The Biggest Mistake I Made as a First-Time Landlord
This one's probably not going to be too much of a shocker to too many people. What's the biggest mistake I made when I first started out as a landlord? Hands down: I didn't screen well enough.
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Early on when beginning in real estate in Kansas City, there was this unmistakable fear that would come over me if a property sat vacant too long. I remember once when I had 13 consecutive applications fall through for one reason or another.
Even though at least four applicants were approved, the prospects all “ghosted” my company and me once I informed them of their status.
Fear turned into anxiety, and then something close to desperation manifested; I had to get that property leased—to whomever and at whatever cost.
Do not make this mistake! And I should note, the mistake is conceptual. Get it clear in your mind that a vacant property is better than a property that is rented to the wrong person.
Evictions are an expensive affair in and of themselves. In some places, they are time consuming, too. The process can take months.
Want proof? Take this thread on City-Data.com, for example. In it, landlord after landlord discusses how it took them years to evict tenants in New York City.
What’s worse, some tenants will do major damage before they leave. We had one take a hammer and go to town on the drywall throughout the entire unit!
So, say it with me now, “A vacant property is better than one rented to the wrong person.”
One of our first mistakes was not doing much “pre-screening.” This is screening done on the phone or through email when a prospect first reaches out to you.
It’s important for Fair Housing reasons to never say that someone should not apply because they don’t meet your criteria. But you should still ask them if they have any evictions or felonies or if they are employed and make sufficient income to meet your criteria.
Then, use the third person and say something like, “We don’t accept evictions.” If the prospect says that he or she wants to apply anyways, don’t dissuade them. But most won’t bother. What would be the point?
Now yes, some people will lie to you and hope they can squeak through your screening undetected. But most won’t try, and you will save a lot of time on going to show the property or running an application for someone who had no chance of being approved in the first place.
You can also utilize new technologies such as Rently or ShowMojo, which can automate the pre-screening and showing processes.
On a somewhat dark yet amusing note, one time we decided to drop the application fee in order to encourage more applications. You couldn’t possibly imagine how bad some of them were!
One guy yelled at me for having declined his application because his background check had 19 convictions on it—three of which were felonies.
“But that was over 10 years!” he retorted.
How could it have been over less time? I politely told him it was our policy, and there was nothing I could do.
Turns out application fees act as a method of screening, as well. Those who are unlikely to be accepted are rarely willing to pay to find out for sure. If you aren’t passing the fees associated with screening along to tenants, in my opinion, you’re doing it wrong.
It may sound a bit mean, but your screening criteria should be strict. In one of our early debacles, we only refused to accept prospects who had an eviction in the last three years. This was a very bad idea to say the least.
For example, we had one lady who slipped through because she hadn’t been evicted in the last three years. Unfortunately, she had been evicted 10 times before that!
How it's even possible to have been evicted that many times is beyond me, but she somehow achieved this impressive feat. Needless to say, she stopped paying her rent a few months into her lease, and we were forced to file for eviction number 11.
Your criteria might change from property to property or market to market. And there are some noteworthy exceptions you have to think about, too—for example, Section 8 applicants, prospects with cosigners, renters with pets (including which types of pets are okay and whether you will charge pet rent). The list goes on. Things can get a bit tricky with roommates, as well, particularly if only one has bad credit.
In general, here is our screening criteria:
- No evictions in the last 10 years
- No more than one eviction
- No felonies (other than one DUI) in the last 10 years
- No violent felonies
- Three times the rent in income
- No more than one late pay per year in their rental history
- No bankruptcies
- A credit score at least above 500, and unless everything else is good, above 600
It’s a bit more complicated than that because all of these issues intersect and have nuance. And remember, this criteria must be identical for each applicant. It can change from one property to the next, but that must be in writing and determined before the fact.
Never treat two applicants differently, or you will very shortly be hearing from Fair Housing.
It’s also critical to screen every single person over the age of 18 who will be living at the property. Another early unfortunate experience we had involved screening a woman who applied and seemed decent. But then her boyfriend came in to sign the lease, as well. It slipped through the cracks that he hadn’t been screened; we foolishly signed the lease with them both.
(Note: It’s not an uncommon occurrence for people who aren’t on the lease to move in after the fact. You should always issue a lease violation if you figure out this is happening.)
The couple turned out to be some of the most obnoxious tenants we ever had. Month after month, we receive innumerable complaints about mostly trivial issues. Then one day, the boyfriend got arrested. Soon after, they fell behind on their rent, and we found ourselves going down the eviction path once again.
Screen, folks! Screen like your life depends on it!
I also recommend outsourcing your screening if at all possible. We use Red Star Backgrounds, which does the income, job, and rental history verification for us.
Most companies won’t. If you can find one that will, I recommend using them. If you choose to do it yourself, there is a temptation to want to get the property leased even if you have to stretch your rules in order for someone to qualify. Confirmation bias can make fools of us all.
In that same vein, this duty would be the absolute last thing I would assign to an employee. You need to make sure screening is thorough, correct, and not rushed.
I would furthermore ensure that your property management company gets your approval on new leases. In the case of the woman with 10 evictions, I never saw the background check. I had delegated that task to an employee. This person saw that the applicant technically met our requirements, and then just approved her. Many employees will just want to get the property leased so they can stop thinking about it and move on.
Delegation is a good thing usually—but certainly not always! Had I seen the background report, I would have immediately realized we needed to change that criterion. But I didn’t, and we lost a good deal of money on a disastrous tenant because of it.
Today, because of our vigorous screening, we very rarely have an eviction. This is true even though most of our properties are in working class or lower middle class neighborhoods.
We’ve saved a lot of money on eviction costs and lost rent (not to mention the damage to the property itself that often comes along with an eviction). That being said, it’s easy to say that screening is extremely important, but it’s not as easy to enact.
Make screening an absolute priority because poor screening is almost always the biggest mistake new landlords make. Heck, it’s often the biggest mistake of veteran landlords, as well.
Do you have any nightmare tenant stories? Had these tenants been screened well?
Share your story below!