BiggerPockets

Proper Tenant Screening In A Tough Economy Minimizes Tenant Debt

Screening a prospective tenant is more important now than ever. With the current economic climate, more people have credit ratings that fall into a gray area compared to just a few years ago. Job losses and foreclosure rates are painfully high. FICO scores are dropping for many Americans, making finding a tenant with squeaky clean credit much more difficult.

I always look at this issue from the angle of collecting or preventing tenant debt. By properly screening a tenant, you can greatly reduce the risk that the tenant will move out owing you money. Tenant debt will always be a problem for landlords, and while you can't eliminate it, you can certainly reduce the possibility of it occurring.

The key to screening in this economy is separating the tenants who have hit a rough spot in life and will recover from those who are habitually late or don't pay their bills at all. The latter group is much more likely to burn you than the first, though both may have similar FICO scores.

So, how do you tell the difference? You purchase a more in depth report and spend an additional ten minutes analyzing it. When you look at the report, think about what would happen in your life if you suddenly lost your job, got a divorce, or became very ill. How would those events affect how you pay your bills and how would it change your credit report?

First, did a credit report come back, or did you get a "no hit" or "no credit" response? There are very rare situations where you may legitimately see this, but it is usually a case of either the prospect giving you the wrong name or Social Security Number (SSN), or you entering the SSN incorrectly when you ordered the report. "No hit" means you are the first person ever to order a credit report with that name and SSN combination. "No credit" means the credit bureau does have a computer file with that name and SSN, but it contains no credit data.

Consider this scenario: I apply for a store credit card with a phony SSN. They order my credit report and get a "no hit." However, because they ordered a report with that name and SSN combination, it established a computer file with the credit bureau with the same combination. Now, I apply for a gas credit card with the same SSN. When they look at my report it will now come back "no credit." If I keep applying, eventually I can establish credit under this phony SSN.

So, if I am 50 years old and only have 2 trade lines that are relatively new, I may be trying to establish credit under a fake SSN. One legitimate answer to this scenario could be that I recently moved to the U.S. from another country. Ask a lot of questions and look hard at the report. If something does not smell right, it probably isn't. Investigate further.

Next, take a hard look at the amount and types of collection accounts the prospect has on his or her report. Take note of the age of the collection accounts. What type of debt does this person have? Medical bills? Utility bills? The types of collection accounts, if any, will tell you something about your applicant. Are the collection accounts recent, from when he or she hit the bump in the road? Or are they over a period of years, indicating a poor track record for paying bills?

Examine the applicant's trade lines in depth. This takes a bit of experience to do quickly, but review each payment the applicant has made. How has your applicant paid his or her revolving credit over a period of time? Has he or she been habitually late for years, or only during the rough patch?

Check the fraud section of the report carefully. Identity theft is rampant. People are even using their children's SSNs to apply for credit, because their credit is so poor. I even see reports of people using the SSN of someone who has passed away! The fraud section may reveal if someone is using someone else's SSN.

Companies that sell credit reports, like TeleCheck, also sell a "bounced check report." Reports like this are what large retailers use to decide whether to accept your check or not. This is a valuable report, as it can tell you whether your prospect habitually bounces checks (another indicator of how he or she pays bills).

Lastly, buy a previous address report. These reports are often matched to the SSN and can go back 20 years. This step will serve two purposes: it can help you determine if your applicant is using a phony SSN and it will help you determine if any hits you receive on the eviction or criminal reports is indeed your applicant or someone with the same name.

Proper tenant screening takes a few minutes. Too many landlords do not take these few extra minutes and it costs them in the end. Tenant debt is lost profit. The few extra minutes and few dollars it costs to properly screen tenants can greatly decrease the possibility of tenant debt once the tenant moves out.

Email me your questions and I will try to help.

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