How do Property Management Companies Screen Tenants?
Here is another post to help those considering professional property management.
No landlord wants a bad tenant, but not all screening processes are equal. Applicants often hide things that would disqualify them, so it’s crucial to understand how thoroughly a company screens tenants. The process can vary, and one eviction shows just how important it is. Get a sense of the protection their screening process offers by asking these questions:
Will they "hold" a property for a tenant, and take it off the market before a lease is signed? If so, do they charge a fee?
There should absolutely be a fee so that you are protected in the event that things fall through.
What systems do they have in place to protect against rental scams? Have they ever been duped by one?
Scams are becoming more widespread and more advanced. It’s not just foreign scammers, but local scammers who will copy your ad, break into your home, and show the unit so they can collect a "security deposit" and run.
What methods do they use to screen tenants?
The more thorough the screening, the better. Former landlords should be contacted, income and employment verified, credit reports run, application details checked, personal references reached out to, and public records (like bankruptcy or eviction) searched. Each manager will have their own methods, so if they use a third-party service, ask who they use and why.
Which tenant qualifications are most important to them? Will they consider a tenant who meets their qualification is some areas but not in others?
Ideally, you want them bringing in people who are serious about their job or schooling. Remember that the less someone has to lose in life (money, family, career, reputation, personal pride), the less you can expect from them as a tenant. The eviction rate and tenant turnover rate on the properties they manage is a good indicator of how well they screen tenants.
Do they provide you with tenant information so you can approve or deny each tenant?
While it may seem like a good idea, it’s not. Tenant screening is a key responsibility of property management companies, and they should be experts in it. If you don’t trust them to handle this critical task, don’t hire them. Owner involvement increases the risk of discrimination, intentional or not, leading to potential fair housing violations and costly lawsuits. This creates significant liability for both you and the management company.
Other Potential and Miscellaneous questions to ask:
- What do they charge tenants for the application fee?
- Do they require each adult that will be renting to complete their own application?
Hope this helps. And as usual, other PM's - let me know what I missed.
Most Popular Reply
- Property Manager
- Royal Oak, MI
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All good stuff, but a little "light" on the REAL problems.
MANY PMCs are unfortunately, more focused on speed than accuracy😖
They use AI that only references a background check and the income, employment & residency history the applicant enters - they don't really do Verifications of Rent (VOR)!
OWNERS SHOULD ASK A LOT OF QUESTIONS ABOUT SCREENINGS AND UNDERSTAND THE STEP-BY-STEP PROCESS!
THEY SHOULD NOT ASSUME PMCs ALL SCREEN THE SAME WAY!
Regarding their processes:
1) They should NOT hold a property off the market without a nonrefundable Holding Fee with conditions.
- Our Holding Fee is equal to one month of rent and requires approved prospect to move in within 2 weeks, or their Holding Fee is forfeited.
- A lease is NOT signed until a few days before the agreed upon MoveIn Date. This maintains flexibility if applicant "plays games".
2) Scams are common because it's easy to dupe AI if you know the "system"!
- Fake paystubs are rampant:(
Here are our thoughts:
1) Credit Score vs Credit Depth
The mortgage industry learned the hard way, via the Great Recession, the fallacy of ONLY relying on credit scores😓
- The score is NOT accurate if there are not enough active tradelines!
- So, we look at how many ACTIVE tradelines are on a credit report
- We're looking for how many at least 12 months & 24 months of history
- We ignore student loans and Chime, Connect, etc.
2) Residency History Verification
You haven't mentioned if this applicant has a prior rental history or if they are living with relatives.
- The background check we use gives us their last 7 years of reported addresses
- Allows us to identify addresses/landlords they may be trying to hide!
3) Rental Payment History
Applicants with lower scores NEED more focus on verifying this😮
- It's important to avoid fraudulent "landlords" via verifying who they are.
- We check public records for legal owner of their previous rentals
- In Michigan, we can even do a Business Entity to lookup on LLCs and often identify the property owner.
- We verify their phone numbers via Google or Whitepages
- We prefer rent ledgers, when possible, to ID late payment patterns
- We also accept 12 months of bank statements showing rent payments
4) Income Validation
It's way too easy to fraud paystubs these days😡. So, we also ask for a bank statement we can verify payroll deposits - since over 80% of employers now direct deposit.
- On the paystub you submitted, you can see the direct deposit info, so get a copy of the corresponding bank statement.
- There are some screening companies out there that get applicant approval to directly access their banking info via Plaid.
5) STABLE Income Calculation
Tenants won't be able to make consistent rent payments, unless they have consistent income, which requires consistent employment🤑
- We require a 2-year work history
- We somewhat validate this by also requiring last year's W-2(s)
- We calculate income 4 ways to verify STABILITY:
--- YTD monthly average (use YTD gross income and Pay THRU Date)
--- Hourly rate monthly average
--- Last year's monthly average (from W-2(s))
--- Monthly average of YTD and last year
- We then compare and investigate if any vary by more than 10% (layoffs, illness, fraud, etc.)
VERY FOOLISH TO 100% RECOGNIZE OVERTIME NOT AVERAGED OVER AT LEAST 12 MONTHS!!!
- Seasonal and economy variances are very common
You might want to read our series about “How to Screen Applicants like a Pro”:
- Drew Sygit
- [email protected]
- 248-209-6824
