To avoid the ‘nightmare tenant,' set up a consistent screening process
Real estate investing
Written by Tom Brady
Reviewed by Mynd Editorial Staff
Almost every property owners’ biggest fear is the nightmare tenant: chronically behind on the rent; demanding about minor fixes to the property; creating disturbances that draw the attention of the police; vandalizes the home; terrorizes the neighbors; and makes life miserable for the landlord.
In Britain, the housing crisis got so bad it spawned a television series called “Nightmare Tenants, Slum Landlords” that first aired in 2015 and is still going strong six seasons later. Aside from the routine unruly or non-paying tenants, the show has featured squatters, hoarders, con artists, drug users, electricity thieves, and properties converted to cannabis farms and scrap yards. The show also features unscrupulous property managers, and eviction specialists who are charged with extricating these nightmare tenants. (And there is plenty of misbehavior by landlords as well.)
It seems every property owner has at least one nightmare tenant story.
But there are steps to take to minimize this risk. Rigorous screening can protect an owner and the property, but as with most things in life, there are no guarantees. Mynd Management offers tenant screening as part of its services and according to Jessica Sills, leasing manager, it rejects some 30 percent of applicants for its properties.
After two decades in the property management business, Sills has learned this lesson: “You can’t judge a book by its cover at all.”
All the processes set up to screen a tenant must comply with the federal Fair Housing Act, and any local regulations, to prevent discrimination in access to housing.
There are a number of steps Mynd takes, and any property owner should have in place, to vet a potential tenant. For starters, the applicant has to earn enough income to afford the rent, has a clear rental history, and can pass background checks.
“Where it gets tricky is that we do see a fair amount of fraud,” Sills said. “Fake pay stubs are easy to create, as well as doctored bank statements.”
“We do have a way of sniffing them out,” she added.
Alex Sutton, a business process analyst at Mynd, said he has noticed a recent uptick in falsified applications. “There are websites you can go to to generate fake pay stubs,” he said.
Mynd’s process is rigorous, but in the end sometimes there are still outstanding issues.
“If the information doesn’t add up, we don’t move forward,” Sills said.
What to include when advertising a property for rent
Finding a good tenant is not rocket science, but does require a property owner to do the due diligence required in all transactions to protect an investment. Choose a platform, or multiple platforms for advertising the listing. Some of the leading sites are Zillow, Zumper, and Apartments.com (which, despite the name, does rent houses.)
Some things that will help: Be sure to include the rental amount so it attracts prospects with sufficient income; clearly state the pets policy; make the credit standards clear; specify move-in dates; identify the length of the lease agreement; and set the amount of security deposit required.
The process of screening tenants
Sutton recommends consistency in tenant screening to be sure that a property owner complies with the law and every candidate goes through the same process.
“It’s important to set clear standards and stick to those,” he said. “It just makes things easier.”
The first part of the screening process is to make sure the advertised listing has enough information and is clear enough so only qualified applicants enter the pool of potential renters. Mynd charges a $50 application fee for candidates, though many property owners will not set a fee.
The company’s partner for screening tenants is Transunion, and Sutton said the four main criteria Mynd uses to evaluate prospects are:
1. Income verification
2. Credit check
3. Background check
4. Rental history check
This screening process will turn up any past bankruptcies or evictions that could disqualify a candidate. Sutton said Mynd partners with Transunion, instead of the other credit reporting giants Equifax or Experian, because it closely examines rental histories.
“They have a great product with a resident score that specifically caters to the residential property market,” Sutton said.
Once the screening process is completed, the prospective resident is notified:
If the report says the tenant is "Denied," an Adverse Action Notice must be sent within 24 hours. A landlord is required by law to provide the applicant with the name, phone number, and address of the credit agency used, and the reason for denial must also be stated.
If the result is "Approved with Conditions," the applicant may rent the property with an additional required security deposit.
Applicants should receive instructions on paying the security deposit. Mynd lets prospects know that whoever pays their deposit first takes the property off the market. Most management companies keep approved applications active for 30 days.
Once a prospective tenant is approved, she is encouraged to pay the deposit. For a property managed by Mynd, the first approved tenant that pays the deposit will be rewarded with a lease.
Challenges of evaluating a gig worker’s income
Sutton said the rise of the gig economy has made it more difficult to evaluate which applicants have the required income to rent a property.
“The challenge is establishing income verification for people who are not in the traditional job market,” Sutton said. “They might have a job as an Uber driver, and a waiter.”
In that case, the company may ask for tax returns, bank statements or other proof of income. Mynd requires a ratio of gross income to rent of 2.5, but many landlords and property management companies prefer three to one.
If the applicant does not earn the required income or have no credit history, a guarantor may be added to the lease agreement. According to Mynd’s policy, the requirements for a guarantor are:
Only one guarantor per household.
Must complete a rental application and pay a $49 application fee.
Must meet the income requirement of 5 times the monthly rental amount
Must reside in the U.S.
In some instances, tenant screeners will take an extra step to make sure a tenant has the job listed on their application. At times, Mynd will look up the company online where the applicant has listed employment to make sure it exists. (Yes, people do make up false companies.)
“There are people who verify employment by calling employers,” Sutton said. “Other people will do an analysis of debt-to-income ratios. There are new products that will do these calculations and evaluate income.”
Fair housing act protects tenants from discrimination
Complying with the federal law known as the Fair Housing Act and any other local regulations regarding property rentals is crucial for any landlord. The law protects against discrimination based on:
Some cities — like Seattle, Portland and Oakland — have fair chance housing ordinances that prohibit using criminal background checks as a reason to deny housing. Several states, including Colorado, New York, Illinois and Washington, D.C., have passed fair chance laws to help the previously incarcerated get a new start in life.
New Jersey passed its Fair Chance in Housing Act in June, and Governor Phil Murphy signed the law during a ceremony to commemorate Juneteenth. He described the new law as a step to “level what has been for too long an uneven playing field when it comes to access to housing.” It bars landlords from asking about criminal history in most instances.
Keeping tenants happy can reduce turnover
If a property owner has made the effort to find good tenants, the relationship is often temporary. Landlords should budget for vacancies and have six months of rent saved for emergencies, but holding on to good tenants is better than having to search for new ones. Offer some gestures to show appreciation, which will encourage lease renewals.
Have a gift basket for a new tenant, ideally made up of goods sold by local businesses. This will help connect them to their neighborhood right away.
Find out important dates in the lives of your tenants, like birthdays and anniversaries, and send them a gift card for dinner at a local restaurant.
Upgrades will attract quality tenants, but it’s not necessary to wait for a vacancy to make them. New floors, bathroom renovations, or new appliances show tenants that a property is well cared for.
Respect tenant privacy. Never visit without notifying tenants first.
Be responsive. When tenants need repairs, make them as promptly as possible.
Use an online portal for rent collection, communication, and announcements.
Ask tenants for feedback and try to address their needs as warranted.
Of course, it all starts with a tenant that best fits with the property. Mynd can help a property owner do that.
“Part of what we do is give them (owners) peace of mind,” said Sills. “And we are placing the right tenant for them.”