The Risks and Rewards of Screening Tenants in the Detroit Rental Market

by | BiggerPockets.com

Our company operates out of the Metro Detroit area, which, as of this writing, contains the second-least-expensive housing market in the U.S. That means we’ve got a solid perspective on low-cost rental markets for which you won’t find much advice online. Over the course of this month, we’re going to talk a bit about how operating in a high-risk, high-reward environment affects the property management process. Today, we’re talking about how the Detroit rental market affects the tenant screening process.

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Screen Time

The tenant screening process, as we perform it, consists of three basic steps. (These come after we’ve obtained the application fee and the application itself.)

  1. Collecting the necessary information from the tenant
  2. Running the applicant through our tenant-screening system to obtain an actual credit report (not just a summary score), nationwide eviction info, conviction history, and sex-offense history
  3. Calling the applicant’s current and previous landlords to inquire about their payment history and about how they took care of the property

If the applicant doesn’t provide everything we need up front, we call them to inquire and send (email) confirmation. This way we have a record of the interaction. If the tenant doesn’t reply within a few days, we call them again. If more than 14 days pass without any response to our emails or phone calls, we assume they’ve moved on and stop trying to reach them (though we don’t actually shut down their application; sometimes we do hear back from people that we thought were long gone!).

Related: 8 Essential Tips for Screening Tenants

Getting All the Information is Vital

One of the elements that makes Detroit a high-risk environment for property investors is the sheer number of people who can’t afford rent. Oftentimes these people have a vast amount of time on their hands, which they use to set themselves up to look as if they’ll be good tenants. The lengths some people will go to are astounding—but few people can fake 100 percent of the documentation they need to establish their employment history, rental history, credit report, and income verification. Even those people can usually be caught by thoroughly cross-referencing their detailed credit report with the other paperwork they turn in. We don’t cut any slack when it comes to screening documentation—you provide it all, or we don’t provide you with a place to stay—period.

Independent Research

If we have even the slightest reason to think it may be necessary, we go the extra mile to research references—especially from prior landlords. It’s a weekly phenomenon that someone to tries to pass off a friend or family member as a prior landlord, so we rarely, if ever, just trust that the people we’re talking to are actually who the applicant says they are. Our application department pulls public records to confirm who the owner of the building is before calling. The application department is also trained to ask open-ended questions to test the “landlord” and make sure they can confirm the information supplied by the tenant.

Balancing Considerations

A lot of nationwide tenants rent because they can’t qualify for a mortgage to buy a home. When you’re playing landlord in a market like Detroit’s, many applicants can’t even qualify for an unsecured credit card. Low credit scores and multiple collections are a given. So, you have to figure out a vastly different protocol for your approval criteria.

For example, in our experience, a consistent, stable job history is far more important than worrying about cell phone collection accounts. In contrast, someone who wants to pay several months of rent upfront if we don’t pull their credit sets off alarms. The more we can build a profile that says “dependable,” the better—even if it doesn’t say “well-off.”

Problems as Bagels

But it’s not over yet. Because if it were, we would approve a stupidly small percentage of our applicants. This is Detroit—evictions, bankruptcies, criminal histories, and other issues aren’t exactly the norm, but they’re common enough that we have to offer our applicants an opportunity to tell their side of the story. So, we send out requests for LoX—that is to say, we ask for a letter of explanation, which we use to judge whether or not a particular red flag can be greened.

Some Things Can’t be LoXed (but May Be Worked Around)

Some things that can’t be explained away can still be made up for. If you’re a NINJA—that is, a No Income, No Job Applicant who claims they work but can’t provide pay stubs—we are going to deny you, unless you work with us to document something that shows you’re not doing something illegal to earn a living. If you have no rental history at all, same situation.

Related: The 4 Pillars of Tenant Screening

Some Things Can’t Be LoXed (and are Always No-Gos)

While we try to be as open minded as possible when it comes to allowing our applicants to explain bad-looking circumstances, there are some things that simply cannot be explained away. For example, if you’ve gotten jailed for cooking meth in your kitchen, sorry, we’re not interested. Also, if you show a pattern of several, relatively recent evictions—please look elsewhere.

When you’re screening tenants in a typical suburban neighborhood or middle-class area, you can adhere to the typical advice about which tenants to screen out. But when you’re screening tenants in a recovering economy, you have to modify your expectations. After all, there are still thousands of abandoned homes in Detroit—so the opportunity to forego rent entirely and squat in a house no one is paying any attention to is a silent competitor that we always have to keep in mind.

But what happens if an applicant slips through your screening regardless—or just turns into a problem six months down the line? Next time, we’ll talk about the realities of managing tenants in the pressure cooker of Detroit’s housing market.

Do you have experience screening tenants in blighted markets? Let me know what strategies you use below!

About Author

Drew Sygit

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

8 Comments

  1. John Mclain

    Good article. Although I don’t do low income rentals I am curious about one thing. What do you do about first, last and security deposits? At that income level that might be difficult for some tenants. Do you work with them on these issues also?

    • Drew Sygit

      Thanks, John!

      We don’t take first/last; rather, we require tenants to pay the 1st month’s rent before they move in and the full security deposit unless they contact us and negotiate a special deal (which of course must pass owner approval first). It’s our experience that if an applicant can’t afford the SD and first month’s rent up front, there’s almost no way they’ll pay consistently later.

  2. Estelle Angelinas

    Low income might mean seniors on measly pensions, or immigrants who have low wages and probably are there illegally as well. That might be tricky. At times you feel like you should give them a chance , but there have been times when landlords here had tenants that left without paying rent or utilities… and if that wasn’t enough they have destroyed property.

    • Drew Sygit

      I suppose you’re right, Scott, we did kind of skimp on the ‘rewards’ in this particular post. If you read the others in the series, you’ll get the gist: the rewards in the Detroit property investment market come in the form of excellent RoI with low buy-in costs. 🙂

  3. Justin Goode

    Have you found any trade-offs between the vacancy rate and your tenant screening process? I understand it is in your interest to obtain the best tenants to drive down vacancy rates long term, but curious if that lends itself to higher vacancy during initial screening (perhaps as compared to a market with fewer red flag applicants).

  4. Very good realistic assessment. I own some of my rentals in Detroit Neibhorhoods for years and this is good to see someone providing pragmatic approach to property Mgt. This is a good check process to use as guideline I am sure for any lower income areas.

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