillment of every term in a good lease.  Be sure co-signers know they are on the hook for all of the terms, not just the financial requirements.  Very little can top telling mom what is going on at the home.

In all matters, CYA!

  • Get it in writing – In all things housing, get all important matters in writing and keep those records.  I maintain every email that I’ve sent/received in housing matters for the last 8 years.  Make sure your lease stipulates that all things of substance must be in writing.  Things like repair requests & responses, lease terms, instructions, community rules, changes to terms, maintenance instructions, and always notice to vacate and renew.  
  • Photograph – Keep good photos of the home for every need. Marketing, inspections, pre-move-in, move-out, damages, updates, and maintenance performed.  If you find you may have an insurance claim, photograph at every turn.  Your adjuster may not be out for days or weeks and you may have to document for them. 
  • Inspect – Aside from applicant selection, inspections are the second most important thing that you can do to protect your investment.
  • Maintain your home – Just like the tenant, you must do what you say that you will do in the lease, and there is also the matter of following landlord/tenant laws to ensure you provide safe and sanitary housing.  You must maintain the important systems of your home and if you advertised it with the home, you should keep it functional.  If you aren’t willing to maintain your home to the standard of the law where the home is located, you should not rent it out.  
  • Deposit Money – Do not delay in collecting deposit funds or getting your lease signed.  Once you approve an application, get the lease signed and the deposit in hand.  People with skin in the game follow through more than those without it.  Until you receive a lease and deposit, your deal is at risk of falling through.  
  • Single applicants looking to become roommates for the first time are considered higher risk than roommates who have lived together before.  Not everyone can cohabitate successfully.  Even though roommate drama has no bearing on the contract itself, these troubles can become your problem even with the strongest of wills.  Roommates who have no rental history at all in addition to not having lived together before = an even bigger risk.  

Mary – PROperty Manager for Stephanie Clark Property Management

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