Tenant Screening: Bad Credit: 2X security or First and Last

6 Replies

Hey BP!!

I am curious on your thoughts. If you have a tenant applicant who is qualified in all aspects except they have bad credit due to medical, would you require first months rent AND 2X securit deposit or First, Last and one month security deposit? Which is better? Why? 

Most people don't know that a Security Deposit is based on their state requirement.  You just can't pick a figure or a method out of the air and think that's okay.  What a rude awakening when you go to court and find out you goofed!!!

In Michigan a landlord can charge one month and a half security deposit plus first months rent. 

Other states will allow you to charge first and last months rent and no security deposit. So check with your state laws.

Second....if an applicant is close to qualifying, (and let's face it there is lots of bad credit out there today) get a Co-signer.

When we choose an applicant or a co-signer we want to make sure they are COLLECTIBLE !  We need to be able to sue them and collect, so that is our number one criteria. 

Have all applicants be on the lease as well as the Co-Signer. 

After a year and the tenants have showed you that they pay on time and are reliable, then drop the Co-Signer. (But make sure the tenants are Collectible by running another credit check on them at that time)  Make sure that your lease agreements states that they are allowing you to run a credit check when it comes to renewing their lease or if problems do arise.  

Nancy Neville

@Nancy Neville  thanks for the response! I understand each state may have different rules and regs on this subject, but my question is, assuming the specific state allows either first, last and security or first and 2x security( no last months rent ) which would be better and why? If I am asking for first and 1 month security to a qualified tenant, and someone applies and meets all criteria except for one, which is the better way to go; Charge them last months rent or extra security ( if allowed of course ). 

Security Deposits are an "Ace in the Hole".  Money that is on hold, placed in escrow to be used in case of damages or for a tenant leaving owing rent or money. 

When a landlord accepts last months rent, you can be assured that the tenant will leave without paying their last months rent because you have it already.  I feel last month rent criteria is a waste of time.  

Get first months rent and a Security Deposit if you can.  If you can't, always go with a Security Deposit.  

Nancy Neville  

@Michael Baradell 

As @Nancy Neville stated you should check your state laws. You can require a letter from their previous landlord. I would run a nationwide background check, and eviction history and they pass those and they are the only qualified tenants I don't see a problem.

If you are going to rent to them directly ask them to meet you for coffee and talk to them for a while to get a feel for who they are and what they plans are for the future.

Also require them to get renters insurance and if you are going to provide applicances make sure they get a warranty on them.

There are also ways to collect the rent by direct deposit into your bank account. This also will show payments on their credit report. You can offer them to get into a credit repair program as well.

There are many ways to help tenants re-establish themselves. In this way they will take better care of the property .

Michael -

If the credit is low because the applicant filed for bankruptcy (most of the cases), this is likely a chapter 7 bankruptcy.  That means all of the unsecured debt they had has been eliminated and they are free to use their wages to pay for their needs.  Unless they can't find a job due to the bankruptcy, I find most of these tenants are eager to come back on their feet and make excellent tenants.  Of course, you need to properly pre-qualify them and ask them for extra security deposit.  If this is not a chapter 7, then you might want to look at it more closely because they might be making monthly payments to creditors and so their disposable income might be lower than what they make.

I always ask for ANY tenant (bankruptcy or not), first month paid in advance and security deposit at time of signing a lease.  The security deposit might be 1 or 2 months depending on the creditworthiness.  I write in the lease that the security deposit can not be applied to either the last or first month of rent.  That ensures me that I will have a security deposit that I can count in to fix damages left after the tenants leave.

If you ask them for 1 month of security deposit and allow them to apply it to last month of rent, you eliminate the incentives for the tenant to take care of the property.  After all, they might leave and not pay you the rent in the last month (because you allowed them to use as the last month of rent) so any damages will come from your pocket.  You can go after them to recoup the expenses depending on your state common law but this will require some of your time.

If you ask them for 2 month of security deposit, you might allow them to use it as the last month of rent if you believe any damages might be less than 1 month worth of rent.  I see nothing wrong in this scenario.

Whatever you do, make sure you include it in the lease so that there are no misunderstandings. 

@Michael Baradell  

I always recommend getting as much money as your state allows from your tenants.  In VT I'm allowed to get first, last and a security deposit equal to one month's rent.  I require all 3 up front plus a W2 job with a boss that I can talk to.

In your case I'd recommend getting as much money as you can.  If you have the option of putting 2 months' rent in a security deposit, do it.  Make sure the tenant has both a co-signer AND a job as well.  Call the job, make sure they work there full time, or at least make enough money to cover rent at least 3x.

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