The Art of Finding The Right Tenant

First things first! Choosing a tenant is not an easy process. First, landlords face the notion of non-discrimination in picking a prospective tenant. State and Federal law prohibit landlords from discriminating against tenants based upon race, sex, age, gender, family status or size, nationality or disbility. As long as a landlord has a legitimate business based reason for denying a rental to a prospective tenant, such as bad credit or negative references, a landlord may reject a prospective tenant. The non-discrimination laws are complex and I will not be dealt with them here. Instead, this article will detail some hints in finding a “good” tenant.

WHAT MAKES A GOOD TENANT

In a word, a good tenant is money. Money in the bank, money in the landlord’s pocket, money saved from legal and other expenses. Assuming that a landlord is reputable, the ideal tenant is one who pays rent on the first of the month and is forgotten for the next thiry days. A tenant that asks for repairs is not necessarily a bad tenant. A good landlord will gladly make repairs as repairs are a cost of doing business just are paying property taxes. A tenant that breaks personal property and does not pay is a bad tenant. This is the tenant that must be screened out

THE SCREENING PROCESS

The tenant screening process begins with a prospective tenant. To avoid difficulties and claims of discrimination, all prospective tenants should be treated equally and an identical process should be followed when checking out the applicants. A landlord should begin by opening a manila folder for each applicant. This folder will contain all information regarding the prospective tenant’s application process and should be maintained for at least two years (perhaps more). In all cases, a landlord should truthfully and carefully deal with a prospective tenant. The landlord should expect a truthful dealing back from the tenant. In most cases, a truthful tenant will opt not to rent from a dishonest landlord.

The Application

The place where the landlord most requires truthfulness from a prospective tenant is on the tenant’s rental application. All landlords should require written applications which should be completed by all prospective tenants and retained by the landlord (in the case of a discrimination claim). These applications should be carfully reviewed by a landlord. If a potential tenant refuses to fill out an application, a landlord should, in no instance, consider renting to that person. This is a sure sign of trouble. The application should request, at a minimum, the following information from all prospective tenants over the age of 18 who will live in the property:

  • tenant name
  • employer name and monthly income
  • driver’s license number and social security number (get a photocopy of the driver’s license)
  • credit and bank information, including monthly debt payments
  • credit report authorization
  • automobile information including license plate number
  • rental history (at least the past three places the tenant resided and the name and number of the landlord)
  • references (at least four references)

The application should include a credit check authorization portion that informs the prospective tenant that the landlord intends to verify and check the information contained in the application. The authorization should include a sentence authorizing the landlord to obtain credit, employment and any other information, including that contained on the application, from a credit bureau in the form of a credit report, from the creditors directly, from employers, references and prior landlords.

Confirm References, Employment and Contact Prior Landlords

Too often, landlords fail to check up on references, employers and prior landlords. It is worth the effort to screen out poor tenants. When contacting these people, landlords should keep excellent written records. Landlords should note the actual answers to questions as well as the attitude of the person giving the answer. Employers should be asked about the prospective tenant’s attendance at work and income levels should be verified. Prior landlords should be questioned about noise levels, complaints from other tenants, lease violations, promptness of rent payments and evictions or other lawsuits against the prospective tenant. References should be quizzed regarding the character of a prospective tenant, but in general, these are the least important persons to contact as they would not be listed unless they were sure to respond with positive feedback to a landlord. People rarely want to bad mouth another person, so they will be evasive with their answers. Obviously, if a reference does speak with disfavor about a prospective tenant, this is a sure red flag. The key is to actually check with these persons to make sure that the references are valid and perhaps to learn a bit more about the applicant.

The Credit Report

Once a landlord has a completed and signed application and credit authorization which looks promising and the landlord has checked references, employment and prior landlords, the landlord should find a credit reporting bureau and order a credit report. As a side note, landlords can pass along the credit report charge to prospective tenants as long as the tenant knows that the fee will cover only a credit report. If a landlord does pass this cost on, he or she must charge only the actual cost of the report, no more. The report should be reviewed for a history of late payments, prior bankruptcies and outstanding debts. The report most likely will not disclose prior evictions or landlord information because this information is rarely reported to these agencies. It will give a landlord a general idea of a prospective tenants creditworthiness. If the credit report turns up a valid reason to reject a prospective tenant, the Fair Credit Reporting Act requires that the landlord notify the prospective tenant of such and inform the prospective tenant of the name and address of the credit reporting agency along with a notice that the prospective tenant can get a copy of the report if he or she files with the agenct within sixty days of the landlord’s notice of rejection. Remember, if the landlord collects a fee for a credit report and does not obtain one, the money must be refunded to the applicant.

The Security Deposit and the Tenants Ability to Pay

Landlords must make sure that tenants have the means to pay their monthly rental obligations. As a result, a landlord should offset the income of a prospective tenant from the applicant’s other monthly obligations to make sure that the applicant can make the rent on a timely basis. Landlords should not assume that higher income equates to an ability to pay the rent. As a result, an applicant with a lower income, no student loans, a fully paid automobile and less monthly debt may be more likely to pay on time than an applicant with a large income, a leased car, student loan debt and a myriad of other borrowing.

As for the security deposit, landlords should get, at an absolute minimum, one month’s security deposit up front along with the first month’s rent. A better policy is to attempt to get one and one half month’s (or even two months) security deposit from a new tenant. This prevents the landlord from being without security against damages in the event that a tenant wrongfully fails to pay the final month’s rent and desires that the security deposit be applied instead. Further, any tenant who cannot come up with at least the required deposit and the first month’s rent is unlikely to be able to pay on a timely basis. When accepting a security deposit, it is essential that the landlord provide a receipt for the deposit to the tenant (it should explicitly state the amount of the deposit) and the deposit should never be comingled with the landlord’s personal funds. A separate bank account should be established for security deposit funds.

AFTER ACCEPTING A TENANT

The greatest mistake madeby landlords is the failure to adequately screen a prospective tenant. As stated above, a good tenant is a joy to deal with and is profitable to a landlord. A bad tenant can be a costly disaster. Many times, a landlord will lose focus when attempting to let an apartment. The landlord will accept payment of the security deposit in installments or even worse, require none at all (some landlords have been known to accept a new tenant and turn over possession of an apartment without even a rent payment or security depsoit). A landlord may be so desparate to rent a property that any tenant with cash is acceptable. Frankly, most of the landlords who get into these unacceptable situations regret their actions down the line when they lose other tenants or lose rental income due to a bad tenant.

Landlords need to change their focus to be successful. Property ownership is a business and should be treated that way. Landlords provide a service to tenants. Landlords are not the tenant’s business partner. A landlord must resist the urge to “give the tenant a break” or “extend some time” to a tenant because these situations lead to disaster. Once the landlord gives in to one of these situations, the tenant will be likely to take advantage again in the future. When a tenant is late with rent, a five day notice should be promptly served. When a tenant violates a lease provision, a ten day notice should be promptly served. Landlords must take a fair but firm stance with tenants. Through adequate screening, a landlord can significantly cut the risk of trouble tenants and costly procedures down the road. This is the key to successful operation of a rental property.