Real Estate Investing Podcast

Screening Tenants: Rental Investments, Applicants, Criminal Background Checks
Posted Tuesday, September 28th, 2021 by Richard Roy

Tenant screening has many parts and in this episode, Aaron discusses how to properly vet tenants before allowing them to rent a home. He covers criminal background checks, rental history, the credit report, income verification, and he reveals the tricks to identify inconsistencies in the information provided by a rental applicant.

Aaron: One of the things that we’ve talked about, and actually I had an investor yesterday evening ask me about he said, Aaron, I’ve got one last question for you and I said, oh, great, what’s that question?  He’s said, well, it’s a professional question and it’s kind of a two-parter. He said, how long have you been in business? Like, how long have you been in property management and in real estate? and I said, well more or less 20 years. He said, okay great. He said, so how do you vet tenants? What is your application process and how do you employ it in order to make sure that the tenant you put into my property is going to be the best suited with the least amount of uncertainty? You know, I want a certain tenant that’s going to be there for a long time, and so we discussed that. Would you like to know what I told him?

Richard: Yeah, I’m curious about that because I’ve seen the tenant process as we’ve worked on it together and we’ve published things on the website. It’s a very complex and nuanced process, but yet you’ve managed to create a process that is probably as simplified as it can be. So, I’m curious to hear exactly what you told him, and see how that lines up with what I’ve seen.

Aaron: Sure. Well, he wanted the elevator pitch length of the discussion. So I’ll tell you what I told him and then we can kind of break it down if you want. He said, so how do you make sure that the tenant you put in my property is going to take care of my property, they’re going to pay their rent every month, they’re going to communicate with you properly, and it’s going to be an overall good experience? And I said, well, here’s how our application process works. I said we have a minimum credit score of 625, we go back and check the rental history through a collections agency, which has the capacity to perform a skip trace on all of our applicants. This isn’t just simple plug-in information and get a report back, that we then have to decode. This collection agency, and we pay for this application, goes deep into these people’s background, their credit background, their criminal background, that they look at everything. They also often suggest information to us, right? What are you smiling about

Richard: Well I’m smiling because now I want to know what you’ve seen. You know, what are some of the rejects, so to speak, that have come back and you’ve been like, yeah, I can’t rent to that person. 

Aaron: Well, okay, so the No.1 red flag for us as a sex offender. I’ll just get right to it. Sex offenders, they’re are required, if they are prosecuted and found to be guilty and they serve prison time, once they become a sex offender… and by the way you guys, I’m telling you this as a Realtor. I’m not saying this to you as somebody who is an expert in this field. I’m not a criminal justice expert, okay? But what I do know is that it’s my right as a realtor and it’s your right as an investor, not to rent to sex offenders. So, if you are a registered sex offender, or have a felony due to a sexually related crime, then you are immediately rejected as a tenant for Enterprise Property Management. Just the easiest way that I can put it, we have had registered sex offenders apply. There are some sad stories, you know. There are some that I won’t get into because I don’t want to trigger anybody. But there are situations where people were prosecuted, they feel that the judgment against them was unjust, but we can’t bend that rule. That is an Enterprise Property Management rule. We will not lease to sex offenders, so that’s number one. No.2 is violent crime. If you’ve been convicted of a violent crime and what we see are guns, drugs, and the drug trade. So if you’re a felon and it’s been a violent crime, then you’re off the table. We will not rent to felons that have been convicted of violent crime. The big one that’s very recent, and had been very interesting to the leasing department and me, is identity theft. There is way more identity theft out there right now than I imagined was even the case. We actually had a house this summer for which we had five different applications, by the same group of people using different social security numbers, different copies of drivers’ licenses, and different identities – and it was the same group. We just started laughing. We were like, oh, you want 123 Main Street, right? We know who you are, you know? And we’d go back and we would point it out to them. Melinda, our leasing manager, would get on the phone and say, I’m sorry, this information is not lining up and the professional advice that we are receiving suggests that the person who’s applying for this property 1) isn’t you. 2) is deceased or does not live and work in the Memphis Tennessee area. 3) your income information does not line up or your resident information does not line up with the information we’ve received from that organization. So no, this application is declined based on lack of valid information and we believe that this is identity theft, and then that person would not call us back again. So we had to process those five applications this summer and decline each one. People will try to get their friends or family to give rental referrals all the time for them. So they’ll try to fake where they live and how much they pay in rent and stuff like that. One of the ways that we get around this is both by the collection agency and here internally, we go to the Shelby County assessors office and we look up the actual owner of that property and once we find out legally who hunts the property, where this person says that they rent, we ask to speak to that actual person. If it’s an apartment complex, we don’t have to worry about it, right? It’s a very official engagement, but if it’s in an individual home, which it often is, then we find ourselves calling all over the world to try to get an actual rental referral. This is where it gets really easy for us. If we can’t get this person on the phone, we decline the application. It’s as easy as that.

Richard: Just black and white.

Aaron: There it is. Yeah, adios! We can’t confirm that you actually rent this property. Now we’ve had some very upset people, you could go on our, you know, pick a review site, and you’ll find a negative review where somebody was declined for an application. We have a job to do! If we can’t confirm the information and that application is accurate, they don’t get in. Okay, so back to the list and I’m sure there’s like a bunch of other stories that I can tell about funny application rejections and by the way, with fair housing and everything involved, it’s a very tricky interaction. So we have to make sure that we are correct in our findings, the state of Tennessee, and fair housing, which is a national law that requires that we keep our rejected applications for several years. So we have boxes and boxes and file cabinets full of rejected applications. We’ve never had a fair housing claim against us – knock on wood! We don’t want one, but we do feel like we’d be able to defend our position, when there’s a fair housing claim, very easily.

Rental history is really important. We want to see that the person is going to treat us, or we believe that they’re going to treat us, the same way that they’re treating their current landlord. So if they have been at their current apartment for 2 years and they’ve paid late half the time, then that’s a reject. If they’ve paid late 3 times over the course of 24 months, then we call the tenant and we say, hey, how’d that go, like, what happened? Oh yeah, I lost a job or my boyfriend moved out or, you know, something happened. We get the story and we’re able to see that that’s most likely true. You know life happens. People, listen, life happens! So we try to be flexible where we can, but if someone pays late 50% of the time or, here’s the worst offense, if they bounce checks on their landlord. When your rent check bounces that’s a terrible sign, and so we have every reason to assume that’s how we’re going to be treated and so we reject that application. On the credit report if there’s a history of evictions obviously that’s a rejection on the application. Income. So this one is really tricky. We were just talking about employment. Income is important to us. Applicants need to make three times the amount of rent per month. Okay? And that’s just a gross amount. We do like to see lower debt on the credit report. So, if somebody has got, let’s say that they make $40,000 a year, okay, and they’re trying to rent an apartment that’s $795 per month. Well, they’ll probably qualify with proper documentation. That’s great. So if they have very little or very few loans on their credit, because we are able to see everything that they are paying debt service on, if there’s very little debt service that they’re paying out on a monthly basis, then that $40,000 would afford them a house that rents between $700 and $800 per month. The problem is when we get into that credit and we see that they’re paying a very high auto note, a car loan, owe several hundreds of dollars in credit card debt, which is also very common. Then, if they have a very high debt load, then we will let them know that it doesn’t appear that they’re able to afford that property. And we’re able to make that decision based on our professional opinion and we will convey that the content of their credit would suggest that they’re not able to afford this property. 

The other thing is collections are pretty common here in Memphis. What we’re looking for when we look at collections, obviously, rental collections would amount to a rejection. So basically, if they owed somebody for rent that they didn’t pay, if they owed Memphis Light, Gas, and Water, which is our local utility, if they owe them in collections, well, we know that that means that they’re not going to be able to get utilities in their name at the next house until they pay off that collection amount. So that could lead to a rejection. I could talk all day long about what we see when we look at people’s credit reports, but it’s those kinds of things on the credit that keep them from moving forward.

Richard: So that introduces a human element then to interpreting what you’re seeing in the credit report and applying that to the other debt to income ratio.

Aaron: Yeah. We look at a lot of stuff. So what I’m about to say, I don’t want the listener to think is absolute policy, okay? So please nobody call me on the phone and say, well, I heard on the podcast that if you get a divorce and your credit stinks, that you will be given a greater amount of consideration – that’s not necessarily true. However, one of the things that we do look at when there is a divorce, is we ask for a copy of the divorce decree. You were talking about being human, you know, we feel like that’s a very generous thing that we can do when someone calls on the phone and they say, if it’s a let’s just say it’s the former spouse, right? And regardless male-female, male-male, that doesn’t matter. They say this is my situation, I just got taken to the cleaners by my spouse, right? They’ll tell us on the front end when you look at my credit, it’s gonna be very ugly. You’re gonna see a house, right?  We share a mortgage, you’re going to see an automobile. I cosigned an automobile for that person. So they’ll tell us what we can expect to see and then our response is, you know what, we want to work with you, can you get us a copy of the divorce decree? So a divorce decree and, although we’re not attorneys, it basically spells out for everybody, including creditors, what responsibility is whose in that arrangement, that credit arrangement, and we can also see on our credit report when there is a joint account. Alright, so this is an easy way to get rejected if you say, well, we own the house together and I look on that credit line and it does not say joint account. It just says that person’s name. Then I’ll say, well, no, there’s no shared responsibility on this mortgage, it’s only in your name. So we look at the divorce decree in the divorce decree will often line up with that. Homeowners have a choice. If they are considering an application where someone is credit challenged, in a situation that’s like a life situation, like divorce or my spouse died, right? These people still need housing and they may even have really good jobs and they may also be trying to work through those credit situations. Like, we’re selling the house, the house is up for sale, I’m gonna make enough money back to pay, to pay off the months of mortgage payment I wasn’t able to make. Great, okay, and can I speak to your realtor? You know, that’s our option. So we reached out to their realtor. Hey, I understand that you’re selling this home. Is there a way that I could get, and there’s a contract on it, can I see a copy of that contract? And so we are a real estate brokerage as well. Those realtors will often send us the contract, okay? And it’s scheduled to close when? 10 days. Great. And so we will gather information like this, call the homeowner and say hey, we think this person deserves a chance here. Do you want to consider their situation? A lot of our homeowners will? And then in those situations where people are credit challenged, that applicant will often agree to pay more in a deposit. So they may double their deposit. They may, in fact, at this point everything is negotiable, right? If they don’t meet our standards in our qualifications everything’s negotiable and, of course, NOT everything. But a lot of things are negotiable.

Richard: I think I’ve seen in the past when I’ve read things online that in some states there’s a legal limit to how much you can ask as a deposit. Is that something that is true in Tennessee?

Aaron: I don’t think that it is necessarily true in Tennessee, that I’m aware of, but what I will tell you is that we limit the deposit, the increased deposit, to a double deposit. I’m very common sense, in case you haven’t figured it out yet. Very, very common sense about everything. So, to my homeowner, who’s the one that’s gonna make a final decision on a credit challenged application, right? I’m gonna say, look, this either works or it doesn’t work. If it works and you want to make it work, and we believe that this person is doing their best and that they’re gonna be a good tenant for you, then, let’s double the deposit, and that deposit, for the listener, the state law requires that it go into a non-interest-bearing account, which is where we have hundreds of thousands of dollars into deposits, right? And they just sit there, per the law requirement, until that tenant has moved out, and then we do a resolution of the deposit. So, we have a deposit resolution process. How the tenant is able to get their deposit back. Our homeowners do not hold on to the security deposits. That’s a really bad habit for property managers and for homeowners to be sent the deposit. You don’t want to do that as a property manager. You want to keep those deposits in that non-interest-bearing account. Anybody from the government can come in at any time and say, I would like to see a list of your deposits, right? And we are obligated to show them. Here, the deposits, this is the account, blah blah. There you go. So there’s no limitation on the amount of deposit that I’m aware of legally that you can charge here in Tennessee. I believe the things either work or don’t so you either take them with an elevated deposit if their credit-challenged, or you don’t, and you can reject them and move on to the next application. Here is what is illegal in Tennessee. You may not and, we DO NOT, raise the rent on someone because they are not qualified. So that is the law. Let’s say my house rents for $1,000, for example, and somebody comes along and submits their application, they’re completely not qualified. I can’t say, well you’re not qualified so I’m gonna raise the rent to $1,500 dollars, and that’s gonna be the rent that you’re gonna pay because you’re not qualified. That’s not allowed. And the last thing would be pets, right? Like pets are a weird factor when it comes to rental property, and here’s why. If you receive an application that has no pets on the application, they don’t list any pets, they don’t declare any pets. There’s a chance over the course of the year to 3 years that that tenant is going to be in that property that they’re going to acquire a pet. And I would say it’s pretty high, it’s about 50:50. So that person, hopefully, if the application is strong is going to be responsible enough, to convey that they have a pet and to pay the pet deposit, and to communicate with the management company about that pet. The other type of application that I love is an application that does declare pets and says very openly, I have these two dogs, I’m going to pay these deposits upfront, here are the vaccination records, and I’m quite happy to do this so that I can have a pet. Well, now we know that there’s a pet there at the property, so that’s good. The problem that we have with applications is when an applicant fills out the application, does not declare a pet and, within 3 months of moving in, we discover a pet at the property. Now we have a problem. The person can be asked to leave. They can be evicted if they have a pet and they don’t declare it or don’t pay a pet fee.

Richard: So about how long does the screening process take and then at the end of it as an owner, what should I expect from you? 

Aaron: That’s a great question. So, the screening process for the applicant takes about, if the application is very clean, so, the credit is good, the income is good, the rental history is good. We’re able to turn an app in about 72 hours. If the application has some challenges, or if the applicant has challenges, one of the most common challenges we have with applicants is that they are not free during the workday to communicate with us. So we’ll call them on the phone and we’ll have questions and they won’t answer them. We try to email them, maybe they have trouble emailing those answers back. So the number one way to kill an application people is to not communicate. So let’s say that the application has challenges, we will communicate both by phone and by email to the applicant basically say hey, we need this information in order to move forward. A common scenario, and when I say common I would say probably happens 3 to 4 times a month, is that we will receive an application, it will be incomplete and it will come with a deposit which means that the applicant intends to reserve their place in line and hold that home off of the market. So we honor that request and that deposit. We were run the application, but if that person does not give us the information that we need, then we can’t move forward and we end up having to call the tenant, text, and email the applicant and let them know if they don’t take action that they’re going to lose their place in line. We’ve heard all manner of reasons as to why they didn’t communicate with us. In the end, applicants have to be available to communicate and they have to communicate with us in order to move forward. A more credit challenge application, I’d say, would take about a week. We ask, as well, for our homeowners to be available to communicate with us, and a lot of homeowners don’t want to accept any application except for a perfect one, and so they just reject, reject, reject, until they get that good one. 1) Those homeowners have the right to do that. 2) They usually have a great experience with that tenant. So, you’ve got to be critical of the applications when they come in. If you’re not, then you’re just asking for 12 months of headache or 3 months of a nightmare, and we try to prevent that experience for our homeowners.

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