What 57% of the landlords do?

Question

Owning rental real estate can be rewarding. But it can also be difficult for some investors to juggle all the tasks related to owning and managing a rental property while managing a career, especially if you don't have enough units to scale and hire help.

One of the areas in which I often see property owners make mistakes is the tenant screening process.

There's a vacancy looming. The only applicant that completed the process isn't great. In fact, he or she doesn’t meet the minimum criteria you established. You promised yourself that you wouldn’t risk it, when you first evaluated that rental application.

But you need a tenant who will pay rent. You have a mortgage payment and other operating expenses. In one week, the property will be vacant for another month. Maybe a small compromise on the screening requirements - just this once - wouldn't be such a bad idea, right?

Wrong. The temporary sting of a vacancy can hurt, but the lost rental income of 6-to-18-month eviction, attorney fees, repairs, and vacancy later are significantly more damaging. It's a lesson learned all too often. Unfortunately, some landlords learn it from first-hand experience.

According to the TransUnion, only 43 percent of landlords surveyed use credit checks as part of their leasing process. Ask yourself, what the other 57% of the landlords do?

“Risk comes from not knowing what you’re doing.”

Warren Buffett

After leasing properties and dealing with tenants for 35 years, I want to do all that I legally can to screen tenants. In fact, I want to know more about an applicant than his or her own mother.

Mark Ainley · Answer

@Arthur R. van der Vant @John Warren As both operators here in Chicago I know you guys are seeing all of these scam tenants that provide a 100% fake identify which has little red flags on the surface. We must all have a screening process and always must follow that process.https://www.biggerpockets.com/...

John Warren · Answer

@Arthur R. van der Vant also a good thing for owners who use 3rd party management is to ask what the 3rd party managers minimum criteria will be. So many people don't realize that the typical 3rd party management company will not share much about the process and they expect to not share this feedback during the time managing. I had a 3rd party management company a few years back here in Chicago that has minimum criteria of 575 credit score with 2.5X rent and 3 or less collections.... yeah you can guess how things went.

Katherine Earle · Answer

I had a tired landlord I recently bought a building from convert an unused space to a terrible studio apartment. He didn’t properly screen the tenant so he could just get anybody in there, who then allowed the bad girlfriend to move in. The tenant abandoned the apartment right before closing, leaving me to deal with the bad girlfriend who didn’t think paying rent or utilities was necessary. It’s been a mess, but a fantastic learning opportunity on evictions and the importance of properly screening people, even when it’s a tough unit to rent. Not everybody sees evictions as a “learning opportunity” though! 😂

Victor So · Answer

Excellent article @Mark Ainley ! Always providing value. Thank you!

Mary Smith · Answer

@Arthur R. van der Vant I agree with you 100%. Tenant screening is such an important part of the application process and I do not understand how some landlords just choose to skip this step.

John McKee · Answer

All you need to know is do they have a consistent job, maybe a landlord referral, and a deposit. Some of the best credit score tenants that I used to have turned out be the worst tenants. It's all a crap shoot so I wouldn't waste too much time or money on it. Get the prior landlord referral and that will tell you what you need to know.

Arthur R. van der Vant · Answer

@Eudith Vacio We don’t visit applicant’s current place of living, but we do verify that the address provided is true and correct. To prevent us from finding out that the applicant is not paying rent to the current landlord, we have had applicants list as their current residences, addresses of other people (friends’ or relatives’ addresses). Any time an applicant lists a family member as a current landlord, it should be a “red flag”. We check references from current landlords, and previous landlords. Current landlords may not always be forthcoming with information, especially if they want to get rid of a problem tenant. But previous landlords who no longer have that problem, may provide more honest verification. One other thing that we do as a part of our rental application process, we require all applicants to provide last 12 months of bank statements showing proof of their rent payments to the current landlord. We ask that the applicant circles or highlights the rent payment on each statement. That allows us to see if payments are made timely, in what amount, and to whom.

Atul Mohlajee · Answer

I recently checked references for a prospective tenant with 740 credit score, 5 times income, no record. However my realtor checked references and found that landlord reference did not own the building and was a relative who obviously gave a great reference. The realtor found the real owner landlord of her previously rented building and called him. He stated that the tenant was great in rent payment and upkeep but was very high maintenance. She would call inadequate heat when heat was 74 degrees. She would complain about hot water turning colder after a 20 minute bath. That happens when tank is empty and you need to wait. If her call was not returned promptly, she would call the village. When the landlord called her, her male relative (not on the lease) would answer the phone in a rude manner for this 30 plus year old woman.

Eudith Vacio · Answer

Such a great point to make for those that want to invest in real estate @Arthur R. van der Vant! I think landlords need to be patient when renting out their units, and risk 1 month of vacancy to find the right tenant. What other things do you look for? I know some landlords that visit the prospective tenants current place of living. Is that something you do?

Drew Sygit · Answer

@Arthur R. van der Vant We hear you!It's even an issue with Property Managment Companies (PMC).Many of our local competitors get a paystub, ID and run a background check that just gives them a rating for the prospect. While that will wofk most of the time for prospects with credit scores above 660-680, the risks increase dramatically as scores go lower.