I am sure you have heard this saying regarding real estate deals… “some of my best deals, were the ones I didn’t do”?
The same can be said for tenants as well. “Some of your best tenants are the ones you didn’t accept.”
The problem with selecting tenants is that your selection process can’t be arbitrary or emotionally driven. Well, it shouldn’t be unless you want to find yourself at the mercy of a judge/jury.
Listen closely. For every landlord, the process of selecting a tenant is the most critical action you could take.
It is more important then location, purchase price and probably even rent amounts.
Simple. if you choose the right tenant you will most likely get your rents on time every month, your property will be well maintained, and the neighbors will love you. If you choose the wrong tenant, well, your life will be pure hell and you will end up paying the mortgage until you can get rid of your tenant.
So… your objective is to find good qualified tenants… but as the saying goes “you have to kiss a lot of frogs to find the prince”? And, that means having to Say No to many more applicants then you accept. In fact, you find yourself accepting most applicants you are either extremely lucky or your market is a landlords utopia.
The question becomes is this: how do you Say No?
Well, actually the NO part is easy. It’s all of the reasons and justifications that become the hard part. The reason being is that when selecting a tenant the number of housing laws that come into play can be significant. From a housing prospective almost every tenant is in a protected class… and there are activists in every community that will constantly test how landlords go about accepting/declining tenants. And, if you are not doing things correctly… you will have wished you did.
There are several key elements that every landlord must adhere to when screening tenants and selecting/declining them. While the list below is by no means the complete list, it should get you started.
Screening Tenants: 8 Steps for Finding, Checking Backgrounds & Selecting Your Tenants
1. You should have a set of written criteria that every applicant must meet to be accepted. These criteria might include verifiable income 3 times the amount of the rent, or a credit score of 6oo or above, or never been evicted or been in rent court. You get to determine your criteria (within the bounds of local/state/federal laws) and once you have them apply them consistently.
2. You need a formal application process that includes an application that is completed by the prospective tenant. Important information to include: personal information (name, current address, SSN), to name a few) for everyone over 18 years old who will be living in your property. Current and last two landlords. Current and last two employers. Next of kin, vehicle (make, model, license number)., etc.
3. Charge an application fee. Be sure to know what your local laws are regarding application fees. Some location allow them as long as they are reasonable and most will allow you keep these fees if the tenant is turned down. The application and the fee to submit an application is the first hurdle a tenant must get over… if they don’t make that first hurdle they have taken themselves out of the running. Also, our application specifically states that the application must be completed in its entirety and if it isn’t the prospective tenant will not be considered.
4. Get permission via a separate document to pull a credit report… and then do it every time. The importance of a credit report cannot be overstated. The obvious purpose of a credit report is to determine the credit worthiness of prospective tenants. However, in today’s climate with so many new renters coming into the market due to foreclosures, the chances of them having high credit scores are slim. But, the two things a credit report will quickly help you to assess is… do the SSNs and street addresses match and are there utility judgments against the prospective tenant. The SSN and street address mis-match is a great way to catch someone trying to hide something and of course if there are utility judgments you should be concerned whose name will the utilities be in once the tenant moves in.
5. Get permission to contact current and past landlords… and do it. You would be surprised at the number of tenants looking for a new place to live… right now, that haven’t notified their current landlord of their intent to move. Do you think they will treat you any differently once you become their landlord? Don’t count on it!
6. Get permission to contact current employer(s). You will find that both current landlords and employers don’t want to answer open ended questions. It is best to develop a form that can be provided to these parties that ask direct questions that when answered will provide you with the information needed to make informed selection decisions.
7. Visit prospective tenants in their current home. While I know this could be a logistic nightmare… whenever we did this and we selected the tenant based on this visit and of course the other criteria, we always had a very profitable outcome. Just consider… you show up at the prospective tenants current home with one last piece of paper to sign and you walk into a full-blown over-the-top party in progress. It that the kind of tenant you want in your property?
8. When you finally get around to saying NO… always do it in writing. Make sure that you provide the reasons for declining this tenant, whether it was income, your site visit, landlord input, etc. If the reason had anything to do with the information on their credit report you must identify what agencies you used. The key to the tenant selection process and in making the determination to say no… is that you must be consistent. You cannot let your emotions factor into you decisions… and if you develop and consistently use robust criteria you will never have to deal with tenants who become your worst nightmare.
Remember that if you are doing your job correctly you will be declining many more tenants then selecting… so do it right!
Best of luck!
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