One of the most important parts of being a landlord is being able to properly select tenants. This will determine a huge amount of your success and happiness as an entrepreneur.
Failure to screen your tenants properly can destroy your wallet, sanity, and business venture. Here are a few of the potential dangers of tenant screening mistakes:
- Eviction costs
- Loss of rental income
- Safety risks
- Legal liability
To circumvent these risks, you should learn about the top six tenant screening mistakes you need to avoid.
More on tenant screening from BiggerPockets
1. Opting out of screening altogether
It’s tempting to allow applicants to skip the screening process, especially if you’re desperate to place the renter (the unit has been vacant). Still, it’s in your best interest to screen properly, even if it means letting the property sit empty for a few more weeks.
Let me give you a personal example.
I bought my first multifamily housing for $85,250. I put $15,000 into it, and the renovations were finished the day before Thanksgiving.
Want to guess how many people move between Thanksgiving and New Year’s Eve?
Yeah, not many.
I finally got a serious inquiry the day after Christmas from a woman named Kelly.
I decided not to charge an application fee, and I told this applicant to just print her free credit report from annualcreditreport.com.
She emailed me back and said she was having problems getting the credit report, but she knew it wasn’t good. I asked for a phone number so we could talk, and she emailed me back to say that Verizon wouldn’t let her have a cell phone because of her credit score.
I asked what her credit score was, and she was right about it not being good—it was 480.
By way of reference, I’ve seen people go through bankruptcy with a credit score of 550.
But here’s the deal: She had the first month’s rent, and I needed someone in this place months ago.
So I let her have the place. She promised she would get me the deposit within a month.
Shocking as it will be for some of you, she didn’t pay rent on time, and I had to evict her.
The moral of the story is this: No matter how desperate you are for a tenant, do NOT opt out of the screening process. Get the credit checks early. In the long run, it will not only save you money but also from having to take too many aspirin to ease your headaches.
2. Choosing an inaccurate screening service
Unfortunately, not all screening companies are created equal. Is it better to go with automated, instantaneous screening results or hand-gathered and verified results that take a longer period of time?
A Princeton study found that human nature tends to choose instant gratification over sound decision-making. David Laibson, a professor at Harvard University, expounds upon this study, stating, “Our emotional brain wants to max out the credit card, order dessert, and smoke a cigarette. Our logical brain knows we should save for retirement, go for a jog, and quit smoking.”
When it comes to tenant screening companies, they are built to maximize profits, which means satisfying the emotional brain seeking instant gratification.
A good example is if someone invited you over for a meal and gave you the choice of a good home-cooked dinner or a packaged microwavable dinner. Which one would you choose? Most likely, you would be willing to wait for the homemade dinner because you know it is the healthier, better option.
However, when choosing a tenant screening company, landlords don’t have a frame of reference for instant background checks. So, they will choose instant gratification because it appeals to the emotional brain.
Instant solutions use less data and are saturated with errors and false positives regarding a tenant’s background since there’s no set of eyes to double-check the work. Instead, you will want to opt for a company that ensures an accurate screening report because they:
- Manually access databases
- Hand-compile reports
- Fact-check the data for compliance
So, just like a home-cooked meal, your best option is to wait for those accurate results.
3. Not reading the credit report
This may go without saying, but if you are going through the entire process of getting an accurate credit report, make sure you actually READ the results.
While the credit companies do us this great service of condensing a person’s entire credit history into a single number, keep in mind that each person and their set of circumstances is unique and should not solely be reduced to a number.
For instance, if the applicant’s credit score is low because they have one huge debt that they ignore because they know they’ll never be able to pay it off, yet they still pay all of their monthly bills, then this person is still a great tenant option.
Another thing to keep in mind is don’t trust an applicant to bring in evidence of their own FICO score. Allow me to introduce you to a little program called Photoshop. Yes, people do use it to fake all kinds of documents. Never trust a tenant’s paperwork—it exists to be verified, not to be used as-is.
Being a landlord can be fun—if you do it right
No matter how great you are at finding good rental property deals, you could lose everything if you don’t manage your properties correctly. Being a landlord doesn’t have to mean middle-of-the-night phone calls, costly evictions, or daily frustrations with ungrateful tenants.
4. Not screening co-applicants
One of the most important tenant screening mistakes to avoid is not screening the co-applicants. Everyone needs to be screened, not just fill out a rental application. If you don’t screen co-applicants, you run the risk of having major problems with your renters.
Co-applicants can stop contributing to rent or suddenly move out, leaving the primary renter high and dry and unable to make the full month’s rental payment. Some landlords do not allow a renter to have contributing roommates for this reason.
Additionally, married co-applicants and grown children should be screened for prior evictions, criminal history, and a low credit score. Failure to effectively screen these co-applicants could cause you major headaches in the future.
For example, I failed to screen a co-applicant boyfriend of a female tenant who moved into one of my apartment units. I ended up having to deal with the FBI, runaway tenants, and a left-behind vehicle that I had to pay to get removed.
Bottom line: A co-applicant is also a prospective tenant and should always undergo the same tenant screening process as the primary potential tenant.
5. Not complying with housing laws
Landlords have an obligation to check fair housing laws in their area before screening a potential tenant. Keep in mind some local laws go a step further than federal laws.
Fair housing laws exist to protect a potential tenant from discrimination based on certain characteristics such as marital status, gender identity, race, religion, and more.
Failure to comply with local and federal housing laws results in negative legal ramifications for a landlord. If a potential tenant determines that they are being discriminated against, you could end up with a lawsuit on your hands.
Ensure you check the fair housing laws for your specific city because these can differ drastically from city to city within the same state.
6. Not checking references, bank statements, and employment history
While all tenants and co-applicants should fill out an application drawn up by a property manager, you must require the screening process for all prospective tenants. Essential ingredients of this process include:
- References – These should include non-relatives, professional references, and two landlord references.
- Bank statements – These paint a pretty good picture of tenant spending habits, dates that they paid previous rent, when their paydays are, how often they go out to eat, and where their general priorities lie.
- Employment history – Does the tenant have a secure job, and how long have they worked for this company?
When you fail to follow up on a potential tenant’s answers and claims, you set yourself up for dealing with potential fraud.
I’ve found that a surprising number of clever applicants put their friends’ phone numbers as their previous landlords. So, I ask open-ended questions about details like the exact dates of their friend’s move-in and move-out to try to expose these situations. I even check public records to confirm the owner of a property and when they bought it.
Additionally, I’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.
Avoiding tenant screening mistakes
To recap, anytime you put a tenant in your rental property, you want to:
- Thoroughly screen them, complete with eviction history and a criminal background check, even for co-applicants.
- Take a security deposit.
- Make sure they have the resources to pay the rent.
If you take someone on (like Kelly in the above example) because you’re desperate to fill a unit and drop your standards, the odds of you needing to evict are drastically higher. Always do your due diligence before handing out a lease.