Tenant Risk Assessment
Tenant Risk Assessment
Tenant screening is risk assessment, pure and simple. In landlording, high risk does not equate to high reward. Quite the opposite is true. With high risk tenants you may find yourself spending more time, more energy, and more money to either salvage the tenancy or end it at an earlier than expected date. Why waste your resources on a marginal tenant or install a tenant with a history of risky behavior?
Each day a rental unit stays vacant eats into your profits, but a single bad tenant can result in substantial losses. The goal therefore is to minimize the costs of installing a tenant and to eliminate installing a potentially bad tenant.
Whether you conduct the tenant screenings in-house or utilize a tenant screening service, risk assessment is an important tool for profitability and asset protection. The size of the landlord’s business does not dictate what types of screening or the number of screenings that should be conducted to thoroughly evaluate an applicant. An independent landlord with one rental unit is usually more susceptible to business loss caused by a bad tenant than a multi-unit housing provider who can spread the expense over his entire operation. With today’s technologies, the playing field is leveled in information collection and delivery. Single-unit and multi-housing providers alike have access to powerful screening models that are
easier than ever to work with and understand, take less time from a business schedule, yet provide more relevant data and a more comprehensive approach to risk assessment than ever before.
When the selection offer is made and the lease signed you have now acquired a business partner for the term of the lease. It would be unwise to put less effort into the screening and selection of your tenant than you would for a financial partner. The tenant will be in control of a portion of your assets (rental property) and promises to pay you the contracted rental amount for a minimum period of time. Risk assessment should be at the top of your list – well before you turn over the keys. You must decide for your business model the amount of risk you can afford and select accordingly.
Some landlords may be able to afford more risk than they are willing to accept. Setting high standards can in theory help minimize risk. However standards that are too high can reduce the applicant pool and extend vacancy periods. Standards should be objective, measurable, and relevant to the applicant’s performance as a tenant. Your standards must also comply with federal, state, and local fair housing laws. Federal fair housing law prohibits discrimination in rental housing based on protected classes of race, color, national origin, religion, sex, familial status, and handicap. State and local fair housing laws may be more stringent than the federal law. If any standard you set, despite being neutral and
non-discriminatory in its intentions, has a disproportionately adverse effect on any member of a protected class you have violated fair housing laws through a practice known as “disparate impact.”
You can select the tenant you want as long as you’ve based your decision on sound business criteria, each and every applicant has been screened in the same manner under the same criteria, such criteria applied consistently, without discrimination and in full compliance with all applicable federal, state, and local laws.
What is it that you look for in a tenant? Most commonly, behaviors of a good tenant are the ability and willingness to (1) pay market rent, (2) take good care of the rental property, and (3) be a good neighbor. These three demonstrated behaviors are the base line standard most landlords consider in applicant evaluation.
In reality there is no perfect tenant, no foolproof screening process, and no perfect landlord. However past behavior patterns are recognized as an indication of future behavior patterns. By analyzing the applicant’s reported historical data for credit management, rental housing, and public records you can begin to see a pattern of behavior that may qualify the applicant for acceptance or denial as your tenant.
Once you have identified the behavioral characteristics that you want in a tenant, determine how you can best measure for these characteristics. As an example, you might require that the tenant have an income that is three times the monthly rent and utilities. An objective measurement would be the applicant’s gross monthly income as verified with the current employer or verification of other sources of income sufficient to meet your standard.
You also want a tenant with a stable rental history and satisfactory payment history. Your objective measurement would be to contact previous landlords, conduct a credit check, and search eviction history.
Historically, landlords relied upon a numerical scoring process to evaluate candidates, thinking perhaps that a fixed score was a more objective measurement, but more likely thinking it would help create a possible future defense if the applicant was denied and later challenged the decision. As an example, your standard is only those applicants with a credit score of 720 or higher will be considered for further evaluation. By setting this criterion you lock yourself out of potential candidates who just miss the cut-off score but qualify in all other standards. You may put yourself out of business if your standards are impossibly narrow and restrictive. A reasonable business policy for your market, your type of properties, and your tolerance for risk may be to exercise common sense and consider alternatives or modifications to your terms. Perhaps you would be willing to accept with conditions, such as a co-signer. You can make changes in your business model to adjust to changing market conditions, but always document the need for such changes and make sure the business criteria upon which the change is based is sound, legal, and defensible regarding a possible discrimination claim.
Design your business model so that all phases of the rental process have a legal, stated purpose that flows together to produce the most efficient and effective collection of data. Stand alone forms or practices inserted into the process without first analyzing how they contribute to the operation of your business may cause confusion or contribute to misunderstandings, actions you want to avoid.
Your policies and procedures, including the criteria you use for tenant screening and selection should be documented in writing. Documentation is the key to defending against charges of discrimination. Any communication with a prospect, applicant, or tenant should be documented and retained for the required amount of time required by statute. Not only does documentation help refute false claims; it helps to “remind” both parties as the tenancy proceeds of what was said and done. Information may be misunderstood, memories may fail, or there might be outright distortion of what was said. Without written documentation of policies, practices, forms, interviews, or other public contact, you create potential liability. It will be your word against a claimant’s allegation. You cannot bank on coming out the winner.
Keep current with landlord-tenant statues. As an example, written notices of tenant screening and selection may now be required by state statute. The Tenant Protection Act recently passed by the Washington state legislature requires landlords prior to obtaining any information about a prospective tenant to first notify the applicant in writing (or by posting notice) what types of information will be accessed to conduct the tenant screening and what criteria may result in denial of the application. This disclosure must be provided regardless whether the landlord performs the screenings or uses a tenant screening agency for screening reports.
Your rental forms must be sufficiently detailed to allow you to collect the necessary information needed for applicant evaluation. Make available a copy of your rent rules and lease agreement at open houses or initial public contacts to alert prospects and applicants of your expectations and, accordingly, tenant responsibilities. Also provide a copy of the application and consent form used for tenant screenings, making it clear what information you will collect and the types of reports that will be run. This should be done whether or not required by state statute.
Tenant screening and selection is a process worth the effort to minimize the risk. With the major decision to employ tenant screening already made, you are able to concentrate on the task at hand – filling your vacancy, not gambling with the rent money.