Best Practices for Landlords doing Tenant Screening.
Best Practices for Landlords doing Tenant Screening.
It’s a risky business. Landlords must take appropriate measures to help reduce their exposure to known risks. Non-payment of rent, nuisance disturbances, property damage, or direct threats to the safety and welfare of others are examples of high risk tenant behaviors that are costly, time consuming, and bad for business. Tenant screening is an important tool for risk assessment of the applicant before he becomes bad business.
Best practices for independent rental owners follow the best practices of multi-unit rental complexes. The most important measure to reduce risk exposure is tenant screening. Failure to screen creates potential future liabilities.
Even if you think you can afford to take some risks, taking on unnecessary risk is foolish. Best tenant screening practices help reduce unnecessary risks.
Time is of the essence
Time is of the essence to adequately analyze and evaluate applicant information. While a vacancy can be an urgent matter, being in a hurry to install any “body” is false savings and questionable business practice. Applicants may contribute to the sense of urgency with their personal need to move quickly. Landlords should not rush to judgment, but lengthening an application process unnecessarily does not contribute to a “better” tenant. While most applicants are willing to wait for a reasonable amount of time, there is a limit to patience and common sense. Taking a controlled approach to focus on each step of the screening and selection process provides a better opportunity to objectively analyze and
evaluate each rental applicant.
Systematic Approach
An organized, formal, written business policy provides a systematic process of screening and selecting rental applicants. It is the framework for your business operations – the way you do business – providing you and the applicant definition and description of what to expect from vacancy notice to lease-term end.
Ready to do Business
Be ready to do business when you advertise your vacancy. Your rental policies and practices should already be in place, in writing, and available to interested parties. You should have pre-determined what types of screenings are adequate for your business and your risk tolerance and set up any third party screening service accounts as needed. Forms and agreements, reviewed for adequacy and legal compliance, should be readily available. It is important that you yourself or your employee have scheduled time accordingly to conduct showings, screenings, and make your selection.
Landlord-Tenant Statutes
Landlord-tenant statutes cover rights and responsibilities of both landlord and tenant. Statutes restrict what you can and cannot legally do for almost all aspects of the rental relationship. Keeping current with landlord-tenant law is a landlord duty. It is important to note that local jurisdictions may have additional regulations governing landlord duties and responsibilities such as licensing, inspections, notifications, disclosures, rent revenue reporting, and/or taxation.
Fair Housing Laws
The federal fair housing law prohibits discrimination based on the protected classes of race, color, national origin, religion, sex, disability, or familial status in most public, assisted, and private housing, with a few exceptions.
Housing that may be otherwise exempt from federal fair housing laws is still subject to prohibition against discriminatory advertising. The Fair Housing Amendment Act prohibits making or publishing statements that indicate any preferences, limitation, or discrimination directed toward a member of a protected class.
Some states and local jurisdictions may provide greater protection from fair housing discrimination for additional categories of protected classes. Fair housing compliance must be in accordance with the most stringent requirements.
Qualification Criteria
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 is applied consistently without
discrimination and in full compliance with all applicable federal, state, and local laws.
Setting high standards can in theory help minimize risk. However standards that are too high can reduce the size of the applicant pool and extend vacancy periods. Standards should be objective, measurable, and relevant
to the applicant’s performance as a tenant.
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.”
Your rental criteria should point to the important items for your business – e.g. the ability to meet rent, acceptable credit history, satisfactory previous landlord references, no history of evictions, no relevant criminal convictions, satisfactory employment history, and no bankruptcies, liens, or judgments. Your criteria establish the threshold level for qualification to the next level of screening.
To help reduce risk exposure, make your business decisions rationally, objectively, before the need arises. Be sure to document your qualification criteria in writing. Without a written record you may have a difficult time defending yourself against claims of misrepresentation or discrimination.
Consistency in applying your standards is a must. If you deviate from your standards, you open the door to possible liability. Fair, equitable, consistent, legal, and non-discriminatory are the watch words for your qualification standards.
However there may be a time when your standards must be adjusted to changing market conditions or business model. You can change your standards but always document the need for such changes with the date the modification became effective. Be sure the business criteria upon which the change is based is sound, legal, and defensible regarding a possible discrimination claim.
Application Process
Two forms of applicant personal identification, with at least one being a government-issued photo ID, should be required at time of application. Each adult applicant will be required to complete an application.
“The first line of defense against bad tenants is having an adequate application form.” Are you confident your application form asks the right questions, legal questions?
The application form should have a logical flow and purpose. You want to gather the information you need to analyze applicant risk related to tenancy. The collected information may also prove useful if it becomes necessary to track the tenant in order to collect a debt related to his/her tenancy.
Your rental policies and the application form itself should note that failure to provide requested information, or knowingly providing false or incomplete information will be result in the rejection or denial of the application.
Consent to Release Information
The application form itself or a separate “consent to release information” form must contain statements that authorize the landlord to verify credit, employment, and any other information, including that contained on the application, from a
credit bureau, from the creditors directly, from employers, financial institutions, and previous landlords, and from providers of eviction and criminal records. Included should be a statement that the permission includes obtaining updated reports, survives the expiration of tenancy, and can be used for any legal purpose associated with the tenancy.
Credit report
Credit reports are the most often used screening tool. There is a wealth of information contained in each section of the credit report which should correlate to applicant supplied information. Social Security number and previous address
history can be compared with application information. Debt obligations and payment history give indications of credit management. Red flag alerts are late or skipped utility payments, or liens and judgments placed against the
applicant. You may want to consider discussing items of concern with your applicant before rejecting the application out of hand.
Landlord References
Tenants move for all sorts of reasons. What you don’t want is a tenant moving because his current landlord is evicting him. Contacting a previous landlord can provide additional information to include in your risk analysis. Would this landlord again accept your applicant as a tenant?
Documents
Put it in writing!
Documentation is key to defending against charges of discrimination. Any communication with a prospect, applicant, or tenant should be documented and retained for at least the period 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 misrepresentation 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. Without appropriate documentation, it never happened.
With the need for documents, comes the need for document control. You must have a plan for security of documentation – how it is stored and accessed; retention of documents; and disposal requirements of documents no longer needed.
Summary
In setting practices for your business, consider what works for you with the caveat of compliance with applicable laws, the local market conditions, and your risk tolerance. The best practices will be those practices that deliver adequate
information to help protect yourself and your investment.