Tenant Screening Process: The Application | Real Estate Investing

The first installment of “The Compleat Tenant Screening Process” took an in-depth look at pre-screening (in addition to explaining what is meant by the word “compleat”).

It outlined what we’re allowed to screen for, the advantages of doing so, and techniques to reduce your screening workload. Now, let’s discuss everything that should be included within an application.

Essential Components of an Application for Tenancy

The five core components of an application include:

The “basics,” such as the applicant’s name, phone, and email (at absolute minimum)
Employment history
Residency history
Financial information
Other questions, such as eviction history, felonies on record, etc.

Each individual who intends to reside in the dwelling should provide all of the above.

The Basics

These are easy enough. We don’t really need to go into detail, except to say this: before you do anything else, Google their phone number and see if you can verify that it’s not attached to someone else’s name. If it is, ask them why.

Employment History

This is really only relevant going back two to three years. At minimum, ask applicants to put down their employer’s name, the business’s main phone number, their job title, their income, and relevant dates of employment.

There are three major things you’re looking to establish here:

Is this person capable of holding down a job for at least the length of lease they’re asking to sign? There’s no point in signing a 12-month lease if they’ve never held a job for more than five months. Those who can’t keep a job are all but guaranteeing they’re going to run into money problems along the way. A college student might be an exception to this, though.
Does this person make enough money to pay the rent? It’s unacceptable if they flat-out don’t make enough right now, but it’s also a little dangerous to approve someone who is currently making enough but didn’t at any of their previous jobs. Think about it: if they lose their current job, they might not be able to afford rent even if they are re-hired quickly!
What do their previous employers think of them? In order to figure this out, you actually have to get on the phone and call their previous employers. Chat with them, using open-ended questions to encourage storytelling. It shouldn’t take long for you to get an idea of how this applicant is as a worker. Often you can tell just from the employer’s attitude. Do you hear horror or disgust? If so, consider it a strong strike against the applicant.

Residency History

It’d be ideal to get information going all the way back to when this person lived at their parents’ house. But realistically, that’s too much data to verify. Plus, older applicants likely can’t remember back that far. At a minimum, you want the prior two years of addresses, the landlord’s name and phone number for each property, the dates of residency, and why they left each place.

What you are looking to determine is:

Did they leave any of their previous residences involuntarily? For instance, have they ever been evicted or left before an eviction was completed? It wouldn’t necessarily be a deal-breaker, but it should be explained in enough detail that you’re satisfied with their story.
Did they indicate anything suspicious in their “why they left” answer that might suggest they are not a tenant you want? For example, if they left due to maintenance issues, you might want to question the previous landlord to find out if the tenant trashed something and then expected the landlord to repair it.
Did they regularly stay in previous properties for less time than the duration of the lease they’re currently applying for? If they’ve moved every seven or eight months for the past few years, and they’re signing a 12-month lease, review their other information to see if something has changed recently that might make them more stable. Otherwise, this is a strike against them.
How do their previous landlords rate them as tenants? This is just like the employers’ section above.

Finances

A lot of landlords won’t even consider an applicant if they find out their credit score is below some arbitrary number. There’s nothing wrong with that, but we’ve seen credit scores that really don’t correlate to the actual credit histories of applicants.

One of the most common instances of this is an applicant with several student loans in deferment, who is still generating a misleadingly high credit score despite being caught up in collections. Ultimately, there are tons of tenants with miserable credit scores who can and do pay rent reliably. The thing to remember is that you’re looking for financial reliability, and that can come in a lot of forms. (Trust the guys who work in the poorest big city in the nation: Detroit. We’ve seen almost all of them!)

We’ll speak more on looking into prospective tenants’ finances in the next post, when we detail the “screening checks” portion of the process, including checking applicants’ credit. But as part of their application, you can get a grasp of their financial situation by requiring that they show you:

An unredacted bank statement showing the last month’s transactions
Their last few paycheck stubs
Their W-2 from the prior year

(Side note: In a market like Detroit’s, we often deal with applicants who don’t even have bank accounts. So, these aren’t necessarily hard-and-fast rules—but in most places, they probably should be.)

The point of the trifecta here is to give you a good idea of their income over time and their savings habits. You can see the income over time by comparing their paycheck stubs with last year’s W-2. From there, work out if their wages seem to be stable.

If they have a decent amount sitting in their bank account, be sure to analyze the transactions to make sure it’s a positive pattern and not just due to a one-time event, like a tax refund.

All in all the most important thing you’re trying to determine is can they reliably pay rent? Ultimately, the rest of the information is just supporting details.

Specific Questions

The question and answer part of the application should be designed to provide further proof about whether or not your applicant meets the minimum qualifications that you established earlier on. Avoid asking yes or no questions—it’s far too easy for an applicant to figure out what the “correct” answer is and lie if all they have to do is circle the right word.

Instead, ask open-ended questions—you know, the kind you used to hate on tests in school—that encourage the applicant to share. So, don’t write, “Have you ever declared bankruptcy?” Alternatively, say, “Tell us about any bankruptcies you have declared.” Phrase questions about felony charges, prior evictions, and similar issues in the same fashion.

That’s it for now. As I mentioned, next up we’ll get into the screening checks.

What do you think are the best indicators of high-quality tenants? What sections or questions would you add to your ideal tenant application?

Comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.