Landlording & Rental Properties

What to Do as Soon as You Deny or Approve a Prospective Tenant

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existing-tenants

After doing a background check and verifying that the information listed on a potential tenant’s application is correct, you will have a good idea of whether or not the tenant is worthy of your rental property. Sometimes, you will receive applications from multiple parties who all qualify.

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To avoid discrimination complaints, I recommend processing applications on a first-come, first-served basis, processing applications until you discover the tenant does not qualify and moving on to the next. Of course, you can choose to rent to the most qualified individual, but be sure that you can clearly demonstrate what (nondiscriminatory thing) made one better than the other.

Denying & Approving Applicants

When you deny an applicant, clearly documenting your reasons for doing so is important to avoid discrimination complaints. Always inform the tenant with a written notice. I always send a letter to the tenant stating that they did not meet the minimum requirements for tenancy for “such and such” reason. Be sure to keep a copy of all records pertaining to the prospective tenant so you can back up your reasons for denying them in the future, should you need to.

When you find an applicant who meets all your requirements, you can verbally let them know that they are approved. However, your job is not yet finished. Many times a good applicant will be approved but will find another place to rent, leaving you wondering what happened to them. Therefore, it is important to require a deposit to hold the vacant property. This deposit is nonrefundable and should be due within 24 hours of the tenant being accepted. Simply let the approved applicant know that you cannot hold the property indefinitely, so if they want to guarantee their position, they must pay the deposit within 24 hours.

The Deposit

Some landlords actually require that this deposit be paid when the application is filled out, and the landlord simply returns the deposit if the tenant doesn’t qualify. I don’t personally use this technique, but it may work for your location if there are a lot of qualified applicants trying to rent your property.

This deposit will become the tenant’s security deposit, so it’s not an unexpected or extra cost for the applicant. When you collect this deposit, be sure to sign two copies of a “deposit to hold agreement” that states what the deposit is for and what the terms are. Essentially, this document will declare that the applicant has until a certain, clearly specified date to sign a lease agreement. If an agreement is not signed by that date, the deposit is forfeited to the landlord.

Related: Should I Accept Section 8 Tenants—Or Run the Other Way?

Both you and the prospective tenant will receive a copy of this agreement, which will serve as a receipt for the applicant. I try to schedule the lease signing for as soon as possible, to minimize the amount of time the property is left vacant and costing me money. Typically, I will not hold it longer than two weeks unless I absolutely love the tenant and don’t want to lose them. This is up to you and your discretion.

The Lease

To sign a rental lease with your tenants, you will need to have, of course, a lease. You can get a state-specific lease agreement from a number of sources, such as EZLandlordForms.com, USLegalForms.com, a local paper supply company such as Staples or Office Depot, or your attorney. Don’t simply download a free lease off the Internet. Each state has different rules and laws that govern the landlord-tenant policies in that state, so chances are that a lease found for free online may not be legally binding for you. Don’t skimp on the quality of your lease.

Before purchasing your lease agreement, however, you need to decide whether you want a month-to-month rental agreement, a one-year lease, or something in between. Most landlords choose a one-year lease in an effort keep their tenants in the home as long as possible and to minimize turnover.

Related: 6 Tips for Raising the Rent Painlessly (Without Losing a Single Tenant!)

Others choose to offer only month-to-month leases, to maintain the ability to quickly and easily remove a tenant if things don’t work out. Still others choose a six- or nine-month lease, which is often helpful in ensuring that a lease doesn’t end during the holiday months of November through January, when vacancies are the most difficult to fill. This comes down to a personal choice, but no matter which lease term you choose, be sure to obtain the correct lease agreement form.

Although lease agreements generally vary in length and content, most contain the following information:

  • Names of tenants
  • Address of the rental property
  • Lease term length
  • Rent amount
  • Security deposit amount
  • Late fee description
  • The move-in condition report
  • Provisions for or against pets, utilities, smoking, and the like

You may also need to provide certain state and federal documents with your lease, depending on when your home was built and your state’s laws. The U.S. Environmental Protection Agency requires that you give your tenant a pamphlet called “Protecting Your Family from Lead in the Home” if your property was built before 1978. Check with your local attorney for other state-specific forms you may be required to provide.

What does your tenant rejection/approval process look like?

Leave your questions and comments below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather, and How to Invest in Real Estate, which he wrote alongside Joshua Dorkin. A life-long adventurer, Brandon (along with Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.

    Christopher Smith Investor from brentwood, california
    Replied about 1 year ago
    I have PMs so most of this stuff is taken care of for me, but I do get involved with lease renewal amounts and lease duration periods. I’ve been experimenting with leases periods longer than a year. With lease rates having risen so much over the last few years (perhaps giving rise to slower increases in the immediate future), I recently entered into a 2 year and a 30 month lease term at premium rates for some of my out of state properties. Hoping this will further minimize turnover with minimal sacrifice of periodic lease renewal increases. So far so good, but only time will tell for sure.