How do you screen your tenants?

[Jake Brooks]

As we all know, a good tenant can be make or break for your investment. I am curious to see what steps do you have or requirements do you put in place to ensure you are securing the right tenant? 

[Mackaylee Beach]

I find it beneficial to communicate my screening criteria to potential clients before they arrange a viewing or submit an application.

It is useful to directly verify information with employers and landlords.

Make sure to follow both your state regulations and the Fair Housing Act.

[Joshua Killian]

Piggybacking on Mackaylee's post. I believe setting the precedent upfront solves what could be serious issues before they even apply by giving them a rundown on some of the big key aspects of what the process looks like a head of time.

Big indicators are verification of identity and verifying the references for documents when needed. While complying with all real estate and fair housing laws by state and more this allows for a more in depth and accurate decision making result. 

But the majority of the time, doing the active diligence can ultimately provide the best experience for any placed tenant which in turn will ultimately help yourself, if a property manager, maintain a healthy relationship with your portfolio of owners going forward for them. 

Real estate is a people business no matter where you are at the end of the day. It's tough when there is only one property of any type and multiple applicants so remember if it's not out of your scope to get them set in a right direction as well if there are multiple qualified applicants.

Best to you Jake, stay safe! :)
 

[Michael Smythe]

@Jake Brooks from our website, this is NOT a solicitation, only for information:

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. 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.

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

1. 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.
2. 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.
3. 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.

4. 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.
5. 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.
6. 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.
7. 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.
8. 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.