How to Screen Applicants like a Pro, Part 6: Verifying References
Verifying references is often a must when screening tenants, especially the lower the Class of property and tenants you deal with.
To screen applicants like a pro, you should contact the applicant’s current and past landlords, as well as their current employer, to verify that the information they provided is correct, and that the identity of their landlords is, too!
In this guide, we’ll go through the questions you need to ask during these verification interviews to make sure you’re getting a truthful picture of an applicant’s rental and employment history.
Current and Past Landlord Reference
Because of the pandemic, the industry has been forced to adapt to technology and contactless applications. But because of the switch to digital, prospective tenants who lie on their applications are more prevalent now than ever before.
TransUnion, the smallest of the Big Three consumer credit reporting agencies, has detected an increase in frauds by nearly 30% from March to August 2020.
People will do everything they can to show that they’re a responsible tenant—including masking their real past rental history. For example, some people ask a friend to pose as their current or past landlord to avoid a bad reference from their actual current landlord. Or they claim they are staying with a relative to avoid giving their actual landlord’s details.
How to Verify References
You can find out the legitimacy of the landlord reference by checking public property ownership records. From there, you can cross-check if the reference name submitted matches the actual owner in the property records.
However, even if the landlords are real, their feedback might not be. Current landlords of horrible tenants may give spectacular feedback just to get rid of them. Past landlords may also steer clear of negativity and stick to neutral responses (e.g. “They were okay”) out of fear of getting sued.
To get genuine answers, ask specific open-ended, follow-up questions during your interviews and have them expound (not just give one-word answers).
Here are some questions you can start with:
- 1. Who were the occupants included in the lease?
2. How much was the monthly rent?
3. How did the tenant pay rent? Was the tenant consistent and responsible?
4.How did the tenant take care of the property? Were there any damages done?
5. How many pets did the tenant have?
6. How much of the tenant’s security deposit did you return?
7. Would you accept them as your tenant again? Why or why not?
Current Employer Reference/s
In part 4 of this series, we mentioned the importance of verifying the income stability of applicants. This includes verifying both their income and employment, as their income stability is your income stability.
Call up their employer and ask about their performance and employment.
If you’re not sure what to ask, here are some questions to start with:
1. Can you confirm that he/she is employed in your company?
2. What was their date of hire? Is their employment full-time or contractual?
3. What is their rate of pay?
4. How much work time have they missed?
5. What is the future of his/her employment in the company?
Recap: How do you screen applicants like a pro?
1. Run Background Checks
Run a thorough background check by screening their public records for evictions or convictions. See if there’s any record of them being sex offenders. Pull the actual credit report as well to show all their tradelines.
To verify the information in credit reports, do the following:
- 1. Get the applicant’s permission to run the credit check.
- 2. Look for anything suspicious in their records. If you find a concern and they can’t provide an explanation, verify their credit report by contacting their past landlords, - current employers, etc.
Note: Background checking tools don’t cover criminal history. Instead, check a state website to verify criminal history, use tools like PropertyWare, or hire a professional background checking service.
2. Verify Debt-to-Income Ratios
As a rule of thumb, rent should only be a third of a tenant’s salary. This simple ratio helps landlords be assured that their tenants are capable of paying rent.
However, this formula assumes that people are responsible and will prioritize rent over other payments. For more accurate forecasting, screen DTI ratios to guarantee rent payments based on the applicant’s financial responsibility:
- Calculate the gross income: You can calculate an applicant’s stable monthly gross income using a pay stub and the previous year’s W-2’s. Below are three ways to do it:
- 1. The simplest way is to divide the year-to-date gross income by the number of months covered.
- 2. Alternatively, you can also multiply their hourly amount by 40 hours/week, then by 52 weeks/year, then divide it by 12 months.
- 3. If the applicant has been in their current job for over a year, you can get the year-to-date gross income from the pay stub, add the W-2, then divide it by the number of months that W-2 and pay stub covers.
- Identify all debts:People have debts that often stack up. In order to identify them, check their credit report.
- Don’t forget to include the rent: The monthly rent for the place they’re applying for should be considered as part of their monthly debt.
- Calculate the debt-to-income (DTI) ratio: Divide the total monthly debt payments by the gross monthly income. Then multiply by 100, to turn this into a percentage.
The lower the DTI number, the more capable your applicant is to pay rent. A DTI number of 40% is acceptable. In lower-demographic areas, you might also consider applicants with a 45-50% DTI ratio.
3. Verify Income Stability
Most landlord-tenant disputes boil down to money—usually, it’s because a tenant can’t pay rent. To avoid these issues, you need to verify their income stability on top of their DTI ratio as part of your screening process.
Verify their employment history, status, and average monthly wages with the following steps:
- For employed applicants: Ask for their YTD pay stubs and W-2s. If possible, get in touch with their employer. Ask for a Salary Verification Letter to check their job position, date of hire, salary, and possible future income changes.
- For self-employed applicants: Ask for their bank statements and federal 1040 tax returns.
- For retired applicants: Ask for their social security statement, annuity statement, bank statements, and IRA/401(k)/pension distribution statements.
In the past three months, we’ve gotten several fake pay stubs already. People are desperate to seem financially stable, making our job to screen properly even more important.
4. Verify Rental History
Rental history will reveal an applicant's true character, based on their past landlords’ experience of them.
Here’s the process:
- Get information: Request addresses and contact details of previous rentals.
- Review their submissions: Check for rental gaps, inaccurate details, or missing information. Also, ask about their living situation. You may need to verify who’s on the lease and ask their current landlord if they’re responsible with rent payments.
- Have them sign a Rental History Release Agreement: The agreement should include their length of tenancy with previous rentals, total rental amount paid previously, and rental payment history.
- Get in touch with previous landlords: Call or visit the landlords they listed. Ask specific follow-up questions.
5. Catch the Frauds
Faking documentation on rental applications is becoming worryingly common. Recently, we had an 18-year-old claim that she’s making 60k a year on her pay stubs with no credit and no savings. It sounded suspicious, so we screened like a pro and checked her bank statements.
We discovered that she receives unemployment, clearly not making 5k a month. She was faking her pay stubs!
Here’s how you can catch frauds with a thorough screening process:
- Check the details: There should be no suspicious information (like the case we just mentioned above).
- Compare against legitimate pay stubs: Pay stubs might be created by online generators.
- Cross-reference with their bank statements: The numbers should add up!
- Ask for additional validation: Review tax returns and call up their employer to verify them.
Summary
How do you screen applicants like a pro? You need to not just review the information in their application, but independently verify its accuracy. All of what we mentioned—from verifying references to calculating DTI ratios— goes into determining if someone’s a good candidate or not.
When the goal is to have consistent revenue streams and well-maintained properties, quality tenants is the number one key. Without a thorough screening process, problematic tenants could drive the quality of your properties and your cashflow. So, while this may seem like a lot, we can’t stress enough how important it is to go the extra mile in your tenant screening - especially during these trying economic times.
If you want more information, visit our How to Screen Applicants like a Pro series here:
Verifying Income & Job Stability
If you found this series useful, let us know!
Image Courtesy of Ketut Subiyanto
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