Tons of great responses and info. Thanks so much.
Well... the decision ends up getting made for me - by the tenant.
First, a few people asked whether I had a previous landlord reference. She put on her application that she owned before renting - and has been renting due to a divorce about a year ago. This all checked out with info on the app and public court records. So I didn't have one.
Back to the story - along the lines of what @Steve Babiak suggested, I politely confronted her with the information, and allowed her to explain. She tells me that when she told him she was not renewing the lease, she wanted to know how quickly she could get her deposit back after moving out (@Justin. - I get your point that it's a lot of money to come up with). Apparently, landlord told her that he doesn't have deposit and wanted to know if she would be ok just applying it to rent - and they had a verbal agreement to proceed this way. The tone of her voicemail was due to being surprised and upset that she was going to get the notice to pay or quit when they had an agreement. She then goes on to tell me -since he has no problem defaming her character - that he has a substance abuse problem and has a tendency to forget conversations. Not mentioned in first post, but getting the scoop on tenant came over the course of multiple interactions - that were strangely repetitive and rambling at times... and he has since called back and left messages wanting to talk about it some more - that the rent was often late over the last year- why the glowing rec then??
So they've each made their case and it's now the classic "he said, she said". Since I have met tenant on multiple occasions and given that I have her 2 months rent + SD money, and the current landlord integrity is somewhat in question as well I'm inclined to proceed with the lease.
However, I wasn't ready to make up my mind on the spot - I told her that I wanted to think it over (meaning: wait for some of your great responses on BP) and I'd get back to her the next day with my decision. She seems ok with this and we hang up.
Less than 15 minutes later she calls me back - ironically interrupting a sentence speaking with my wife saying that I think we should give her the benefit of the doubt and keep her. Now she launches into a rambling tirade (same tone as that nasty voicemail landlord played me) and says that this whole situation has left a bad taste in her mouth and that my lack of professionalism (?) has made her not want to rent my place anymore (!). Totally didn't see this coming - I guess she expected me to make a snap judgement (btw - this was at 11:45pm)...
She wants to know if I'll return her money - I have a hold deposit agreement that says if she wants out that the one month hold deposit she paid is non-refundable. Seeing the pending potential nightmare tenant situation looming, I decide to cut my losses and let her off the hook.
I go to the bank, get a cashier's check for the full amount, make her sign an agreement noting that it is she who wishes to no longer rent the property, and I'm now looking for a new tenant.
Sorry for the long post, but you all were so helpful I felt the full explanation, and any post-mortem analyses from the great folks here, might be helpful to others who may stumble across this in the future.
PS I already have several other interested parties and one showing today - actually decided to increase rent by $50 since I had so much interest previously and the repairs have turned out nicer than expected and it's not the holidays anymore - I'm feeling ok that I made the right call.
