Should I rent to tenant with 540 credit score
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
I have 1 property which rents for an above avg $1275/mo, SFH, tenant pays all utilities, yardcare, etc. We did a full reno 3+ years ago and have a mtg so cash flow is only about $450/mo.
So far we have had 3 tenants - all of which have been very responsible and had credit scores over 700. Now it is vacant again and our only applicant in 6 weeks has been a single mom, 2 older kids, recently divorced, and with a credit score of 540. Income is $50K so she makes the 3x ratios barely, but that comes from 2 jobs, the 2nd of which is a newly opened bar so she only has 1 paystub year-to-date. The other job is leasing manager at her current apartment. She pays that rent "on time" but it is a payroll deduct, so it would be hard/impossible to pay it late.
She is very interested, and paid the $39 background fee check, so I want to work with her, but don't want to take on a completely stupid risk. Thoughts on this one?
Would you approve her?
Ask about a co-signer?
Deny application initially but offer approval with deposit plus 2 months rent up front?
Something else?
1) verify all income AND employment
2) pull a full credit report and look at 30,60,90 day lates; verify there's NONE in the last 6 months.
3) how many and what kind of collections are on the account?
Life gets messy and the FICO means JACK as to what kind of person she is and her level responsibility. The fico of 700 for the others has nothing to do with her 5xx.
Question is: what could/can she change vs how has she been reacting to circumstances?
Being thorough and careful, you can get a loyal and reliable tenant.
@Bill Briscoe you've had 3 good tenants in 3 years, all responsible, and all with FICO over 700. Why did they leave? Is it because they had FICO over 700, interest rates were in the 3% - 4% range and they likely bought their own home? Your rent is above market average at $1,275 which may be why the high FICO tenant pool is looking elsewhere because your competition is rewarding the better tenant pool with "at market" or slightly "below market" rent. Some people are willing to take a little less rent for a less risky tenant profile. You're cash flowing $450 per month which seems great assuming your rent-to-value is 1% and assuming the place cost you $120k or less. It seems you have some wiggle room in your cash flow to attract high FICO tenants, if that's your main crux. Otherwise, the $450 per month cash flow is your reward for taking a little risk, dealing with annual turnover and make-ready expenses. Do you want a potential long term tenant or turnover every year?
If you're going to reject the applicant, be sure you document the reason is due to not meeting your published criteria for FICO score > X, and monthly income 3 times rent, and/or previous collections. Gook luck!
So why have we had 3 vacancies in 3.5 years? Good question. We advertise 1 year leases. The first one began in October and was quickly leased - lots of applicants and we took the best one.
She was a single mom with older teens - no problems except that her mom contracted cancer so she had to move away after 6 months to take care of mom. We let her out of the lease with 45 day notice and got it released with no missed rent. 2nd couple was middle-aged and kept the place immaculate. They stayed their 1 year lease and offered to pay extra to go month to month because they were thinking of moving out of state if they could find jobs. We accepted and they were month to month from about April thru Dec of '15, then they bought a downtown condo. We then got a young married couple who had just graduated college so were looking to move in Jan 1 '16. As was mentioned above - Dec/Jan leasing is difficult, but the recent college grads are most of that pool. They have paid on time every month for the 12 months but are expecting a baby so they decided to downsize to an apartment to re-align their budget. So that is the tenant we are looking to replace. They moved early so I've been trying to re-lease and refund them part of their lease if we get a new tenant before year end - just to help with the baby expenses.
Also, I don't allow pets - bad experiences with another rental in the past. So that probably shrinks my pool of traditional families with kids quite a bit.
Sorry but a credit score of 540 typically falls in the "bad" category (even below "poor"). Think of it along the lines of "dismal".
In addition, this woman has to struggle to make her income through not one but two jobs, the second one involving just one very rent pay stub.
You MIGHT consider her if your rent was in, say the $650 to $700 range. But $1275? No way.
You sound like you might be under increasing pressure with this being the only applicant in six weeks to provide you with an application. And thus you're perhaps thinking of trying to "work with her" as she's been the only "live" one to respond to your ads.
Don't. You'll regret it.
If this helps with your decision....I've currently got a guy bugging the heck out of me for one of my properties. He and his "fiance" (everyone around here has a "fiance") and their three children came to view my $745 house on Sunday. At the showing it came out mom had an eviction in the past. I reminded them that our ads say NO history of evictions.
So what message do I get on my phone last night from this guy? "I'll have the security deposit for the house on Friday and we'd like to move in over the weekend because we have to move out of our apartment then and we'll have to live in a hotel".
Guy is trying to work with a private landlord because no commercial company will take them because of this eviction history (I suspect it's more than one eviction).
Gail
Tommy F - What I meant by above average is that $1275 is above for All houses and apartments in the county. But the size/condition of the home is also well above average. $1275 is actually on the low side for all Comparable houses in this school district (top in the state).
My buy and hold strategy was to target the above average market to attract people with above avg incomes/FICOs etc who are willing and able to pay above avg rents and price out the deadbeats - including the functional deadbeats. If I dropped the price to say $975, I would get a lot of lower income applicants who currently live in run-down homes or apartments and are looking for something nicer but with a similar rent.
"My buy and hold strategy was to target the above average market to attract people with above avg incomes/FICOs etc who are willing and able to pay above avg rents and price out the deadbeats"
Unless you have changed the direction of your business plans why are you considering this applicant ??????
Has your business plan changed from high standards to no standards ?
I recently rented to a mother of 2 with a bankruptcy. It pulled at my heartstrings as my mother was also in the same position when I was growing up and we had to have a place to live. She really wanted the place and made good money in the medical profession. I made her put together a budget and send it to me where she incorporated all household cost and expenses. I can say its been about 5 months now and I couldnt be more pleased! And as far as credit scores, if they all had great credit scores we would all be out of business
The reason you are asking, is because you know in your gut that it is a bad idea. I rented to a single mother with a similar credit score last year...and I ended up having to evict her because her payment kept coming later and later in the month. Was it worth it, considering I had 2x monthly rent deposit? I was fortunate that she kept a clean house overall and the place didnt require much rehab, which mitigated the cost of the lawyer to evict...but would I have been better off with an empty unit waiting for a better tenant for a month...or more?
Damn...that is a hard question...alll of us have faced the scenario of an empty apartment...but going forward I personally will wait until I find the best tenant that my property can pull.
Ironically this tenant had a 2nd job in customer service...she didn't get along with some of her co-workers and quit.
While you can easily deny her, on XYZ, and hope someone better comes along, having a vacant place, especially in the winter, is bad for your budget, and bad for your property IMO. I also agree, if you lower the rent, you'll get a ton more applicants, but why rent for a lower amount, when you have someone capable and willing to pay higher?
Why not set up the lease to be aggressively in your favor and a month to month? Month to month gives you and her flexibility, if she can't make it, or it's hurting her too much financially. What we're doing now, is month-to-month leases, and, in your case, I'd rent it for $1375-- with a $100 discount if she pays by the 1st of the month- $1275. I'd give her a 5-7 day grace period, and then tack on another $100 for a late fee. This way there's VERY strong incentive for her to pay early. Just be upfront about the terms. I'd also recommend at least 1 month security deposit at the new rate, or maybe 1.5x rent? Good luck!
I will tell you how I view this from my experience in the banking industry. I do quantitative analytics for large consumer portfolios at a commercial bank. We build account management strategies which are dependent on many things, but are almost always dependent on credit bureau score (cb score).
With your background and training, your response is easily anticipated. However, my 19yrs operating a 6-plex taught me to not use any single metric as a go-no-go qualifier and least of all a FICO score. I've denied a few with scores in the mid 700's and accepted applicants such as the one being discussed here. I've also only had three evictions in that same 19yrs.
@Bill Briscoe: consider her efforts at providing for her kids and herself - - she's highly motivated mother and unless there's a history of evictions and collections, I would take her and bet she will be a good tenant.
Tommy F - What I meant by above average is that $1275 is above for All houses and apartments in the county. But the size/condition of the home is also well above average. $1275 is actually on the low side for all Comparable houses in this school district (top in the state).
My buy and hold strategy was to target the above average market to attract people with above avg incomes/FICOs etc who are willing and able to pay above avg rents and price out the deadbeats - including the functional deadbeats. If I dropped the price to say $975, I would get a lot of lower income applicants who currently live in run-down homes or apartments and are looking for something nicer but with a similar rent.
Something to consider... My best qualified tenants (highest credit score and highest income) generally stay at the property the shortest period of time. My tenants who live paycheck to paycheck rarely move because they cannot afford to move.
Ability to pay and likelihood of paying are two different things. Ability to pay means they have sufficient income and money left over after expenses. Likelihood of paying is their historic track record of paying bills on time. Credit score is part of that track record and rental references are the other part. You may have a tenant with bad credit due to credit cards or medical bills, but that same tenant may have paid rent on time for the last ten years.
I wouldn't... You need more tenant options...
Franklin
I think @Joe Splitrock hit on the key question. Will she maintain her income from the leasing agent job if she moves out of the complex? Then she has little to no income and you are left in a real bind. I understand her situation as I had similar circumstances years back as a result of a divorce from an ex spouse who became an addict. Bad things can happen to good people. You can be empathetic, but control the situation as well. We had a tenant who did not have a stellar score, but had rent history, and income verification, etc. We charged 2 months rent as security deposit (that can be done in Wisconsin). Open dialogue with the applicant is key to you understanding the situation. You can tell if they are lying.
Jeff, I'm happy for you that you've had such a good experience with your tenant screening. You seem to have an intelligent way of screening tenants. I also value your real life experience.
I have the benefit of working in big data and using the tools of statistics and finance to assess the credit risk associated with not only credit bureau scores, but also many other variables.
To be technical, CB score is perhaps 1 of 10 variables we consider for automatically originating loans. For example, we create an internal score that we decision upon. Variables of importance are max delinquency last 12/24 months, LTV, CB score, behavior score, employment history, income, etc. For collections purposes, we consider behavior score, time on books, cb score, balance characteristics, LTV, utilization, etc. So to be clear, we don't just use cb score.
Perhaps the clearest relationship in all the consumer loan data that I work with is the negative relationship between cb score and credit risk. (CB score drops, credit risk increases.) CB score is also negatively correlated with charge offs, delinquency, LTV, bankruptcy, etc.
What's interesting about what you do is that you're actually adding extra variables to the analysis. Statistically speaking, it sounds like you have identified characteristics in people that are predictive of rent payment performance. Only experience can provide such a thing.
A large commercial bank does not have the benefit of considering such personal characteristics as you do. With the movement towards automation, it seems like the personal touch is simply fading.
I think there remains an argument to consider the underwriting standards found in the movie It's A Wonderful Life. I like that Bailey Bro's Building & Loan considers strong character and human relationship as predictive of loan performance.
@Bill Briscoe All the opinions posted are valid. Everyone is different and that's what makes land lording a fragmented business. There are so many different ways to make money providing homes to people. You have your strategy and that's okay. Others make money with Section 8 in "C" and "D" class neighborhoods and others make money with weekly rate mobile home rentals. Find your niche and work it. I've rented to three different tenants with bankruptcies and all three have proven to be great tenants. They're motivated to restore and rebuild their finances, and they appreciate having a nice place to live which makes rent payments a priority for them. I've modified due dates to accommodate tenant pay periods, slightly reduced rent on one place to keep a tenant in place another year. It was better than paying for a make-ready and dealing with vacancy trying to get it leased again. I even give tenants $50 gas cards after a successful year and they renew lease. Tenants know when they have a good deal and they're appreciated as paying customers. They shop rents like you and I shop lending rates or Amazon. Treat them right and most people will reciprocate.
I have rented to people with lower credit scores if there are valid reasons, divorce, medical expenses etc. Typically I have found if those are the causes they can afford the rent just fine just don't have great credit and in my most recent case like this the tenant put up 6 months rent at lease signing.
From a landlords perspective, risk analysis wise, this applicants credit score is not her only red flag and certainly not her biggest. All things considered she is a train wreck waiting to happen.
IMO, she is not, but you and I are frequently contrary.
Definite no. a car loan being 90 days late means that she's lucky it wasn't repossessed. One of the last things a person lets get late is their car. it usually goes rent, utilities, car in that order.
The issue is when you have to evict her for not paying rent, how are you going to feel when she starts telling you that your putting her children on the street (true or not)?
As already stated it's a business treat it like one.
Don't panic and make a mistake of renting to the wrong tenant because you have an upcoming vacancy. There are worse things than vacancies. Like a tenant who doesn't pay, damages the apartment and THEN needs to be evicted.
Now I am not saying your current applicant has this problem, but I would really try to separate tenant screen criteria from the need to fill a vacancy.
A month or so of vacancy is well worth it to find the right tenant. Remember its Dec, you will have much better luck in the fist of the year finding a tenant.
Lastly, I would strongly go by credit score unless there is a concrete story to tell. And even then I would get a double deposit or a couple of months rent. We once rented to a couple with a terrible credit score who got caught in the financial crisis with a couple of rental properties that were foreclosed on after a job loss. They had perfect credit scores before, and were back on track after the husband got a new job. But the story and current verified income allowed us to look past . We rented to them with a low credit score but took on a two month deposit.
In your case I would be worried that the presumed tenant is making a low income, and in the middle of that is moving from the apartment complex that is her main source of income.
NO, we would not rent to this tenant. Credit score is too low, and not enough other mitigating circumstances to over come that score.
I have 1 property which rents for an above avg $1275/mo, SFH, tenant pays all utilities, yardcare, etc. We did a full reno 3+ years ago and have a mtg so cash flow is only about $450/mo.
So far we have had 3 tenants - all of which have been very responsible and had credit scores over 700. Now it is vacant again and our only applicant in 6 weeks has been a single mom, 2 older kids, recently divorced, and with a credit score of 540. Income is $50K so she makes the 3x ratios barely, but that comes from 2 jobs, the 2nd of which is a newly opened bar so she only has 1 paystub year-to-date. The other job is leasing manager at her current apartment. She pays that rent "on time" but it is a payroll deduct, so it would be hard/impossible to pay it late.
She is very interested, and paid the $39 background fee check, so I want to work with her, but don't want to take on a completely stupid risk. Thoughts on this one?
Would you approve her?
Ask about a co-signer?
Deny application initially but offer approval with deposit plus 2 months rent up front?
Something else?
No, I would not approve her. But you're not me and the property you own is likely not like the property I own, so that's not a useful question that you should expect a useful response from.
The better question is: "is this the best applicant you can get for this property in this location?"
Yes, at 540 credit score I would ask if they can provide a co-signor (can't hurt). I would also structure the lease as a month-to-month lease that will automatically continue into a full 12 month lease if BOTH landlord and tenant agree. That way you can "try before you buy". If she turns out to be a problem tenant, you'll be able to get her out more quickly (30 days) and likely without an eviction.
Yes, I would ask for double deposit, but be prepared for her to say she doesn't have it. Often, applicants with poor credit also don't have cash, with the exception of maybe drug dealers.
Obviously "she is very interested". Desperate applicants often are because they have little chances of being accepted for a rental.
Get all info you possibly can on her. Run thorough criminal background checks.
Credit score is just one factor...Look more deeply through her credit, line for line, to get a sense of how much monthly expenses she has and how much NET (after tax) income she has left each month to pay your rent.
In a word, with tenant selection RESPONSIBILITY is what you're looking for. Applicants who are not financially responsible (credit report), often are not responsible in other ways. I personally, do not lease to irresponsible tenants.
PROPERTY MANAGMENT in a very big way IS tenant selection. Meaning that the quality of the tenant you select will ultimately determine whether or not property management will be easy (and cheap) or hard (expensive). This will also determine in a big way your return on investment.
FYI: I own and manage properties in 5 cities and have experienced just 1 eviction in over 13 years.
I wish you the best.
I also would see why her credit was so low. Does she have additional income? child support? I think I'd consider a monthly rental agreement with first and last rather than a lease. At least that way you can get her out quickly if you need to and you have more protection with the double security depost.
There is only one right answer: 3 previous tenants had a score above 700, the 4th should be comparably the same, unless the area changed.
I disagree. Things change and not just the area. The pool or renters change, the job market changes, and the demographics for the area change.
The best one can achieve is to attract the best quality tenant possible with the given property in its current condition. No property manager can attract a high quality tenant to a low quality rental in a bad neighborhood. It is the property that helps attract the tenant. The best leasing agent or property manager is a salesperson who's job it is to sell the positive features of the property OR ignore them... process applications and collect a leasing fee.
Property management has to do with the quality of product (property) you're offering as well as the quality of service that accompanies it (human resources).
The low credit score is not what would be my first concern. I know of 2 people close to me that had terrible scores a few years ago, one was a recently divorced single mom with 2 young kids (most bills were joint with ex husband, who hid the bills and didn't pay them), and the other was trying to put herself through school for 1 year with 3 part time jobs and lapsed on the non-essential bills. They both have paid everything perfectly on time since that time, but it took about 3 years for their scores to go from the 500s (or less) to the low 700's now.
My bigger concern would be the income - a recently opened bar? 3/4 of restaurants fail within a few years of opening - how good is business at the bar? Assuming business from the bar is good and it's not in danger of closing, what percentage of her income comes from that job? As for the property management job - how likely is it she will keep that job when she moves out? Not only that, but her current rent is about $200 less that her new rent would be, plus she gets a sizable discount I imagine. If she's paying all her bills now, that's great, but if you take her, her expenses will jump significantly, and is she in a good position to be able to handle the extra expenses?
I also would see why her credit was so low. Does she have additional income? child support? I think I'd consider a monthly rental agreement with first and last rather than a lease. At least that way you can get her out quickly if you need to and you have more protection with the double security depost.
How can you do a monthly and still collect first and last month's rent? Wouldn't the first and the last month be the same month on a 1 month lease?
Would I need to structure it as a 2 month lease with 10 monthly renewal options to be exercised 30 days before expiration?