Landlording & Rental Properties

6 Common Application & Screening Mistakes Property Managers Make

Expertise: Business Management, Landlording & Rental Properties, Real Estate News & Commentary, Real Estate Marketing, Personal Development, Real Estate Investing Basics
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It’s time for the second installment of Property Management Mistakes!

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Earlier, I covered 6 Common Advertising & Showing Mistakes Property Managers Make. Today we’re talking about how easy it is to screw up the process of taking applications and screening tenants. This is one of the most important parts of being a landlord — being able to properly select tenants will determine a huge amount of your success and happiness as a landlord.

So let’s get onto the screw-ups!

6 Common Application & Screening Mistakes Property Managers Make

1. Application Mistake: Not Asking ALL the Questions

It’s easy to download a form from the Internet and print it out and give it to a prospect — but how many of those forms were put together by a lawyer (or worse yet, an editor) instead of by a property manager?

Naturally, you need all of those legal aspects taken care of, like proof of identification, permission to run a credit check, co-signer information (if relevant) and so on. But there’s more.

You also need to obtain references that are not landlords or family members, a list of their previous (at least two!) landlords, including contact information (and previous addresses), verification of their income and permission to run a criminal background check. Then — and this is just as important — you have to actually follow through and do the legwork that all of that information enables.

In particular, take care to actually call all of their previous landlords and ask them about the applicant’s tenancy — including allowing them to fill in the dates of that tenancy. We’ve found that a surprising number of clever applicants put their friends’ phone numbers as their previous landlords, but that not many of them are prepared with details like the exact dates of their friend’s move-in and move-out. So we ask open-ended questions to try to expose these situations. We even check public records to confirm the owner of a property and when they bought it.

Related: Protect Yourself As a Landlord With These 6 Crucial Documents

Needless to say, faking a landlord is an automatic “decline” from us.

2. Application Mistake: Trying to Profit From the Application Process

It’s not unusual for a property manager to charge an application fee — it does a lot of good things. It immediately weeds out a lot of people who aren’t actually serious about moving in. It pays a portion of the money you have to shell out to do a full background check. And it gives you some tiny bit of information about the applicant’s finances.

But application fees have been going up lately, and we’ve even encountered some PMs who require a relatively significant application fee and then ask the applicant to bring proof of their FICO score. That tells us that they’re not doing a full credit check (or even any credit check at all — see below), which means their expenses for the application aren’t all that high.

Their application fees are being treated like an income stream — and that’s not acting in the best fiduciary interest of your clients because you can be guaranteed that those high fees are keeping valuable applicants from moving into their properties.

3. Screening Mistake: Not Looking in Depth at an Applicant’s Credit Report

The credit companies do us this great service of condensing a person’s entire credit history into a single number, and that number can tell you a lot — but it certainly can’t tell you everything you need to know about a person.

This is especially true of tenants. A score can’t tell you, for example, if their credit score is low because they regularly miss ordinary bill payments or if it’s low because they have one huge debt that they ignore because they know they’ll never be able to pay it off. The people in that second category can make great tenants provided they have a solid record of paying their normal monthly bills.

In contrast we’ve also seen applicants with acceptable credit scores who have nothing but collection accounts on their credit report — with the exception of student loans in deferment with a “perfect” payment history. Don’t know about you, but that’s not a tenant we want to manage.

If you’re one of the above crowd who would go so far as to trust an applicant to bring in evidence of their own FICO score, allow me to introduce you to a cute little thing called Photoshop. Yes, it’s out there, and yes, people will and do use it to fake up all kinds of documents. Never trust a tenant’s paperwork — it exists to be verified, not to be used as-is.

4. Screening Mistake: Not Understanding Income

The industry standard seems to be that an applicant must have monthly income equal to three times the rent.

We say phoeey to that! That was lifted from the mortgage industry, and those guys knew so much, they caused the recent real estate meltdown.

There’s only one income number that matters: what the prospect has available to make their rent payment. This means looking at their take home income after payroll taxes and any other deductions, like child support or garnishments. Then subtract from that their car payments, student loans, credit card payments, etc.

Think you’re done? What about utilities? You should be able to estimate those, but what about food, clothing, medical, etc.?

The point we’re trying to make is that there is no perfect, guaranteed system, but you should put more thought into it than the “3 x rent” rule.

By the way, don’t forget to be on the lookout for fraud here, too. We once had a prospect who claimed to be an administrative assistant give us pay stubs and a W-2 showing over $80k in income. That might be possible at a Fortune 500 company, but not the little mom & pop shop our research turned up!

5. Screening Mistake: Not Asking for Bank Statements

Every week we have a prospect tell us they’ve never been asked for a bank statement to rent a property, and we shake our heads wondering what the rest of the PM’s out there are doing (actually, not doing!).

How important do you think it would be to know if a prospect lives paycheck-to-paycheck or has a pattern of saving money for a rainy day? Granted, some properties are located in areas where it seems 99% of inhabitants live paycheck-to-paycheck. Many in those areas don’t even have a bank account, but wouldn’t you want to know that? A prospect without a bank account often turns into a tenant who causes headaches with rent payments.

Bank statements also paint a pretty good picture of someone’s spending habits. They can show what day rent was paid, paydays, how often someone eats out for lunch and dinner — pretty much where their priorities are.

6. Screening Mistake: Thinking That a Bullish Market Means Good Applicants

It’s a common enough mistake — if the rental market is doing well, it means that more people are moving into rentals, which means that more good people are moving into markets. When the market is on the uptick for as long as it has been lately, you start to get a little complacent because there are so many qualified candidates — but think about it from the shoes of a crappy tenant.

With so many good candidates squeezing them out of the market, renters with bad histories get desperate. If you think that someone using Photoshop to mock up a FICO score or using a friend as a landlord are unlikely, we’ve got some stories for you.

Related: The Top 8 Mistakes Made By Rookie Landlords

We’ve had applicants mock up entire employment histories, complete with excuses as to why each of a half-dozen businesses isn’t available to be called for verification. The truth is that as the market gets better, the worst applicants get better, too — better at lying, deception and fraud.

We’re still nowhere near done talking about the many mistakes that a property manager can make — keep looking under the “Landlording and Rental Property Investing” tag for more tales from the dark side of landlord-dom.

What are the biggest property management mistakes you’ve seen when it comes to the application and screening process? What would you add to my list?

Join in the discussion below!

While in the mortgage business, Drew rose to a VP position at the first broker he worked for and then started his own company. In the pursuit of excellence, he obtained several mortgage designations and joined mortgage & several affiliate association Boards. He also did WebX presentations and public speaking. It was during this time he started personally investing in single-family rentals, leading him to also start Royal Rose Property Management with two partners. He also joined the Board of a local real estate investors association, eventually becoming its President. The real estate crash led to an offer from the banking industry to manage a Michigan bank’s failed bank assets they acquired from the FDIC. The bank acquired four failed banks from the FDIC, increasing from $100M in assets to over $2B while he was there. After that, he took over as President of Royal Rose Property Management. Today, he speaks at national property management conventions and does WebX presentations.

    Peter Silvester
    Replied about 5 years ago
    I have been renting to short term visitors to Los Angeles for many years with success. The requirements are that they are not from Los Angeles, This would suggest personal, financial or other problems if they are looking locally for short stays. One question I never thought to ask until it was too late: How many servants did you have growing up? After a sweat English girl moved in, kitchen plates and utensils stopped returning to the kitchen. The bad smell of perfumed candles wafted through the house. Then I discovered she grew up in the Middle East due to her father getting a high paying job there. With all the servants she lost all concept of cleaning or putting anything back. The room was a wreck once she left. I have a no smoking rule. This means No Hookahs either. The burn marks on the wood floors and broken hookah found hidden in the garage was the clue.
    Dawn Anastasi
    Replied about 5 years ago
    If I ever asked applicants “How many servants did you have growing up?” I would get a lot of double takes and weird looks. No one I know has ever had servants.
    Drew Sygit
    Replied about 5 years ago
    PETER: great input! I can think of a couple of tenants that we could’ve asked this of. The rest would give us weird looks as Dawn mentions:) It’s all about adapting to your market and demographics of your prospects.
    Replied about 5 years ago
    Property managers are not making a mistake by missing these items, they know they will not get their commission as soon if they pass on a tenant. And when they get a bad tenant, the owner pays, not the PM. The PM actually makes more money with a bad tenant, that a good one.
    Drew Sygit
    Replied about 5 years ago
    ERIC: thanks for another perspective for owners to keep in mind when hiring a PM. We’re not perfect, but we do our best to be of value to our owner clients!
    Replied about 5 years ago
    Wow, I have never asked a prospective tenant for bank statements. In the area where I live I suspect no one would ever do that, they would just say weird and go to the next place. Have you ever had tenants refuse to turn over bank statements?
    Drew Sygit
    Replied about 5 years ago
    JERRYW: we’ve had more applicants give us a hard time in the lower demographic areas than in the higher areas. We have maybe 1-2 applicants every 3 months that refuse to give us their bank statements. Many more claim they don’t have a bank account – we do catch some that have auto-deposits showing on their paystubs! Like many things, it’s how you ask and what you’re projecting when you ask that plays a key in your success rate. The last agent we hired expressed skepticism about getting bank statements. He was surprised how easy it usually is. Of course, it’s listed on our rental application and our website, which we suggest you do if you really want to get them.
    Replied about 5 years ago
    Hi! My ex and I owned over 15 duplex/single family homes during the boom. One really helpful trick I used was after meeting them and showing them the place a time or two and collecting their application and DL if I had any doubts I would tell them I also needed their bank statement or copies of paycheck stubbs and I would “be in their current neighborhood this evening” could I stop by and pick up the paperwork? I ALWAYS drove past the address they used as theirs on the app and checked out how they lived…if they took care of the yard…how many cars were in the driveway…etc. Doing that saved me from making a bad mistake often. When times were tough we could not afford to keep the house empty for more than one month and so we made some sketchy calls.
    Drew Sygit
    Replied about 5 years ago
    SHERI: Great input! We often do the same thing with borderline applicants:)
    Replied about 5 years ago
    I have zero tolerance for lying. I can and WILL do a thorough background check “is there anything I might find that I should know about?”. Just turned down a family. I do a pre-check, and one tenant admitted to (but explained away) the domestic violence incident I had found in the local court record 12 years ago, but claimed there was nothing else at all. Lo and behold two of them had 5 items apiece. Really? Feigned disbelief (“but there wasn’t a judge — wouldn’t there have to be a judge trial if was a felony?”) Sad part is that with the glowing references from the previous landlord (of 10 years), proof of income, and the fact that all the incidents were 10- 20 years ago I would have been willing to overlook a few other flaws and allowed them to move in IF THEY HAD TOLD ME THE TRUTH. Huge relief that I could say “no” with so few regrets.
    Drew Sygit
    Replied about 5 years ago
    DJO: a very passionate comment! We have a similar mindset, but we do allow that many tenants consider omissions on their applications a “white lie”. Instead of broadly saying no when these situations occur, we create another hurdle for them to overcome – a detailed Letter Of eXplanation (LOX), proof of rent payments (cancelled checks or money order receipts), automatic payroll deductions for rent, have them agree to pay for quarterly inspections, max security deposit, a nonrefundable cleaning fee, etc. You can get pretty creative, just don’t violate any Fair Housing Laws!
    Drew Sygit
    Replied about 5 years ago
    DJO: a very passionate comment! We have a similar mindset, but we do allow that many tenants consider omissions on their applications a “white lie”. Instead of broadly saying no when these situations occur, we create another hurdle for them to overcome – a detailed Letter Of eXplanation (LOX), proof of rent payments (cancelled checks or money order receipts), automatic payroll deductions for rent, have them agree to pay for quarterly inspections, max security deposit, a nonrefundable cleaning fee, etc. You can get pretty creative, just don’t violate any Fair Housing Laws!
    Replied almost 5 years ago
    If they do not have a checking account,mand a Credit Card, it is because the bank does not trust the, nor should you,
    richard dunlap
    Replied almost 4 years ago
    I aske how many people wil l be living in the house first if is a 1 bed room and they say 3. saves u time not to go farther. I say sorry to many people for this unit and move on. FIRST QUESTION ! DO NOT OVER LOAD .