Tenant screening - Subpar credit score...but...

Mark A. · 2017-03-19T16:37:11-07:00

We are thinking about renting our 3 bedroom apartment to a family (2 parents and a 20 year old child). The family just sold their house and received approx $200k from the sale. Seems like they moved out due to financial difficulties. The wife makes $20k per year and the husband just started a new sales job based on commission. So he has not much to show for his earnings at this point. Their credit scores are both subpar - in the 600s. The rent is $2900 per month for the apartment - is obviously in a nice area and can attract nice tenants. The family asked to sign a 2 year lease at the advertised price, which i thought was a positive sign. The apartment is continuing to show, but i was wondering what your thoughts would be on the following plan: I would ask for 8 months rent up front and reduce the rent payments accordingly for the 24 month term. Essentially, asking them to put a large down payment down because of their low credit scores and the fact that they have a large amount of cash supposedly sitting there from the house sale. Does anyone have any experience doing something like this? What would you recommend? Pass on this tenant even if they agree to something like I'm thinking?Thanks in advance for any advice/help. Mark

Reaz H.

Rental Property Investor · Raleigh, NC · Member since 2016 · 49 posts · 15 votes

9y

@Mark A. First thing you want to check is whether your state allows collecting pre-payment of rent and if there are limits to what you can demand. You may also want to collect the maximum security deposit. I am not usually for collecting last month's payment but for a 2 year lease fixed term lease you can do so.

My question to you is this though. Why are you willing to look past the subpar 600 score? It sounds to me you are content with taking their sitting cash for 8 months. It lends to a few issues. If they can't make payments after a couple of months you'll have a hard time evicting them because you've collected 8 months rent. And 8 months later you'd be in winter time when renting is usually slow. So you may risk some additional vacancy. On top of that, it is very possible that they were living beyond their means and your apartment might still be beyond their means. Taking their cash and letting them stay for 8 months is detrimental to them if they are unable to produce the income needed to maintain possession of your rental.

My approach is that if they don't qualify due to two factors (score and income), then they don't belong. May be they haven't realized it but it's not my job to realize that through a bad experience.

1 Reply

Mark A.

OP

Attorney · Hoboken, NJ · Member since 2016 · 24 posts · 17 votes

9y

Well essentially what I'm trying to do is use this large cash reserve they supposedly have to reduce risk of not paying rent. And I wouldn't have them pay 8 months upfront per se. They would still be required to pay monthly rent it would just be reduced by the total down payment. I.e. A down payment of $23,200, and monthly rent of $1933.00 for 24 months. Seems to reduce burden on them each month and provide me more security because they have skin in the game up until the end.

0 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Hi Mark,

FICO scores are not an accurate measurement of creditworthiness. There are 800 FICO people that I wouldn't let pet my dog unsupervised, and 500 FICO people that I'd lend my car to no questions asked. My industry is stupid and acts like FICO scores are everything, but you don't have to be as stupid as we are compelled tobe.

Look at the story the credit report tells you:

Are they in the low 600s because of an unexpected medical thing that trashed their ability to fulfill their financial obligations forcing them to sell their home so they could get right with their creditors after several missed/late payments, or because of ridiculous and irresponsible luxury car payment that led to a repossession and them selling their home rather than face foreclosure?

Those are two very different stories, but both might be reduced to "619 FICO" if you look at a credit report and fail to read the story it tells you.

And, hell, the family that has someone get sick, and thus sells the home they love to fulfill their financial and contractual obligations? Probably A+ tenants, no? It took a near-death in the family for them to miss any payments, and then they did whatever it took to get right with everyone. Heck yes you should rent to these people that are asking you for a two year lease, if that's the story told in the credit report.

3 Reply

Ericka G.

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

I've learned the hard way that bad credit = trouble. The last "bad credit" tenant I allowed was a friend of my cousin, used a guarantor, and paid 4 mos up front. Guess what? He was LATE when that initial payment was done. He always had an excuse and was just generally a pain. I always had to chase him down. So, after that experience and a couple of others, I've become a firm believer that most people with bad credit have bad credit for a reason and I also feel that credit is in some ways a reflection of CHARACTER. Unless there was a major life tragedy like an illness that prevented them from paying their bills, I say keep looking since it sounds like this is a desirable property

3 Reply

Reaz H.

Rental Property Investor · Raleigh, NC · Member since 2016 · 49 posts · 15 votes

9y

You may have to talk to a lawyer to craft the language on this one. You have to make it sounds like you're not collecting advance rent and you're not collecting partial rent payment or a security deposit of $23200. All of those scenarios can turn sour for you.

Check the income history for both tenants (husband and wife). Find out if they are capable of getting back on their feet. Because if they aren't you'll run into the bad scenarios really quick. Honestly, you need to see a sustained household income > $105K for this tenant to be considered safe.

Collect the maximum security deposit allowed by local laws. Keep the rent the same as you would and consider using a month-to-month arrangement. For tenants with weak financial standing, fixed term leases are not necessarily a good thing. This way you can give a 1 month notice if they don't pay and get better tenants.

In short, I would pass on these tenants. Too weak from what you've described.

1 Reply

Account Closed

Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes

9y

Your state allows for only 1.5 months rent as security deposit. http://www.nj.gov/dca/divisions/codes/publications...

I would rethink your whole process. IMO, you should take the first person who meets your written requirements. Not the person you want. I have no problem asking for 2 months deposit (my state allows it), but I cannot ask for more.

LandLordOlogy dot com for the win.

1 Reply

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

9y

600s credit score is where most renters are. 620 is all you need to buy a house.

[email protected]301-893-4635 Podcast Guest on Show #192

District Invest Group545 Reviews

Website View Page

6 Reply

Mark A.

OP

Attorney · Hoboken, NJ · Member since 2016 · 24 posts · 17 votes

9y

Mark Poulton I appreciate the information, and that is very good to know. I would say that I am inclined not to take these tenants based purely on what you and everyone else above has said re credit score. I will however say that the validity of the lease terms will never be questioned until some form of legal proceeding takes place, e.g. Eviction. Me possessing the money would still entice someone to continue to pay, and if you get a judgment against the tenants for rent owed (through eviction), the money you are holding could be used to immediately satisfy the judgment - at least I believe that to be true. Disclaimer - I am an attorney, but I do not practice in the landlord/tenant/real estate area. So take what I am saying with a grain of salt. However, I am a litigator and therefore have experience with judgments and the like. And again, I appreciate everyone's input on this.

0 Reply

David Lilley

Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes

9y

I took a chance on a tenant that developed some pretty terrible credit after her husband died. She had a good income/job history and wanted to sign for 2 years. I required 2 months rent be put down and she has been a pretty great tenant for almost 2 years now.

2 Reply

David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

9y

@Mark A.,

There is almost always too much focus put on credit scores rather than the content of the credit report.

Here's the best definition of a credit score I've ever heard: "A numerical representation of your likelihood of going 90 days late on a payment in the next two years."

As @David Lilley's experience indicates, this is, indeed, a projected likelihood - not an absolute guarantee.

2 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Originally posted by @Russell Brazil:

600s credit score is where most renters are. 620 is all you need to buy a house.

It's actually down to 580. FHA.

Down payment gift from mom, and all of a sudden it's easier to get a 30 year mortgage than to sign a 1 year lease...

1 Reply

Account Closed

Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes

9y

Originally posted by @Mark A.:

Mark Poulton I appreciate the information, and that is very good to know. I would say that I am inclined not to take these tenants based purely on what you and everyone else above has said re credit score.

I will however say that the validity of the lease terms will never be questioned until some form of legal proceeding takes place, e.g. Eviction. Me possessing the money would still entice someone to continue to pay, and if you get a judgment against the tenants for rent owed (through eviction), the money you are holding could be used to immediately satisfy the judgment - at least I believe that to be true.

Disclaimer - I am an attorney, but I do not practice in the landlord/tenant/real estate area. So take what I am saying with a grain of salt. However, I am a litigator and therefore have experience with judgments and the like.

And again, I appreciate everyone's input on this.

I am going to give you great advice here. You live in NJ. It is a liberal uptopia with extremely left wing judges. I agree with the sentiment of what you say. It doesn't matter what is in the lease until someone takes a legal action. I do it all the time with clauses in my lease. The difference here is that a judge will just invalidate a clause in my lease. No real damage. If you take 8 months rent (not sure why you would anyway) as a security deposit, you are breaking the law. Big difference my friend. Many eviction judges think you are a billionaire slum lord and will take it out on you. They city/state has unlimited funds to go after you and if they decide to to do that, your life will suck.

On the other hand, if renters had great credit scores, they probably would be buyers. I don't care so much about your credit score as long as your credit shows a history of you paying your bill. Think cell phone and cable. If they won't pay their cell phone and cable bills, they probably won't pay their rent. Ignore medical bills. They cannot be collected anyway.

2 Reply

Michael Noto

Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes

9y

Why get creative and talk yourself into accepting a tenant in a desirable area where you can attract good tenants? If you were my client up here in CT I would advise you to deny this applicant and be patient. I have never regretted being patient from a tenant screening perspective, especially in good areas like the one you described.

Take a step back, you are going to approve a tenant that makes little money relative to the rent price and they have terrible credit which tells you at some point (maybe currently) they don't pay their bills regularly. You trust someone like that on a 2-year lease? I wouldn't, the fact that they asked for that is a red flag for me.

1 Reply

Douglas Krofcheck

Hudson, NH · Member since 2017 · 70 posts · 47 votes

9y

Hoping no legal action would happen is extremely risky. What if the tenants know you're overcharging the security deposit? They'll stop paying the first month and you've got nothing you can do about it because you can't take them to court without ending up in court yourself.

0 Reply

Max T.

Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes

9y

Just rent to someone you're sure can pay. Why take the risk? They don't meet your minimum income requirement.

0 Reply

Amy Beth

Rental Property Investor · Edison, NJ · Member since 2016 · 753 posts · 565 votes

9y

I would decline these tenants because it is too risky. If you are set on accepting them I would not sign more than a one year lease with them. A month to month lease would be even safer than a one year with these tenants. If your house is in a desirable area like you mentioned holding out for a more qualified tenant would be the best business decision.

1 Reply

Rolanda Eldridge

Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes

9y

@Mark A....Look at the total picture. 600s for a renter is ok. My biggest concerns are the husband's new job and $2900 rent. Cash upfront is enticing, but stability counts. Most qualified tenant rules...

1 Reply

Peter TverdovBusiness Member

Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes

9y

If you are renting a place for $2900 a month you do not have to bend so much. Decline them, take a deep breath and wait for more people to come through.

"Better to have a vacant apartment than a nightmare tenant"

[email protected]732-289-3823

3 Reply

Deanna McCormick

Minneapolis, MN · Member since 2013 · 2k+ posts · 1k+ votes

9y

NO one earlier had commented on this

The "Child is 20" he is a ADULT, and his credit should also be ran as well as criminal for your screening, as anyone over the age of 18, is liable for rent. So all 3 would be joint tenants.

As far as what your considering for prepayment I'd caution you as others have and stick with state law regulations.

As far as a 2 year lease = Nope I would only do 12 months. Why get trapped into a lease with longer terms.

I continue to take applications, You could charge what state permits for additional security deposit because of marginal credit score.

2 Reply

Linda S.

Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes

9y

@Mark A.,

Not trying to be a debbie downer, but everything about this sounds insane.

1) 8-months rent upfront-- this just sounds crazy. Not to mention, depending on state law, I don't think you can use it for rent? Not a lawyer, but this just sounds ridiculous and something that'd get on the news.

2) 2- year lease-- You are worried they won't be able to pay, why would you want to be potentially tied to them for 2 years?!

3) The 600 credit score-- it all depends, the biggest thing I'd look for-- do they have a history of late payments? Ask them what happened? Life happens to people.

Here's what I'd do.... put them on a month-to-month lease, structured very aggressively in your favor.. if $2900 is the price, make it the discounted price if paid by the first of the month and have $3300 be the regular rent, and then add another $200 if it's ever late-- strong incentive to pay on time. It sounds like they are worried about you raising rents, so write in your contract you guarantee you won't raise rates in 2 years as long as rent is always paid by the first. I hate moving, most people do, so if they like the place, they won't move... and again they want 2 years... they are likely staying put. People appreciate transparency, and just explain to them the lease needs to be structured like this because their score is lower than normal, but you want to work with them.

2 Reply

Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

9y

@Mark A. , you've gotten some great advice here, and I am surprised that no one has brought up the $2900 rent on a $20,000 salary.

$2900/month rent is $34,800 for the year. She makes $20,000.

He might be an awesome salesman, he might be awful. You don't know because he just started.

"Seems like they moved out due to financial difficulties." No kidding.

I would deny based on income and find another tenant.

[email protected]Podcast Guest on Show #261

2 Reply

Mark A.

OP

Attorney · Hoboken, NJ · Member since 2016 · 24 posts · 17 votes

9y

Thank you everyone for the great advice throughout this thread. I am obviously learning and appreciate all your help!

1 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

9y

@Mark A. I think @Mindy Jensen just brought up the biggest problem here which is that they lack ability to pay rent. Income needs to be 3X rent regardless of credit score.

Lets say you let them have them prepay 8 months worth of rent to reduce their rent payment to $1933 per month; by taking $966 per month in advance, you have taken partial rent payment for each of the 24 months. In many states taking partial rent payment prevents you from evicting them. I wouldn't be so sure that a judge would just let you keep all that money if it went to court. In some instances, tenants have been awarded damages. I would review this with an attorney before entering into this type of agreement.

One common mistake people make is thinking that giving a two year lease is great for a landlord. In reality it makes it much harder to get rid of a bad tenant. Leases are a false sense of security. It is very easy for a tenant to break a lease and trust me, they will if it benefits them. You are better off signing a high-risk tenant on as month-to-month.

@Linda S. also pointed out that the child is an adult and should be screened. I would add that their sources of income should also be considered. They could be a student, but it would still be good to have them on the lease and financially responsible. The more people you have to go after for money, the better.

3 Reply

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

9y

When we sign-up to be a landlord, we may have greatly exaggerated expectations but over time, we get 'adjusted' by the real world experiences of the job.

As noted above, even tenants with 800+ FICO scores can be real PITA (pain in the a**) people and tenants. Conversely, as life IS messy, a low FICO is not the definitive metric to discard anyone. I've learned to get a full credit report and review the collections & 30,60,90 lates as these indicate how this applicant conducts business. I had a woman with a lousy score and a a poor track record and I denied the application. "Oh you should have talked to me, I never miss my rent or payments on my car" - - IMO, that hearsay and the CR shows me how I would be treated.

Also noted above, you can't charge one deposit for Joe and a different amount for Sam - - that's discrimination according to the Fair Housing regulations.

If our tenants have great incomes, then why are they still renting? Lots of reasons, but a frequent issue is their CR disqualifies them from getting a SFR loan - - so don't expect a perfect world - - it doesn't exist.

0 Reply

Shana Prymicz

Naperville, IL · Member since 2017 · 11 posts · 38 votes

9y

Hi, as a former tenant myself and now becoming a landlord, I think 600's is a fair credit score for renters. But I do not think the credit score is the question as much as the income. Wife is making 20k a year and husband, new job, commission only? Why would they ever consider a 2900 monthly rent? I'm unfamiliar with the area and current market. I'm in the Chicagoland area. Overall in my opinion seems like you should pass on them.

0 Reply

Tenant screening - Subpar credit score...but...

Tenant screening - Subpar credit score...but...

Most Popular Reply

29 Replies