How to Successfully Perform Background Checks on Potential Tenants

Although property managers face constant pressure to fill vacant units, not taking the time to conduct thorough tenant screenings can have significant consequences. Bill Gray, consultant to property managers and business owners, says 4 to 5 percent of all screened tenants will end up owing money at the end of their lease, and the average-sized debt for these tenants is around $3,500. While accepting a new tenant always involves some risk, there are steps you can take to get quality tenants in your units:

Screen more effectively
Merrie Turner Lightner, vice president and CFO of Lightner Property Group in San Francisco, says her company qualifies applicants based on three main criteria: Can the applicant pay the rent? Will the applicant pay the rent? And will an applicant follow the terms of the rental agreement?

Determining whether an applicant can and will pay the rent comes down to looking at their background information as well as income and credit information. Although this information is important and needs to be considered carefully, PMs need to do more research than simply looking at numbers. Talking to past landlords can give important insight.

The American Apartment Owners Association recommends asking these questions to a potential tenant’s previous landlords:

1. What was the tenant’s payment history?
2. Did the tenant give sufficient notice according to the lease?
3. Did the tenant fulfill all of the terms of the lease?
4. Did the tenant give a reason for moving?
5. Were there any complaints from neighbors about the tenant?
6. Would you rent to this tenant again?

Gray also suggests obtaining a full credit report for all adults living in the unit as well as any co-signers. Screening for eviction and criminal reports, including sex offender and terrorist checks are also important. While credit checks are required by law, rental history and criminal background checks are not. Gray recommends including a statement at the end of the application that authorizes the rental company to do a credit check and any other checks on potential tenants to prevent future problems or complaints.

He adds that applications need to be legible and complete in case you need to collect debt down the road. This sounds simple, but it’s a costly mistake he has seen many landlords make.

Standard operating procedures protect your company
Standard operating procedures are beneficial when it comes to two laws involved with tenant screening, the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act, especially as more applications move online.

For PMs, issues with these acts generally involve the need to safeguard consumer credit reports and a tenant’s confidential information. Lightner once again suggests having procedures not only about how to handle this sensitive information, but also how to react if there is a security breach. Though a breach has never occurred, Lightner has a system in place just in case. In her office, if two pieces of confidential information are exposed or potentially exposed to a third party, the person is notified and Lightner Property Group offers to pay for a year’s worth of credit monitoring.

While establishing thorough procedures will take some time initially, taking that step is worth it. “Defending a claim that you’ve discriminated against somebody or somebody has suffered an identity theft episode because of your lack of security measures is probably going to involve hiring a lawyer at $300 to $500 an hour for 10 to 30 hours,” Lightner says. “So the dollars add up quickly.”

Background checks are not just about saving money
The importance of due diligence cannot be overstated in background checks, and not just when it comes to monetary concerns. Gray says about three years ago he saw a case where an application question read: Have you ever been arrested? A particular applicant said yes, so the rental company did a criminal background check and found this man had a minor traffic violation on his record. Assuming this was what the applicant was referring to when he answered yes on the application, no more research was conducted and his application was accepted. It turns out this man was a registered sex offender, but it wasn’t discovered until the tenant already had moved in and nothing could be done until the lease was over. The other tenants in the community were upset and the situation created major problems for the PM.

“Take a little more time evaluating,” says Gray. “In this economy it’s even more critical, but so many landlords are just anxious to get some warm-blooded person in that unit.” As Gray has seen too many times, being complacent or lazy can lead to much more time, effort and money being spent, as opposed to being thorough in the first place.