The Good, the Bad, the Ugly: How to Screen Tenants the Right Way
It’s tempting to take the first tenant that applies to your property. I understand. You’re ready to earn rent income ASAP. Please, please, please, don’t make this mistake!
Screening tenants is the most important step in renting your property. A bad tenant can cost a lot of money. Therefore, your screening process can determine the success or failure of your business.
The Cost of a Bad Tenant
What can a bad tenant really cost me?
Assume your tenant stops paying rent, and you need to file for eviction.
For example, in Florida, uncontested evictions cost around $500-$700 if you use an eviction lawyer and $400-$500 without a lawyer.
Most owners wait too long to file for eviction. Instead, they delay serving the notice 45 to 60 days after the rent is past due. This severely lengthens the eviction process and increases the amount of money the bad tenant will cost you.
Assuming the monthly rent is $1400, how much will a best-case scenario cost you?
Let’s crunch some numbers.
Eviction fees $650+
Lost rent, 3 months* $4200+
(after deducting the
Re-renting cost: $550+
Total cost: $6850+
*Three months of lost rent includes the 1 month of rent unpaid by the tenant, 1 month of rent unpaid during the eviction process, and 1 month of time it takes to prepare the property and find a new renter.
Wow! The best-case scenario costs at the minimum $6850. That’s almost 5 months of rent! At $1400 per month, your gross rent for the year is $16,800. After deducting taxes, insurance, and other costs, you’ve lost nearly half of your yearly profit because of one bad tenant.
Half of your yearly profit! And this is the cost of a best-case scenario, filing for eviction immediately when rent goes unpaid. In contrast, if you wait 45 to 60 days longer to serve the 3-day notice—as most homeowners do—your costs are significantly higher.
The moral of this story? Always screen your tenants! It helps you to avoid costly bad tenants and to pick the best tenant for your property.
Never trust your gut feeling.
Always do your research!
What does a great tenant look like?
A great tenant should be able to comfortably afford the rent, have a history of paying on time and have long-term job stability. He or she should also have a history of treating a property well and be law-abiding and low-maintenance.
How you screen your tenants may vary from property to property. Criteria for class A properties are different than class D. Regardless of the type of property, NEVER trust your gut feeling! Always do your research.
Should you ever relax your screening criteria?
No, absolutely not.
Please don’t let a vacancy or a lack of qualified applications make you a desperate landlord. Property owners can be tempted to relax their screening standards when confronted with these uncomfortable situations. Don’t do it!
Remember: a bad renter is worse—and more costly—than no renter!
Lack of qualified tenant applications?
Take a critical look at your rent price and the condition of your property. Your rent is probably too high or your property needs improving or updating. We strongly recommend reducing the rent to
get qualified prospects, NOT lowering your screening criteria.
The Screening Process
The best way to screen effectively is to have a strong process and written criteria of which applications you will approve and which ones are automatically declined. This eliminates mistakes and bad decisions.
I meet many landlords who shy away from asking the tenants to pay for a credit check. That’s either because they don’t have systems in place to screen the tenants or because they feel bad asking the tenants to pay an application fee.
From my experience managing hundreds of rental properties, I know that tenants expect that they will have to fill out an application and pay an application fee. Most property management companies charge between $35 to $80 per applicant. This may seem high but good property managers know that it takes time to screen tenants and time is money.
How Do You Screen a Tenant?
You can start by emailing them an application. Our Rental Application is the result of many trials and errors. If you don’t have any experience it’s a good place to start.
A good rental application should not be too long but it should ask the right questions so you can determine if an applicant is a good fit.
Our application also allows us to:
- Track advertising
- Find potential motivated sellers.
- Determine if the tenant is a future buyer
- Check if we collected all the documents and info we need
If you are a real estate investor, this information will be very useful.
What Do You Do After You Receive the Application?
You Should Review the Following Five Key Items:
- Criminal Background
- Rental History
To review Credit, Background, and Eviction all in one, I recommend either SmartMove by Transunion or Naborly. I have listed below the most popular services and what they have to offer. I have used both SmartMove and Experian Connect with success.
Credit, Criminal Background Check and Eviction
Here is a list of screening services that are free for landlords and provide credit background and eviction reports.
- My Smart Move by TransUnion (an online tenant screening service). The screening can be paid by the landlord or the tenant. Smart Move offers three different levels of screening ranging from $25 to $40. Their most comprehensive screening includes credit score, criminal background check, full credit report, eviction report, and income insights. They will also include a recommendation based on the criteria you set for your property.
- Experian Connect is a service offered by Experian. All you need to order a tenant screening is the applicant’s name and email. Experian includes rental history in their reports. They don’t yet have rental data on all tenants but it’s something to watch for. A criminal background check is not included. Tenant pays only $14.95 once and can share the report with other landlords and property managers.
- Naborly is free for landlords. Naborly offers optional insurance that protects landlords from eviction, late rent, and property damage. The is a new service and the only negatives I was able to find, come from applicants who have been turned down. This service is unusual not only because is completely free but also because their interests are aligned with the interests of the landlord. The landlord will receive an offer to pay for insurance and the insurance premium is based on the tenant screening result.
What Is a Good Credit Score for Tenants?
A credit score is a measurement of risk and what score you should accept depends on the property class and location. For example, a tenant with a score higher than 650 has only 0.3 % chance of rent default while tenant with a score below 549 has a 5.8% chance.
We accept tenants with credit scores above 600 with no additional conditions, 500-600 with additional deposit or a cosigner.
Can You Accept an Applicant with Eviction?
TransUnion has analyzed how predictive evictions and resident scores are on rent defaults. In our own business we don’t accept tenants with evictions because of the statistical probability of another eviction.
What About Criminal Background Check
Criminal background checks can be inaccurate. Sometimes it’s because the report doesn’t include the final outcome of the case filed and sometimes it’s a mistake.
Should you accept someone with a criminal record? This is the new guidance from HUD on this matter:
While having a criminal record is not a protected characteristic under the Fair Housing Act, criminal history-based restrictions on housing opportunities violate the Act if,
without justification, their burden falls more often on renters or other housing market participants of one race or national origin over another (i.e., discriminatory effects liability).
Additionally, intentional discrimination in violation of the Act occurs if a housing provider treats individuals with comparable criminal history differently because of their race, national origin or other protected characteristic.
This guidance further states that you can’t deny an application based only on arrest and no conviction and even if there is a conviction you should deny an application only if there is “a demonstrable risk to resident safety and/or property”.
Income and Employment History
One of the most important indicators that an applicant will be a good fit for the rental property is their income. This is not only important for their ability to pay the rent but also for the level of maintenance they require.
A tenant who is barely able to afford their rent can make a landlord’s life very stressful. They may start complaining about things that have nothing to do with rent in hope that they will be let out of their lease or even just to justify the high rent. I have seen it more than once.
How to Verify Income and Employment?
There are a couple of ways you can do this. You can request:
- Pay stubs – we usually require the three most recent pay stubs.
- W2 Form – their taxes for the past one year.
- Bank statements – the three most recent ones. We ask for this usually from self-employed applicants.
- Call or email the employer an employment verification form.
How Do You Know If a Potential Tenant Can Afford Your Rental Property?
Check their Rent-to-Income Ratio. Rent should be 30% of their total gross income. Or an easier way to calculate this is to multiply the monthly rent amount by 3, the result should be their required monthly gross income.
For example, if the monthly rent is $1500, the applicants’ combined gross income should be $4500.
Unfortunately, this ratio doesn’t work in all markets and in all situations but it’s a good guideline.
Our rental application requires the last two addresses. We find that sometimes we are lucky and the manager or landlord will talk to us but most of the time property managers will only verify rent and length of residency. It’s understandable because we live in a litigious society.
What we look for in rental history is someone who tends to stay in one place. This doesn’t apply to military applicants.
How Do You Check Applications if You Have More than One Applicant?
We try to be fair to all applicants but at the same time, we want to choose the most qualified tenant. If we receive a couple of applications at the same time, we will review first the income, employment, and residency and for the applicants that pass that test, we will request that they pay for a credit check.
Should You Use Application Scoring?
Rental application scoring simplifies your decisions. It may be the best solution if you manage many units and/or have employees. Here is our Application Scoring Worksheet.
We like using it and it works for our properties. It may not work for you. If you decide to use a scoring system, it’s a good idea to use it for everyone, otherwise, you may get in legal trouble for arbitrary discrimination.
Some property managers give this worksheet to all potential tenants and disqualify the ones that will not fit, thus saving time and money.
How to Notify Applicants That They Have Been Approved or Denied
If you don’t already know, you will eventually learn that everything in property management should be done in writing.
Even if you approve an applicant but are requesting a higher than the normal deposit or a cosigner, you should send them an Adverse Action Notice.
According to FTC, these are some of the actions that require sending an Advertise Action Notice:
- Denying the application;
- Requiring a co-signer on the lease;
- Requiring a deposit that would not be required for another applicant;
- Requiring a larger deposit than might be required for another applicant; and
- Raising the rent to a higher amount than for another applicant.
Asking for a Holding Deposit? Should You Do It?
Some landlords ask for a holding deposit with the application in order to reserve the property. Holding deposits are different than security deposits. The laws in many states are unclear on what portion of the holding deposit can be kept if the potential tenant walks away so this can lead to legal issues and misunderstandings.
We don’t ask for holding deposits because the market has been so good and holding deposits is more hassle than it’s worth.
Would we change our approach if it becomes more difficult to lease our properties? Yes, we would.
If you decide to ask for a holding deposit, make sure it’s absolutely clear under what conditions and how much of the deposit you will keep if the applicant does not sign a lease. Here is a sample holding deposit receipt.
Related Rental Forms:
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