Screening In a Bad Economy
Screening In a Bad Economy
As we move toward the end of the year, high unemployment rates continue their impact on rental housing affordability and availability. Landlords are facing increased competition for qualified applicants to fill their vacancies. In some markets, properties are staying vacant much longer than even just a year ago. It is a renters market in many areas of the country where supply of rental housing exceeds the demand, sometimes by significant margins. How much of an impact the current economic conditions have on your business may well be determined by your perspective.
While it may be true that the pool of applicants to fill vacancies is likely to include less qualified applicants and while it is true that more people are unemployed and/or have had other problems that affect their rental qualifications, logic would indicate that an unemployment rate that is 5 percent higher than usual does not translate into 100 percent of applicants being unqualified.
So while it isn’t business as usual it is still business. As we have discussed before, risk management becomes ever more important during changing conditions. Tenant screenings remain a critical component of risk management practices.
Unfortunately, we are seeing evidence of landlords reducing screening efforts based on their thinking that there is now less reason to bother with screening because all applicants will have blemished credit records. Unless this is your first landlord experience, you will have come across bad credit scores before. Current conditions notwithstanding, what was your procedure to accept or reject?
However, we believe landlords should be putting even more effort into adequate screening during bad times using a wide variety of screening tools.
While landlords may choose to lower the minimum qualifying credit score, some of the risks of doing so can be offset by more aggressively utilizing other screening tools. This includes a closer examination must be made of the other detailed information provided on credit reports, more extensive rental history checks with previous landlords, check of eviction records in multiple jurisdictions, careful employment and income verifications, and extensive criminal record checks.
A brief review of some of those screening tools follows.
Credit Reports
A credit report is the most important screening tool and should be utilized even if no other tool is used. It is the one tool that does not require cooperation of previous landlords, cooperation of employers, knowledge of which county in the country may have a record of eviction, or knowledge of which state or county may have a record of conviction. Furthermore, credit reports provide a variety of information that often provides clues regarding which of the other tools might be useful and which state or county should be of interest.
With a full credit report, you can corroborate information shown on the rental application; review the individual’s payment history including credit accounts, account balances, and collection accounts; and view reports compiled from public records on bankruptcies, liens, and judgments. You also see who has recently requested a copy of the applicant’s credit report.
If the report shows a positive pattern of responsible credit management before the date of a significant affecting event (foreclosure, bankruptcy, major medical bills, divorce, etc.) you could infer that the event was the contributing factor resulting in derogatory items in the credit file. While the event cannot be overlooked, the data can be analyzed in the overall context of credit use and payment history. As is often the case, honest discussion of events with the applicant may give more detail that may allow the applicant to be considered for the vacancy.
Past Rental History
It is important to check each applicant’s rental history in addition to his credit history because many types of tenant problems do not make their way into a credit report.
When checking rental history be sure that you are really speaking with the actual past landlord. There are many ways to do this including checking ownership records and obtaining the correct phone number independently of the applicant.
Some current landlords may be unwilling to say anything derogatory about bad tenants because they would like to be rid of them and would be happy to transfer the problems to you. Accordingly, it is always best to also contact the applicant’s landlords prior to the current one, the reason most experienced landlords require the applicant to provide rental history for at least the past three years. For an applicant who has rented the same unit for more than a few years, it can be difficult to get history from more than the current landlord, but a long-term tenancy often is indicative of a good tenant.
At a minimum, you will want to confirm basic information such as dates of residency, the rent amount, the security deposit amount, and whether the landlord would rent again to this tenant. If only one question could be answered, it would be “would you rent to this tenant again?”
Employment & Income Verifications
Employment and income documentation can consist of requiring the applicant to produce the last several paycheck stubs. Note that last year’s W-2 provides no certain information regarding current income, although it might be useful as additional verification if other items are questionable.
Self-employed individuals can be asked to provide copies of 1099s and tax returns (as can employee applicants), but one must keep in mind that it is easy to createW-2s, 1099s, and tax returns that say whatever is desired using a personal computer.
Verification of non-earned income, including interest, dividends, and other investment cash flow and entitlement items, including disability, social security, and private retirement, are all relatively easily verified because the recipients are
provided official statements of the amounts.
Eviction Searches
It is good practice to conduct a search of eviction records as recorded in the court of jurisdiction for the counties where the applicant is known to have resided. You may want to review the rental application, the applicant’s driver’s license or motor vehicle registration, and current/previous address history as shown in the credit report to determine applicable search areas. Most tenant screening vendors offer regional, statewide, and national eviction searches of landlord-tenant filings.
Criminal History Checks
A criminal history check generally includes a search of statewide, multi-state, or regional criminal records databases and sex offender registries. For a more detailed search, most screening vendors can provide a “hand search” of a specific county’s criminal records index and court documents.
Criminal background reports generally include the defendant’s name (and any aliases), the defendant’s date of birth, gender, race, physical description, dates of the offense, and the date of disposition or conviction. To help ensure accurate results, be sure you have the correct spelling of the applicant’s full name, a verifiable date of birth, and a list of known aliases used by the applicant before purchasing a report.
A search of convicted sexual offender records may be included in a comprehensive criminal report or in case of some vendors, ordered as a separate report. Be aware, however, that some states restrict the use of this information to deny housing.
In general, landlords are free to reject someone with a criminal background, as ex-cons are not a protected class under federal fair housing laws. An exception is that past drug use, even when resulting in a conviction, is considered a disability under federal law. Those currently using drugs or those who have been convicted of drug manufacturing or dealing are not protected. Landlords must also consider any protections provided by state or local laws.