Screening Your Own Tenant w/ Property Management Company

[Drew Osifalujo]

I have property that i have recently rehabbed and that I am about to being marketing for tenants through my PM. While I am a big fan of using a PM for day to day activities, the first month's rent that is charged for tenant screening and placement takes a huge chunk out of my ROI calculation. I am curious how often investors have had luck placing their own tenants and bringing in a PM once the tenant is in place. I cant see a company turning down a contract because it doesn't have the cherry on top, but would be curious how many would pass on that offer.

I know a good property manager helps protect my investment from bad tenants in screening, but I really see tenant screening, showing and renting the property as a one-time activity that I should own, especially if it will cost me $2,000 for only a few hours of my time.

[Drew Sygit]

@Drew Osifalujo We charge a premium on our monthly management fee, when an owner brings us a property with an existing tenant.

Why?

Because now we may have to manage someone else's mistake, which will take up more of our time.

Also, while there is nothing wrong with you trying to be cheap and save pennies over dollars, here's what we do to earn a Placement Fee (fyi: we don't do biz in IL):

We write unique, descriptive rental ads and publish them on 20+ websites. In secure markets we offer cutting-edge Self-Showings for prospect instant gratification – which leads to more showings and less vacancy time. All inquiries, showings and applications are tracked to generate bi-weekly Marketing Reports.

Below are the activities handled by our Marketing Department to get as much exposure for your advertised rentals as possible.

1. Verify Property Showable
   Many owners think we should just throw up any old ad as soon as possible to get their property rented quickly. It’s been shown by many experts that this gives a property a “bad reputation” as everything on the internet stays on the internet. While your property doesn’t have to be 100% Rent-Ready, we make sure it’s in acceptable showable condition before marketing it.
2. Take Pics
   We want your property to look it’s best when a prospect is searching online. Also, in today’s market, ads without pics are rarely looked at, so we must have decent pics before we can advertise your property.
3. Write Ad
   Once we have enough information about your property, a descriptive ad is written about your property. We include room sizes and other pertinent facts about the property to attract the right prospects.
4. Touchup Pics
   To avoid crooks copying our pics and running fake ads, we watermark all our pics with our log and phone number. We also adjust rotation, brightness, intensity and other aspects of pics to make them as attractive as possible.
5. Rent Analysis
   Since there is no single source of reliable rental data, we check multiple sources for rental comparables to determine market rent for your property.
6. Owner Approval
   The ad and rental analysis are presented to you for your final approval before it is published.
7. Ad Published
   Once an ad and price are approved, the ad is published and syndicated to numerous websites. Click here for the list of websites you can find your property on.
8. Schedule Showings
   Consumers shopping for a rental home today expect immediate gratification, so we use an online system that allows prospects to self-schedule showings and where possible, schedule self-showings. This maximizes the number of showings for your properties, getting your property rented faster.
9. Obtain Applications
   To meet the expectations of as many prospects as possible, we offer several methods of applying for your property.
10. Monitor Activity
    Unfortunately, not every vacant property rents out as fast as the owner expects. So, we monitor the number of web views, inquiries, scheduled showings, completed showings, submitted applications and approved applications – and analyze this data to recommend ad edits, ad reboots, price drops or property improvements.

and here's how we screen:

A bad tenant can lead to thousands of dollars of losses via unpaid rents, legal fees and property damages. We’re one of the few property managers that require W-2’s and a bank statement and we go way beyond the traditional, “income must = 3x rent” qualifier.

Below is more information about what our Applications Department does to screen applicants and find the best tenants possible for your property.

1. Required Info
   We require the following from each applicant over the age of 18, that is not a dependent of another applicant (as evidenced on a tax return):
   • Copy of acceptable state picture ID
   • Recent YTD paystub
   • Recent W-2
   • Recent Bank Statement, all pages, no info blacked out
   • Recent tax return if self-employed

   Applicants are often slow about turning this information in, asking us why we need it and then taking several days to submit. Then they complain that our process takes too long!

2. Credit History
   Many companies use credit summaries, but we find these rarely tell the whole credit story. So, we obtain a full credit report and review collections, chargeoffs, age of credit accounts, active accounts, etc. to build an overall credit evaluation.
3. Public Records
   We also obtain data from national databases about evictions, convictions and sex-offender histories. These all require applicants to submit an acceptable Letter of Explanation addressing each specific issue and occurrence.
4. Rental History
   Because a current landlord may say anything to get rid of a bad tenant out of desperation, we also require information for the previous landlord of all applicants. Verifying rental history often takes a long time to complete due to applicants not giving us correct landlord contact information, landlords not returning our calls or refusing to give us any details.We also deal with applicants trying to have family or friends pose as their landlords. To address this, we verify the property owner per government records and use this information to vet imposters.

   Anything that seems suspicious will lead to us requesting an acceptable Letter of Explanation to address.

5. Analyze Income
   Many landlords require a month of paystubs from applicants and just use these to calculate a monthly qualifying income. In our opinion, this doesn’t result in a viable income amount or analyze income stability. We use a YTD paystub and last year’s W-2(s) to calculate income several different ways:
   • Hourly or salary income calculated to a monthly amount
   • YTD income divided by number of YTD months
   • YTD + W-2(s) income divided by the corresponding number of months

   If these numbers vary too much, then we investigate and require an acceptable Letter of Explanation.

6. Employment Stability
   Unless an applicant has exceptional credit, we strive to determine their stability of employment to make sure they’ll always be able to pay the rent on time. So, we require a detailed employment history for the last two years and verify as much of it as reasonably possible.
7. Assets
   We are one of the few management companies that requires a bank statement as part of our application process. We think it’s important as it allows us to check for Non-Sufficient Funds (NSF) issues and to determine if an applicant is living paycheck-to-paycheck. Bouncing payments or only being an illness or accident away from not being able to pay the rent, are issues considered by our underwriting.
8. Letter Of Explanation
   Any time there are credit issues or we discover an inconsistency, we require a written letter of explanation (LOX). Many applicants just want to tell us their excuses over the phone, but if they won’t take the time to put it in writing, we find they rarely end up being good tenants.
9. Underwriting
   Traditionally, landlords have only looked at the income of applicants and approved those having income equal to three times the property rent. This crude method ignores all the other debt payments tenants have. Given that many tenants will make their car payment before their rent payment, we've copied the mortgage industry's method of debt-to-income (DTI) ratios. We calculate rent plus all debt payments as a percentage of gross monthly income.Our underwriters strive to analyze and balance all the information above to determine the statistical likelihood of a tenant paying their rent on time.
10. Approval
    Once an applicant is approved, we require a nonrefundable Holding Fee to make sure they are serious and don’t change their minds. We actually keep marketing your property and accepting back up applicants until your property is actually occupied.

Of course, you can cut corners everywhere and "go with your gut" and hope it works out for the best.

[Nathan Gesner]

I have to agree with Drew. You're choosing someone to live in your rental for $2,000 a month. How qualified/experienced are you to properly screen them, avoid the scammers and sob stories, etc?

You have no screening experience, or very little, whereas I process nearly 1,000 applications a year. Who do you think will do it better?

No PM worth his salt will waive a fee just to help you retain cash. They charge for a service because they know what's involved and require compensation for their training, experience, and effort. If you can't afford that then I recommend you try to find a PM with lower fees. Just remember that cheaper doesn't mean you'll make more money.

[Drew Osifalujo]

@Drew Sygit, 

Thanks for the lengthy and detailed response. You mentioned a premium. What % of rent would you say I should expect from a property manager to manage an existing tenant?

[Drew Osifalujo]

@Nathan Gesner

Thanks for the feedback. I don't see this as waiving a fee at all. I see the 1st month's rent as compensation for performing the duties of placing a tenant. Landlords change property management companies with existing tenants all the time. PMs don't really offer a money back guarantee for placing bad tenants who slip through their screening process. I have 0 experience in tenant screening, but would be willing to try, fail and learn what works best for me. With that said, I am curious how you have approached management relationships where you did not select the tenant. Do charge a different fee, adjust your agreement, or do you pass all together?

[Nathan Gesner]

Quote from @Drew Osifalujo:

@Nathan Gesner

Thanks for the feedback. I don't see this as waiving a fee at all. I see the 1st month's rent as compensation for performing the duties of placing a tenant. Landlords change property management companies with existing tenants all the time. PMs don't really offer a money back guarantee for placing bad tenants who slip through their screening process. I have 0 experience in tenant screening, but would be willing to try, fail and learn what works best for me. With that said, I am curious how you have approached management relationships where you did not select the tenant. Do charge a different fee, adjust your agreement, or do you pass all together?

Professionals don't custom design their services to the whims of each Landlord. Anyone that does that is bound to slip up and/or go out of business. You're also asking to choose the Tenant yourself and then leave the Property Manager to deal with them, which sounds like a losing proposition to me.

If you insist on going that route, place the tenant and then immediately hire the PM.

[Orrett Lawrence]

From my experience, having a property manager is worth it, especially if you don't live in the immediate area of the rental property. I agree the placement cost can be discouraging or a put off and not all PM are equal.  So interview them, look at their ratings and reviews, talk with some of their home owners they work for, if its ok. 

I currently have properties I manage myself and other properties with a PM.  For each approach, I decide which tenant I accept.  You can screen and select your tenant but you need to understand the screening process and what to look for and look at such as, credit scores, credit reports, rental history, income to rent ratio (income 3 times rent rate is my minimum) back ground, creating that worthiness profile.

If you are placing the tenant in order save on the PM cost, its not worth it.  Either you jump in and manage your property or give it to a great PM. 

Great PM has a price but so does cutting corners.