Double security deposit in leu of poor credit score?

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Double security deposit in leu of poor credit score?

Heath Jones
Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes

Just wanted to start a conversation about strategies for dealing with potential renters who have poor credit, a bankruptcy and several delinquent accounts.

For example right now, I have a potential renter who is in her mid to late 40’s, and living with her sister and her sister’s husband. She is trying to get back on her feet after a divorce and wanting to move into her own apartment. Given her credit report, she is an automatic deny and there is not even a glimmer of hope to feel confident about her ability to pay rent reliably. I feel bad but I will be denying her based on credit report.

However, I’m wondering if I’m being too unsympathetic and if there are ways I could be more compassionate and help her out. I’ve talk to others who have said they will ask for double the security deposit if the credit score was low because of falling on some rough times. In the case of my example, I know she is going to have a real difficult time finding someone who will rent to her, but I don’t want to be stuck with a tenant who doesn’t pay the rent because of my good nature. I would love to help out but I have to think about my business. Would love to hear everyone’s thoughts on this!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
Originally posted by @Mike McCarthy:

The only way I’ll even consider someone with a lower credit score is if they are 1) upfront about it, and 2) have made obvious changes to fix it.

I had one family that was honest about it when they came in for the walkthrough. They bought a house above what they could reasonably afford, etc. They were selling it and moving into a cheaper rental. Their credit check and listed/contracted home backed up their story.

I did a double security deposit and it’s worked out well.

On the other hand, I had another perspective tenant not say anything, credit at 601 or something, and significant credit card debt from department stores and specialty stores. Oh, and a DUI. not being flexible there.

Everyone has their own comfort level. I manage about 360 rentals and about 1/4 of them are rented by lower-income tenants. A good percentage of them have low credit. However, I use an objective score sheet that ranks them 1-30. Tenants scoring 16 - 20 pay 2x deposit and tenants scoring 21 - 25 pay 1.5x deposit. I instituted this about three years ago and the results are fantastic. Out of 350+ rentals, see about 1% moving out and owing more than the deposit can cover. It's a great way to increase occupancy while minimizing risk.

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  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    6y

    "...Just wanted to start a conversation about strategies for dealing with potential renters who have poor credit, a bankruptcy and several delinquent accounts...."

    Your hoped for rental payments will be next, there has to be a more qualified tenant out there.

    2Reply
  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    6y

    A double deposit is something I have used in the past successfully.

    However, you must be aware of relate laws in your area.  I've used a double deposit in Texas, but the max you can do in Michigan is 1.5x rent.

    On a side note, I would encourage you to have set, written policies. People that get in trouble with fair housing often do because they "feel bad" for one person and change the rules. The person that came beforehand may contact HUD and get you in hot water if they feel the reason they were given different treatment because they are one of the 5 protected classes.

    3Reply
  • Howard HerringtonPro Member
    Realtor · Boston, MA · Member since 2014 · 159 posts · 75 votes
    6y

    @Heath Jones is she employed?  Does she make enough that will cover the rent payments and still allow her to live comfortably?  It is a tough call to make.  Yes it is business and you do not want to get screwed, however with all the things that are happening in the world, perhaps we should all try a little harder to help out those who need a hand. Perhaps look into a trial lease.  Just a suggestion.

    1Reply
  • Stephen J DavisBusiness Member
    Rental Property Investor · Houston, TX · Member since 2017 · 529 posts · 467 votes
    6y

    Your real estate is not your charity. Sure, give 10% or more of your profits to charity but don't turn a unit into a charity. Does she make 3x rent? If not, she can't afford it and you are actually hurting her by putting her in debt that she can't afford.

    1Reply
  • Heath Jones
    OP
    Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes
    6y

    @Pat L.

    I completely agree with you. I did mention that they are an automatic deny in my book. Just wasn’t sure if there were others out there who were able to help out people in need, but not at the expense of their business. Thanks for the feedback Pat!

    0Reply
  • Heath Jones
    OP
    Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes
    6y

    @Greg Scott

    These are great points Greg. You definitely need to make sure you are operating in accordance with the appropriate laws and regulations. It’s just generally good policy to avoid getting in hot water whenever possible 😁. I appreciate the feedback, this is great advice.

    0Reply
  • Heath Jones
    OP
    Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes
    6y

    @Howard Herrington

    Thank you for your post Howard. You brought up what I’ve been asking myself lately, how can I be more helpful to people who may need it and won’t get it anywhere else? It is a tough call. However, I do like the idea of doing a trial lease. Thanks for the idea!!!

    0Reply
  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    6y

    We do occasionally accept a lower credit score with additional deposit. However, everything else has to look good other than the credit score. And we study the credit score to see why it's lower. In the case you described, we would not consider this applicant. Also, we return that additional deposit after 6 months if they have a perfect payment record. Otherwise, it's held for the duration of their tenancy.

    The whole object here is to select an applicant that we're reasonably sure will pay the rent every month. I don't think your applicant falls into that category.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    I use increased deposits for higher-risk applicants, but I don't give away the farm in the process. People with delinquent accounts and crappy credit are high risk. They don't care about adding another delinquency on the pile because their credit is already shot.

    Keep looking.

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    1Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    The only way I’ll even consider someone with a lower credit score is if they are 1) upfront about it, and 2) have made obvious changes to fix it.

    I had one family that was honest about it when they came in for the walkthrough. They bought a house above what they could reasonably afford, etc. They were selling it and moving into a cheaper rental. Their credit check and listed/contracted home backed up their story.

    I did a double security deposit and it’s worked out well.

    On the other hand, I had another perspective tenant not say anything, credit at 601 or something, and significant credit card debt from department stores and specialty stores. Oh, and a DUI. not being flexible there.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y
    Originally posted by @Mike McCarthy:

    The only way I’ll even consider someone with a lower credit score is if they are 1) upfront about it, and 2) have made obvious changes to fix it.

    I had one family that was honest about it when they came in for the walkthrough. They bought a house above what they could reasonably afford, etc. They were selling it and moving into a cheaper rental. Their credit check and listed/contracted home backed up their story.

    I did a double security deposit and it’s worked out well.

    On the other hand, I had another perspective tenant not say anything, credit at 601 or something, and significant credit card debt from department stores and specialty stores. Oh, and a DUI. not being flexible there.

    Everyone has their own comfort level. I manage about 360 rentals and about 1/4 of them are rented by lower-income tenants. A good percentage of them have low credit. However, I use an objective score sheet that ranks them 1-30. Tenants scoring 16 - 20 pay 2x deposit and tenants scoring 21 - 25 pay 1.5x deposit. I instituted this about three years ago and the results are fantastic. Out of 350+ rentals, see about 1% moving out and owing more than the deposit can cover. It's a great way to increase occupancy while minimizing risk.

    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    5Reply
  • Brian Roberts
    Rental Property Investor · Member since 2018 · 34 posts · 25 votes
    6y

    @Nathan G.

    Your points system for tenant screening is something that I would like to pick your brain about if you would be willing to share more information.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    6y
    Originally posted by @Heath Jones:

    Just wanted to start a conversation about strategies for dealing with potential renters who have poor credit, a bankruptcy and several delinquent accounts.

    For example right now, I have a potential renter who is in her mid to late 40’s, and living with her sister and her sister’s husband. She is trying to get back on her feet after a divorce and wanting to move into her own apartment. Given her credit report, she is an automatic deny and there is not even a glimmer of hope to feel confident about her ability to pay rent reliably. I feel bad but I will be denying her based on credit report.

    However, I’m wondering if I’m being too unsympathetic and if there are ways I could be more compassionate and help her out. I’ve talk to others who have said they will ask for double the security deposit if the credit score was low because of falling on some rough times. In the case of my example, I know she is going to have a real difficult time finding someone who will rent to her, but I don’t want to be stuck with a tenant who doesn’t pay the rent because of my good nature. I would love to help out but I have to think about my business. Would love to hear everyone’s thoughts on this!

     Something most, if not all landlords go through at the beginning of their career is the rationalization of putting a sub-par tenant into one of their units. Going over things you can adjust to "make it work" like increasing the security deposit. Bottom line, don't do it. There is never a situation where it makes sense to place a sub-par tenant into one of your units. If you are not comfortable renting to them utilizing your normal standard screening process that's the end of the line. Cut them and move on. Do not deviate from what works.

    2Reply
  • Heath Jones
    OP
    Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes
    6y

    Thank you to everyone who responded. I did inform the tenant they did not qualify and I could not approve them. I toyed with the thought of a trial lease, but thought once they are in there, if for whatever reason they decided to treat their rent like the other 6 delinquent accounts, then I’d have more trouble getting them out. Appreciate all the feedback and information!!

    1Reply
  • Jonathan Herron
    Attorney · NJ · Member since 2018 · 120 posts · 58 votes
    6y

    In many locations, the maximum amount of a security deposit is set by law.  In NJ it is 1.5x the monthly rent.  Another option is to require a cosigned to guarantee payment.  If the not creditworthy tenant were to default on payments you would be able to go after the cosigner for payment, and the cosigner's credit would be on the line if payment were not made.

    1Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    6y

    @Heath Jones

    I agree with @Nathan Gesner I use a scoring system.  Basically if you score 80% or better your approved.  70%-79% your approved with a double security deposit.  I have had co-signers like mom and dad, but they need to be screened as well.  I have rented to tenants with credit score in the 580/590.  The other criteria was fine.  They have been my tenant for 4 years with no problems.  Have a system and stick to it.  It also avoids discriminatory application of tenant selection.

    1Reply
  • Wendy PattonBusiness Member
    Real Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes
    6y

    @Greg Scott a double month security in Michigan is not legal.  The most we can charge here is 1.5 months TOTAL for refundable money to the tenant.  We can however charge a cleaning fee or maybe the first 2 months in advance (which also might be a bit edgy here but better then security) -  Every state/city has their own rules on this so just make sure you know how much you can charge for security or pre-paid rent - you don't want to get yourself into a bind down the road.  Judges do not look favorably on landlords who don't follow the rules.  

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    1Reply
  • Wesley W.
    Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
    6y

    @Wendy Patton

    We can beat that in NY.  Anything over 1 month's deposit is unlawful, and last month's rent or any kind of "move in fee" may no longer be collected.  So, the marginal tenants that the legislators were trying to "help" will most certainly be passed over by many landlords now.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y
    Originally posted by @Brian Roberts:

    @Nathan G.Your points system for tenant screening is something that I would like to pick your brain about if you would be willing to share more information.

    Connect with me and send me a private message.

    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    1Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    6y

    @Heath Jones as a private land lord I placed around 20 tenants in 2018-2019. This is not nearly as many as a professional PM firm would place, but still enough to have a very good sample size. I took one set of tenants with a 1.5X security deposit. They literally took 90% of my time when it came to rental collection. They were late constantly, had tons of drama and were emotionally exhausting. Stick to your criteria. If you can find good tenants in your area, be patient and wait for the right tenant. 

    1Reply
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    6y

    If they can't find a co-signer that says everything, doesn't it? Get a co-signer and double up the deposit. If their income qualifies them, give it a shot if it's a C/D area.

    [email protected]732-289-3823
    0Reply
  • Marlen Weber
    Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes
    6y

    @Heath Jones Not a bad idea actually. How did the renters take this approach? 

    0Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Heath Jones

    Open collections or delinquent accounts? Hit the road deadbeat. Low score because of divorce but otherwise spotless? Welcome to my humble abode.

    0Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    6y

    No.  A poor credit score is meaningful.  And you want to reject the tenant.  Don't try to fix it with this solution.  However, do look at the items on the credit score.  If it is a lot of medical problems, be flexible.

    0Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    @Heath Jones I have done this before as well. It works. I feel better about it and the tenant would rather do that then have their mom or someone sign. And you are good for an extra month, essentially. But make sure they are employed.

    0Reply
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