Are You OVER-Screening Tenants? How Background Checks & Credit Scores Can Fail
We’re known for making a big deal about tenant screening — we believe (and have years of experience to back it up) that 90 percent of tenant evictions can be traced back to poor tenant screening. So, we thoroughly screen every single tenant with the same process. Before you form any thoughts about us operating in an easy market, note that we manage properties in the city of Detroit, so you know that many of the people we’re screening are not exactly exemplary when it comes to their credentials.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
But even we believe that it’s possible to be too strict when it comes to tenant screening. We won’t take a tenant who straight up lies on their application, period. But there is at least a tiny bit of wiggle room on any other aspect of their application, and I’ll explain why, but first, I have to explain just a little bit of background theory. Bear with me; it’ll be worth it.
The Two Dimensions of Tenant Qualifications
Tenant screening consists of two essential aspects of each tenant: their financials and their behavior. If a tenant represents too much of a risk because they might not pay rent regularly, they’re not worth signing — but even a tenant who pays rent like clockwork can still be too costly if they’re prone to behavior that damages the property, be it neglect or active abuse. A tenant has to have both to get signed by our company. The problem is that establishing each of these is just as much art as it is science.
Related: Tenant Screening: The Ultimate Guide
Background Check Providers Aren’t Entirely Reliable
Property managers — ourselves very much included — don’t have the ability to do their own research into every applicant that comes their way. So we almost universally rely on one or more of a hundred different companies that puts together tenant-suitability reports. The problem is that these companies don’t have a huge staff of people who do the research, either — they rely on software that “scrapes” a bunch of data from a bunch of sources that they pay for access to. That data is only as good as the software that scrapes it, and no software is terribly good at distinguishing between, for example, Frank Keith Sr. and Frank Keith Jr. — much less handling identity theft in either direction (i.e. when the tenant has had their identity stolen or when they’re presenting themselves with someone else’s identity).
The result, as shown by a study in 2004, is that a jaw-dropping 79 percent of all tenant-suitability reports had at least one error. Even criminal background checks weren’t immune — while no studies have been done of them, an ABC investigative journalist revealed in 2008 that every single major criminal background check provider had “at least dozens” of court cases pending against them for damages caused by inaccurate criminal background checks.
Furthermore, most tenant-suitability reports are very judgmental and binary when it comes to court records. Civil and criminal court records are notoriously difficult to accurately judge, even for humans — leaving it to a computer to decide whether or not the little old lady on the other side of the table is suitable based on her 30-year-old court case wherein she sued a landlord for sexual harassment is just not right.
Credit Scores Are Not Infallible
Many landlords and property managers use credit scores in making approval decisions on applicants. I don’t have a problem with that in general, but many have minimum credit score requirements, which I think is a problem.
I can show you many credit reports with “acceptable scores,” where the applicant has nothing but collection after collection, but oh wait — they have a bunch of student loans they’re not paying on because they’re still in school, yet the software thinks they’re being paid on time.
We can also show you credit reports with only one or two bad accounts on them, but the credit scores are way low.
The Human Side of Tenant Screening
That’s precisely why it’s possible to be too strict when it comes to tenant screening — because people aren’t accurately presented by any computer-generated report, no matter how much data the computer has access to. Not only are computers really bad at doing the job of collecting, sorting, and presenting the data in the first place, but they’re literally incapable of any degree of judgment.
Now, when you have an in-the-flesh human reason to believe that the tenant in front of you is unsuitable — whether it’s the fact that their car is a biohazard on wheels (a sure sign they’re not going to respect your house) or that their “previous landlord” phone number happens to show up on Facebook belonging to one of their best friends — there is no latitude given. But when the tenant-suitability report says one thing and the human being in front of you has given you a solid reason to believe something different, you should strongly consider further investigation. Discarding a perfectly valuable tenant because of a computer’s poor skill set doesn’t do anyone any good.
Landlords: What’s YOUR take — is it possible to screen too strictly?
Leave your comments below!