How do you screen your tenants?

Question

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 · Answer

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.

Michael Smythe · Answer

@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 ofthe 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 tenantspossible for your property.

• Required InfoWe require the following from each applicant over the age of 18, that is not a dependent of anotherapplicant (as evidenced on a tax return):Copy of acceptable state picture IDRecent YTD paystubRecent W-2Recent Bank Statement, all pages, no info blacked outRecent tax return if self-employedApplicants are often slow about turning this information in, asking us why we need it and then takingseveral days to submit. Then they complain that our process takes too long!Credit HistoryMany companies use credit summaries, but we find these rarely tell the whole credit story. So, we obtaina full credit report and review collections, chargeoffs, age of credit accounts, active accounts, etc.to build an overall credit evaluation.
• Required InfoWe require the following from each applicant over the age of 18, that is not a dependent of anotherapplicant (as evidenced on a tax return):Copy of acceptable state picture IDRecent YTD paystubRecent W-2Recent Bank Statement, all pages, no info blacked outRecent tax return if self-employedApplicants are often slow about turning this information in, asking us why we need it and then takingseveral days to submit. Then they complain that our process takes too long!
• 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
• Credit HistoryMany companies use credit summaries, but we find these rarely tell the whole credit story. So, we obtaina full credit report and review collections, chargeoffs, age of credit accounts, active accounts, etc.to build an overall credit evaluation.

• Required InfoWe require the following from each applicant over the age of 18, that is not a dependent of anotherapplicant (as evidenced on a tax return):Copy of acceptable state picture IDRecent YTD paystubRecent W-2Recent Bank Statement, all pages, no info blacked outRecent tax return if self-employedApplicants are often slow about turning this information in, asking us why we need it and then takingseveral days to submit. Then they complain that our process takes too long!
• 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
• Credit HistoryMany companies use credit summaries, but we find these rarely tell the whole credit story. So, we obtaina full credit report and review collections, chargeoffs, age of credit accounts, active accounts, etc.to build an overall credit evaluation.

• 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 takingseveral days to submit. Then they complain that our process takes too long!

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

• Public RecordsWe also obtain data from national databases about evictions, convictions and sex-offender histories. These allrequire applicants to submit an acceptable Letter of Explanation addressing each specific issue and occurrence.
• Rental HistoryBecause a current landlord may say anything to get rid of a bad tenant out of desperation, we also requireinformation for the previous landlord of all applicants. Verifying rental history often takes a long time tocomplete due to applicants not giving us correct landlord contact information, landlords not returning our callsor refusing to give us any details.We also deal with applicants trying to have family or friends pose as theirlandlords. To address this, we verify the property owner per government records and use this information to vetimposters.Anything that seems suspicious will lead to us requesting an acceptable Letter of Explanation toaddress.
• Analyze IncomeMany landlords require a month of paystubs from applicants and just use these to calculate a monthly qualifyingincome. In our opinion, this doesn’t result in a viable income amount or analyze income stability. We use a YTDpaystub and last year’s W-2(s) to calculate income several different ways:Hourly or salary income calculated to a monthly amountYTD income divided by number of YTD monthsYTD + W-2(s) income divided by the corresponding number of monthsIf these numbers vary too much, then we investigate and require an acceptable Letter of Explanation.
• 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
• Employment StabilityUnless an applicant has exceptional credit, we strive to determine their stability of employment to make surethey’ll always be able to pay the rent on time. So, we require a detailed employment history for the last twoyears and verify as much of it as reasonably possible.
• AssetsWe are one of the few management companies that requires a bank statement as part of our application process. Wethink it’s important as it allows us to check for Non-Sufficient Funds (NSF) issues and to determine if anapplicant is living paycheck-to-paycheck. Bouncing payments or only being an illness or accident away from notbeing able to pay the rent, are issues considered by our underwriting.
• Letter Of ExplanationAny time there are credit issues or we discover an inconsistency, we require a written letter ofexplanation (LOX). Many applicants just want to tell us their excuses over the phone, but if they won’t take thetime to put it in writing, we find they rarely end up being good tenants.
• UnderwritingTraditionally, landlords have only looked at the income of applicants and approved those having income equal tothree times the property rent. This crude method ignores all the other debt payments tenants have. Given thatmany tenants will make their car payment before their rent payment, we’ve copied the mortgage industry’s methodof debt-to-income (DTI) ratios. We calculate rent plus all debt payments as a percentage of gross monthlyincome.Our underwriters strive to analyze and balance all the information above to determine the statistical likelihoodof a tenant paying their rent on time.
• ApprovalOnce an applicant is approved, we require a nonrefundable Holding Fee to make sure they are serious and don’tchange their minds. We actually keep marketing your property and accepting back up applicants until yourproperty is actually occupied.

• 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.

Joshua Killian · Answer

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! :)