I have had a rash of evictions lately for non-payment and it has caused me to look introspectively at what I am doing or not doing when screening these tenants, that may result in me allowing bad tenants to slip through my screening process.
Although I own lots of investment property, I wonder if I can't see the forest through the trees. I am looking for some practical advice.
Background: Most of my properties are 2-4 unit buildings in Minneapolis. I own in many parts of the city, but have 95% of my evictions in the lower income (but not bullets flying) areas. I do full credit, criminal, and rental history checks through an agency.
Here are some questions (please tell me the way you really do it and not the pie in the sky hard-ass landlord canned reply):
[list] Do you have an income to rent ratio the tenant must pass? If so, what is the ratio?
Do you allow any evictions or collections on their record? If so, how old does it have to be for your to excuse it?
If it was 2 weeks before your apartment was vacant, would you (Or do you) lower your standards instead of losing a month's rent?
Have you also found some correlation between your bad tenants and something on their background check?
To stay honest with yourself and your rules, do you use a point system for each applicant?
Do you have buildings or units that you are willing to lower your standards on because they are more difficult to fill or some other reason?[/list:u]
I can't answer many of your questions as I haven't had any rentals for more than 10 years. But the two I can answer I'm pretty emphatic on as the answers don't change with time.
If it was 2 weeks before your apartment was vacant, would you (Or do you) lower your standards instead of losing a month's rent?
This was a hard lesson to learn, but once you take a long term view it will answer itself; there are two kinds of vacancies-a place sitting empty and a place that's OCCUPIED but non-paying. Of the two the latter is way worse. Not only is no cash flowing but you have the potential for damage and having to do another make ready before you can get the money flowing again. Also your legal fees escalate. Let it sit empty!
Do you have buildings or units that you are willing to lower your standards on because they are more difficult to fill or some other reason?
Places that consistently ended up being " problems" we always referred to as haunted houses. In many cases there was nothing specific we could point to, in others we determined it was the " garage conversion" that made the tenants realize that there was all that " extra" space that they could sub-let (illegally). We re-converted it back to a garage and it fixed that one.
Places that became " haunted" (and many times they were in the same neighborhood as other rentals of ours, we just SOLD.
The things that we did that fixed most of our problems, even in lower price ranges were;
1. Our house was always the best looking in the area! Slight upgrades over the competition. That didn't mean we put granite and stainless is lower priced neighborhoods. We did have extra insulation, nicer cabinets and stoves/dishwashers, better floors-always ceramic instead of linoleum etc, solard reflective screens on windows. Which leads to
2. Higher rent! Our places always rented for slightly more than the competition. In a $600-$625 neighborhood we might be $640, but we could point to everything in 1, some of which saved the tenant on their utility bills and justify, and GET our higher price.
3. Minimum of a two year lease! Even with lower wage earners there are some who are more stable and responsible than the norm. Those are the guys you want! By requiring a 2 year lease I pointed out that they were SAVING MONEY by not having the expense of moving or paying more in a year. Once I went to this my AVERAGE tenant started staying about 5 years. That is when you're overhead drops, when you're not doing make readies every summer!
4. Always make sure your places are coming vacant during the busy season. If you have a vacancy in January make that lease an 18 month one so you have lots of lookers when it comes up again. IMO getting a " January" looker because you just evicted someone just leads to more problems because you'll be looking for another one next January!
My income to rent ratio is 3:1 and can be alimony, welfare, food stamps, disability, job, etc. Of course this can change if they get fired or the shack-up moves out, so it's just a move-in qualifier.
I allow no evictions unless it's over 5 years old and I can talk to some landlords since then, the most recent of which will probably lie to me just to get rid of a problem tenant. But of course, what do you do when the tenants say they've been staying with Sis since the old eviction?
I try not to lower my standards just to rent out a place, but you better believe I'm tempted. I have one multi-family like that and I'm going to sell it, hopefully at break-even or better.
I guess I do use a point system to rate my applicants, but it's sort of instinctual and cumulative. Tattoos, gross piercings, skulky demeanors, unruly kids, smelling of beer at ten in the morning, living with Sis for the last five years, the list goes on. The most recent was a lady who drove an expensive SUV but couldn't afford the low rent; well, gee, there's some money-management problems there.
Look, I know the consensus is that in low-income land 'screening right' eliminates most tenant problems, but it still seems to me kind of a crapshoot, too, where sometimes you get lucky and sometimes not. My last two evictions were tenants that passed all the screening and had glowing recommendations from previous landlords. So what made them 'go bad'? Who knows. Maybe my next roll of the dice will turn up a winner.
Great suggestions. Thanks for the plain talk. I love those subtle changes that I can make to my process to improve my ratio. Especially like the 2 year lease as it would reduce my workload.
Screening in " low-income land" is definitely a crapshoot. Even with all of the recommended screening efforts, you can end up with a terrible tenant. Like Frank says, sometimes you need to let these properties go.
I just unloaded a few properties where eviction was the norm. I wasn't willing to deal with that nonsense anymore and got out. Sometimes, the best move is to cut your losses.
Edited: 06/26/2010 at 05:14AM
Joshua Dorkin, BiggerPockets, Inc. E-Mail: webmaster@biggerpockets.com Telephone: 877-831-4704 Website:http://www.biggerpockets.com Be sure to check out the BiggerPockets Blog at http://www.BiggerPockets.com/renewsblog/
Yes, tenant must have income OR savings of three times monthly rent. And, it must be verifiable- actual bank statements (local or foreign) showing regular deposits or savings balance, very recent paystubs, income tax return or letter of reference from CPA firm for self employed.
Evictions, NO! NEVER! Collections, it depends. How many, how recent, what type of account? If more than 3, NO! If collection accounts are less than one year old, and NOT medical, NO! If 3 or less, but accounts are for ANY utilities (including cell phone service), or minor consumer goods (Wal-mart, Pizza Hut, Victoria's Secret, etc.) NO! Repo'd car, NO!
I ignore medical related bills of any kind. If someone has older collection accounts, and has TOLD me about their problems (divorce, bankruptcy, job loss) but is back on their feet and shows good recent history, including stable employment, I MAY consider them, if everything else checks out properly.
Lower your standards, and you get exactly what you ask for. As other posters suggest, make sure yours is the BEST value offered in the area. Be aggressive with marketing and lead followup. You MUST get bodies through the door looking, in order to find the qualified prospect, and you MUST " close the deal" when you find that prospect. If you lower anything, lower your price a little. Boost it back up in six months.
Usually, past behavior is an indicator of future behavior, but sometimes Life Happens. Job loss, domestic issues, whatever. You can't do anything to foresee that, but if their history shows numerous slow pays or other issues noted above, chances are they will fall into those habits again at the first sign of trouble, or, at least when Christmas rolls around again and they overspend!
No point system (but our MINIMUM requirements are spelled out on the application), I study ALL the facts available, fit all the pieces together, and look at the whole picture for each applicant.
The minimum requirements are the same across the board, although I MAY fudge slightly on the income requirement if everything else is in order. I also do not hesitate to ask for a qualified guarantor if anything is questionable.
Keep in mind, there really ARE far more Good tenants than Bad. Proper screening is your one opportunity to minimize the headaches and expenses for the long term.
I have 2 sets of screening criteria. One for the companies that contain nice SFHs and one for my low income apartment buildings.
For all tenants, I require income of 3 times the rent (including whatever government assistance they receive).
For my SFHs, I don't allow any evictions within the past 5 years. For my low income apartments, I don't allow any evictions within the past 3 years.
For my SFHs, I don't allow any felonies within the past 5 years; for the low income apartments, I don't allow any felonies within the past 3 years. In either case, if they did have a previous felony, I require them to be out of prison for the 5 and 3 years respectively.
For my SFHs, I don't allow more than 2 misdemeanors within the past 5 years; for the low income apartments no more than 2 misdemeanors within the past 3 years.
For my SFHs, I don't allow any illegal drug activity on their record within the past 5 years; 3 years for the low income applicants.
I also check for any tendancy for the tenant to sue people. I won't take anyone with that inclination.
With my SFHs, I make the tenants sign a one year lease. With the low income tenants, I won't sign anything longer than a month to month lease, because I can't enforce it anyway.
As I have been growing my business, I have been evicting 1% of the tenants per month. That includes the inherited tenants. If you only include the tenants I have screened, I am evicting .25% to .50% per month.
Of course there is a tradeoff between having vacancies because of doing a thorough screening and having terrible tenants due to not doing a thorough screening. Where is the right mix? I don't know. One of our local landlords does absolutely no screening. He has a lower vacancy rate than I do, but he does a lot more evictions than I do. He also has more tenant damage. However, that still could be a better strategy if it results in a higher income over time.
Mike, Can you elaborate on this statement? I am not sure why you would not be able to enforce a lease on your low income rentals and therefore choose to go month to month. Are there not laws in Ohio that protect a landlord and enable him/her to enforce rental leases? Why would low end housing not be enforceable and the higher end sfr's be enforceable?
Other than that, I think it is fair to say that we all require a 3-1 ratio on income, screen for past criminal and credit histories and use the criteria Mike and the others suggested.
Edited: 06/26/2010 at 05:14AM
Will Barnard, Barnard Enterprises, Inc. E-Mail: info@barnardenterprises.com Website:http://www.barnardenterprises.com info@barnardenterprises.com
Do you allow any evictions or collections on their record? If so, how old does it have to be for your to excuse it?
Evictions - No.
Collections - yes (I don't like to see any in the past year but it's not a hard rule for us)
If it was 2 weeks before your apartment was vacant, would you (Or do you) lower your standards instead of losing a month's rent?
No, NEVER.... I'd lower my rents before I'd lower my screening standards
Have you also found some correlation between your bad tenants and something on their background check?
I haven't had any bad tenants to date.
To stay honest with yourself and your rules, do you use a point system for each applicant?
No, but I do treat all applicants equal
Do you have buildings or units that you are willing to lower your standards on because they are more difficult to fill or some other reason?
No, but I don't have any buildings in the slum areas yet. When I do get some in the slum areas I am planning on keeping my standards high in hopes that I can help clean up that area of town. (I just went and looked at 7 units in a slum area that I am thinking of putting an offer on. It has one possibly two tenants that NEED removed, I hope they're on month to month leases, that'll make it easier.)
[/list:u]
You can't enforce a low income lease because the people have nothing for you to get. You can't even get their BATV or their old leaky clunker. Besides if they turn out to be really bad tenants you just give them 30 days notice to leave.
You can't enforce a low income lease because the people have nothing for you to get. You can't even get their BATV or their old leaky clunker. Besides if they turn out to be really bad tenants you just give them 30 days notice to leave.
Exactly, you can't get blood from a turnip. Low income tenants usually don't own anything. Even if they do, if you try to collect on a judgment, they'll just move and play the shell game. I've got a few judgments against deadbeats, anyone want to buy them at 50 cents on the dollar?
In my town we're stuck with 1 year leases because students are the main group of tenants. They don't have credit and few of them work.
1) Everyone must fill out an application.
2) If they want to paint or buy a puppy " in the future" - no
3) Monies owed, even medical - no
4) Facial jewelry and boyfriends and girlfriends on the first visit - bad sign and usually no
5) Right to enter quarterly for pest spray and filter change. Essential.
6) Go to magistrate's court on the 6th. Make sure lease language is that required by the state landlord tenant act so that you can avoid the notice letter and go straight to court.
7) Get the parents cellphone numbers/names on the application. Believe nothing they tell you verbally. Call parents after you file for eviction.
8) Never, ever allow moveouts. Put right to show 45 days from end of the lease. Normally their housekeeping precludes being able to show the house/apartment early.
9) Even if allowed, don't rent to 4's. Too difficult.
May 22 '08, 11:54 AM
