Tenant screening is one of the most critical components of successful property management. By doing your due diligence and looking into the background of a prospective renter before turning over the keys, you can lower the risk of costly problems down the road. Challenges come into play, however, when it comes to remaining compliant with housing laws. If you’re new to the industry or could just use a refresher course, here’s what you need to know to do tenant screening the right way.
What is tenant screening?
Proper screening of a prospective tenant involves taking a closer look at their history to see if there are any red flags that should concern you. For instance, thorough screening may reveal a background that involves criminal activity. Or, you might discover that a particular prospect has a history of paying late or defaulting on their financial responsibilities. When you uncover these things early, you can essentially weed out the prospects that present a higher risk to your property management company.
The screening process can be informal, such as a basic checklist that you ask potential tenants to complete as part of their application. Or, it might be more formal, such as a professional credit or background check. In either case, it’s important to have a well thought out policy that you can use consistently with every applicant.
5 Key Areas of Focus for Effective Tenant Screening
A well planned out, data-driven system enables property management companies to identify and approve quality applicants faster, reduce the risk of bad debt, keep existing tenants safer and protect properties. Here are five key areas where you should focus your efforts.
Pulling a prospective tenant’s credit report can help identify applicants that have low credit scores due to a poor payment history or a debt-to-income ratio that’s too high. This information can help property managers determine whether or not a potential renter poses too great a risk. Weeding these individuals out early can prevent the possibility of late or missed rent payments in the future, which will help keep your company’s cash flow positive.
Criminal Record/Background Check
Background checks give property management professionals the opportunity to gather information about certain behaviors that might not be favorable. For instance, a person with a history of domestic incidents or destruction of property is probably not someone you want to sign to a long-term lease at one of your properties. Keep in mind, however, that some jurisdictions have passed legislation preventing property managers from denying tenancy based on criminal history alone. Be sure to check your local laws and regulations or consult with a legal professional before proceeding with this step.
You obviously want your tenants to be gainfully employed and financially capable of paying the rent. That’s why verifying employment is such an important part of the tenant screening process. Bear in mind, though, that employment patterns are different today than in years past. These days, people rarely stick with the same employer for long stretches of time. As such, tenure may not necessarily be a deciding factor. Instead, focus on steady employment and patterns of professional growth. You may even wish to implement a policy that involves ongoing employment verification at certain intervals, such as every six months or annually.
Another critical area to examine when screening prospective tenants is whether they have a history of evictions. This is obviously a huge red flag for property management professionals to look for, as it can be indicative of a pattern that may continue down the road. Don’t just assume your applicants are being truthful when they check off “no” next to the question about whether they’ve ever been evicted. Comprehensive eviction summaries never lie. Again – just be sure to check the local laws and regulations as they relate to the access and use of eviction records.
Just as a hiring manager would check the references provided by potential new employees, property managers should follow up with previous landlords to verify the accuracy of information on the application and identify any potential red flags. It’s always a good idea to ask for the last two or three landlords and check with them, rather than the current one, as these individuals are more likely to provide honest assessments. (If the tenant is a nightmare, the current landlord might hold back information just to be rid of them.)
The old adage “Trust, but verify” is quite applicable in the tenant screening process. By taking the extra steps to follow up and verify the information provided by potential renters, you’ll be better able to short list the candidates that are likely to be good, long-term tenants. This will mitigate risk and keep your property management company profitable.