Doubling security deposit for high risk people
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
I've been reading another forum and they recommend charging twice the security deposit if the FICO score(s) is below 600. Has anyone tried this and if so were the people willing to pay?
Also I was wondering how people here deal with "self-employed" income--do you increase the deposit for that, or just refuse to count that money as income? My concern is that it's harder to gauge, since you're relying on the applicant to provide tax records, etc,, which could be doctored.
I've learned to throw the "rule book" out. Our latest 3 tenants all paid a security deposit greater than one month's rent, for various reasons with differing results.
The first was simply an extra deposit because he had a dog. He had a very good credit score, low 700's, and was self-employed. But his business, and health, went south after a couple of months, he ran out of money, and we were forced to evict him. Lessons learned? Credit score has very little to do with character. Past performance is interesting, but anything can change in the future.
The follow on tenants had poor credit scores, high 500's, but it was obvious the delinquencies were a result of them short-selling their home. They had good income (a State of California job) and were willing to provide a high security deposit. Not 2 months as limited by California law, but it was up there. We also put in the lease that if they paid on time, without fail every month, and didn't violate any other terms of their lease for 1 year, we would refund a portion of the security deposit, which we did because they've been great tenants.
The last tenant we just placed also paid a slightly higher deposit great than one month's rent. No pets, an average credit score, good income, but going through a divorce. So the extra deposit is just that, extra security.
My friend, who has been underwriting for many many years said (paraphrased), "Credit score is just the headline of their story. You have to look deeper and see WHY their score is what it is." He's seen high scores on the verge of defaulting, i.e., living off their credit cards and home equity. Their score is good because they've always paid, but their balances keep increasing. It won't be long before they run out of credit, money, and ideas all at the same time. He's also seen people with scores in the 400's get home loans because they had a 40 year history of paying their mortgage on time, just a problem with paying anything else, especially those with several medical bills that went into collections.
I'm not leasing now but I would think that most in that category would not be able to pay. After all, if they have poor credit, they probably don't pay their bills very well because they don't have the money.
I used the last year's tax return and past three months bank statements. If they had a master card/visa/CCs I asked for the statement.
I can pretty well read people financially from the statements. Seeing Pizza Hut charges, and strings of ATM withdrawls for $20 or so, is a good indication of poor money mgt.
Instead of me using what lenders do as ratios, 36% I would require 40, maybe 45% to cover rents. I also had an authorization to acquire tax returns (never did it) but if they think you can verify the return they are less likely to make a mistake and give you the "first return they did and caught mistakes on it and never sent it in" kinda return.
In my opinion, the amount of security deposit you collect should definitely be determined by the amount of risk you attach to your potential tenant. On the residential side, I believe this is regulated by your state. If I can recall my RE education, California allows you to collect up to two months of rent as a security deposit for an unfurnished unit, three months for furnished. I have no idea what the regulations are in FL.
I don't manage residential but I have friends that do and they tell me they have charged renters 2+ months of rent as a SD due to a BK or foreclosure, and most if not all the renters have agreed (YMMV).
On the commercial (retail) side, I've collected much more than that in the past due to spotty history, a weak balance sheet and/or lack of experience.
Victor
I've been down this road and it has never worked out for me. I just stick to good credit and income. I'm not as scary as the creditors they have refused to pay so why should they pay me? I find most people with bad credit can come up with the double deposit no problem. But once you comb through their credit they are a total mess and currently delinquent. The more willing they are to pay a double deposit the higher risk they probably are. Responsible, credit worthy people don't want to do that.
Yes, tax returns and bank statements showing consistent income for self-employed.
Go vacant instead of getting in bed with a tenant that is going to make your life hell.
I can't say that I've ever collected more than a month's rent for a security deposit. At the same time, I'm also in the interesting position of being a tenant of another landlord, as I own my own properties.
I don't show any income thanks to my various LLCs, and I don't like hard checks on my credit for obvious reasons. When I applied for my apartment, I made sure to call them and explain the situation, and show them the properties.
Their obvious response was, "why don't you live in your own properties?" My answer was that I wouldn't really want to live in my properties anyway :P
My security deposit is about half a month's rent, even though I probably look like more of a security risk on paper. While I think it's important to have a good screening system in place, there's more to someone than what the financial documents say. Especially with self-employed people, a good accountant can make them look a lot poorer come tax time.
I've never asked a tenant for an account statement, like Financeexaminer has. Maybe we focus on different kinds of clientele, but I've never had an issue with it.
The only issue I've had with tenants, surprisingly, is my tenants that rent the only single-family I own, and they look good on paper. I think they have chickens at the house, and that's going to have to stop.
I could see myself increasing the security deposit for people I see as high risk, but I've yet to find a high risk tenant. That's just me, and I focus on nicer areas of the city for multi-units.
I've learned to throw the "rule book" out. Our latest 3 tenants all paid a security deposit greater than one month's rent, for various reasons with differing results.
The first was simply an extra deposit because he had a dog. He had a very good credit score, low 700's, and was self-employed. But his business, and health, went south after a couple of months, he ran out of money, and we were forced to evict him. Lessons learned? Credit score has very little to do with character. Past performance is interesting, but anything can change in the future.
The follow on tenants had poor credit scores, high 500's, but it was obvious the delinquencies were a result of them short-selling their home. They had good income (a State of California job) and were willing to provide a high security deposit. Not 2 months as limited by California law, but it was up there. We also put in the lease that if they paid on time, without fail every month, and didn't violate any other terms of their lease for 1 year, we would refund a portion of the security deposit, which we did because they've been great tenants.
The last tenant we just placed also paid a slightly higher deposit great than one month's rent. No pets, an average credit score, good income, but going through a divorce. So the extra deposit is just that, extra security.
My friend, who has been underwriting for many many years said (paraphrased), "Credit score is just the headline of their story. You have to look deeper and see WHY their score is what it is." He's seen high scores on the verge of defaulting, i.e., living off their credit cards and home equity. Their score is good because they've always paid, but their balances keep increasing. It won't be long before they run out of credit, money, and ideas all at the same time. He's also seen people with scores in the 400's get home loans because they had a 40 year history of paying their mortgage on time, just a problem with paying anything else, especially those with several medical bills that went into collections.
The first was simply an extra deposit because he had a dog. He had a very good credit score, low 700's, and was self-employed. But his business, and health, went south after a couple of months, he ran out of money, and we were forced to evict him. Lessons learned? Credit score has very little to do with character. Past performance is interesting, but anything can change in the future.
The follow on tenants had poor credit scores, high 500's, but it was obvious the delinquencies were a result of them short-selling their home. They had good income (a State of California job) and were willing to provide a high security deposit. Not 2 months as limited by California law, but it was up there. We also put in the lease that if they paid on time, without fail every month, and didn't violate any other terms of their lease for 1 year, we would refund a portion of the security deposit, which we did because they've been great tenants.
The last tenant we just placed also paid a slightly higher deposit great than one month's rent. No pets, an average credit score, good income, but going through a divorce. So the extra deposit is just that, extra security.
My friend, who has been underwriting for many many years said (paraphrased), "Credit score is just the headline of their story. You have to look deeper and see WHY their score is what it is." He's seen high scores on the verge of defaulting, i.e., living off their credit cards and home equity. Their score is good because they've always paid, but their balances keep increasing. It won't be long before they run out of credit, money, and ideas all at the same time. He's also seen people with scores in the 400's get home loans because they had a 40 year history of paying their mortgage on time, just a problem with paying anything else, especially those with several medical bills that went into collections.
That sounds good Mitch, but isn't it a bit arbitrary? Are you able to come up with a hard and fast set written criteria on how to evaluate the credit report?
Edit: On the other hand, I just realized, if someone were to claim discrimination based on one's use of the credit report, how would they know/prove it? They aren't privy to the other applicants' credit reports, since that's confidential.
I don't manage residential but I have friends that do and they tell me they have charged renters 2+ months of rent as a SD due to a BK or foreclosure, and most if not all the renters have agreed (YMMV).
On the commercial (retail) side, I've collected much more than that in the past due to spotty history, a weak balance sheet and/or lack of experience.
Victor
I guess I'm concerned about people trying to "buy" their way in to the rentals. I just had a group come that was MikeOH's nightmare: gangbanger tattoos up the neck, shady living situation with a large "pack" of people living together. They had plenty of money though--they wanted to pay three months at a time instead of monthly? How do I know it wasn't drug money? But they told me that their mom, who would be living there, had bad credit. I'm thinking it would be easier just to have a cutoff score below which I don't take people, in order to weed these types out easily.
Just a side note to the conversation, you may want to check your state's statutes regarding security deposits, especially regarding residential leases.
I know my state has on the books a security deposit cap when it comes to tenants over the age of 62.
You would hate to run afoul of a security deposit law in your pursuit of extra cushion only to have it turn into an affirmative case against you by an tenant's rights group.
Yes, tax returns and bank statements showing consistent income for self-employed.
Go vacant instead of getting in bed with a tenant that is going to make your life hell.
I have to agree with Chris...I lowered my standards on a tenant and raised the deposit to cover or at least what I thought would cover the risk involved. BIG MISTAKE....2 months later they were late and late every month until 7 months later when I had to evict which was the middle of January so by the time I washed all the freshly painted walls and cleaned the once spotless house out and got it rented again I had lost over $3k so I don't think the extra little bit you charge for deposit is worth it. I would let the house sit empty first. NEVER lower your standards. IMHO
I know my state has on the books a security deposit cap when it comes to tenants over the age of 62.
Thanks, I will do that. I'm pretty sure that Florida is very lenient about the deposit, but it's good to check and be sure.
You would hate to run afoul of a security deposit law in your pursuit of extra cushion only to have it turn into an affirmative case against you by an tenant's rights group.
To be legally compliant and for peace of mind consider objective criteria for every applicant. As Mitch indicated credit is one piece of the pie and it is not rock solid by any means.
I look at many factors including credit, income, rental history, pets, term of lease desired, references, etc. If you do a thorough screening you should be able to make an educated decision if the person is going to work out.
Keep your 6th sense in overdrive as well. Maybe a 21 year old wants a 3 bedroom house all to themselves but their siblings are at the showings and keep calling you? A tenant says he needs a place and is ready to sign the lease today before he sees the place? Applicant lists several junkers on the application and swears they are only in storage and won't park them at the rental as lawn ornaments?
Just my opinion... why would you rent to high risk tenants with all the people looking for quality housing? I have found that i keep my rents a little on the lower side of the market value....this lets me be pickier plus it keeps my turnover down.... just my school of thought
As I understand it, only 16% of Americans have a FICO below 600.
Now, the % of people below 600 may be higher in the low-middle income areas that we as landlords typically rent to.
However, a lot--possibly the majority--of these low score applicants will also have other issues--bad rental references, etc.--that are an automatic disqualifier.
So, it seems to me, the question is do you want to lower your standards to capture the small number of people with a score below 600 who would still be good tenants, or just reject anyone with a score below 600, and have an effective tool to quickly eliminate a large number of problem people?
Evaluating credit reports and screening tenants is as much as an art as it is a science. I learn something new every time because no two people are alike, with the same situations, same character, etc.
As Chris said, you have to look at all the facets of the application and determine subjectively how risky a tenant might be. That's why I don't simply say "FICO 650 and above only" or "33% rent/income maximum". Look what happened to us? Mr. 700+ FICO got evicted and Mr. and Mrs. 500+ FICO have been there over a year paying on time without any drama.
If you keep the process strictly a business decision, you won't have to worry running afoul any discrimination claims.
Evaluating credit reports and screening tenants is as much as an art as it is a science. I learn something new every time because no two people are alike, with the same situations, same character, etc.
As Chris said, you have to look at all the facets of the application and determine subjectively how risky a tenant might be. That's why I don't simply say "FICO 650 and above only" or "33% rent/income maximum". Look what happened to us? Mr. 700+ FICO got evicted and Mr. and Mrs. 500+ FICO have been there over a year paying on time without any drama.
If you keep the process strictly a business decision, you won't have to worry running afoul any discrimination claims.
Thanks, but I think I'm going to try an experiment and change my criteria so that the cutoff is FICO score 600 (and no derogatory items from a landlord on the report, regardless of score). If it doesn't work out I'll go back to doing it the other way.
Now, the % of people below 600 may be higher in the low-middle income areas that we as landlords typically rent to.
However, a lot--possibly the majority--of these low score applicants will also have other issues--bad rental references, etc.--that are an automatic disqualifier.
So, it seems to me, the question is do you want to lower your standards to capture the small number of people with a score below 600 who would still be good tenants, or just reject anyone with a score below 600, and have an effective tool to quickly eliminate a large number of problem people?
So, 65% or so of the population are homeowners (this was posted in an article that somebody linked in a recent thread); that leaves roughly 35% of the population as your rental pool.
So, if the majority of below-600 FICO folks are renters, then that "16% of Americans" leads to almost HALF of the rental pool having a FICO below 600. And if you are in lower income areas, that proportion will be even greater IMO.
Just food for thought.
When I screen tenants I don't place so much weight on their actual credit score, but more or less their references, past landlords and their employment outlook.
Personally, I would rather rent to someone with less than perfect credit with stellar references and good income than someone with perfect credit and good income. Reason for this is the person with good credit is probably going to be moving on and buying soon (most of the time... but not always).
If I am able to give someone a "chance" they usually stay with me for longer and I seem to have less turn over with those tenants.
With the ones with bad credit, I ALWAYS ask them to explain themselves. If they start blaming everyone else I won't rent to those ones even if they gave me a triple deposit... those people are victims and will be a nightmare.
If they take responsibility and tell the truth for whatever blemishes are on their credit, I tell them I am going to give them a chance and explain that due to their credit there will be two deposits. One is a regular security deposit, and the other is a performance deposit in which they will receive back at the end of their term if they are never late and if the place is left in good condition ect ect. Make sure you check with your specific state laws before you do this, but its worked wonders for me!
For the second part of your question regarding self employment income... that one is a little more difficult. I would have to understand what their business was and how they were receiving income and make sure they are not over extending themselves depending on what the rent was.
Getting double the security is just fooling yourself . If you get stuck with bad tenants who knows the ropes they may be able to string you along for months without paying rent and cost you more to facilitate the eviction process. I look for the past 2 Landlords as references as well as documentation of income. If I feel I require 2 months secureity I would be better off looking for a more qualified tenant. The 2 months wont make up for potential loss.
I guess I've been lucky, the tenant/applicants I've seen so far have been excellent, so I wouldn't assume that renters are necessarily all or most of that 20% at the bottom of the credit pile. I rented two properties in the past 30 days, one tenant had a 798 fico, and the other was 759. These are ~$1k rentals in a nice blue-collar neighborhood.
I don't care what the FICO is, truthfully, I'm looking primarily for a stable good-paying job, and no eviction history. We can do garnishments here, and I want tenants with something to lose if they stiff me.
In AZ, you can't *require* large deposits, but the tenant can volunteer them -
? 33-1321. Security deposits
Mark,
With regard to being voluntary, it said rent in advance, not deposit money - and that is usually a big difference (at least in my state).
With regard to being voluntary, it said rent in advance, not deposit money - and that is usually a big difference (at least in my state).
It wouldn't surprise me if a judge were to read it that way, but the local attorney who taught my property management classes claimed it was legal and proper. It hasn't been an issue for me - I'd much rather have a vacant house than a "high risk" tenant.
My point of the previous post was watch where your taking advice from. A page full of responses and no one is discussing the legality of doing it, unless I missed it. Wait till a professional tenant comes along and like it or not they will make you learn the law by the way of stress and cash money.