Tenant Screening Best Practices

The absolute most important process in Property Management is Applicant Screening.

This is a difficult statement to make.  All the processes are important, but I think Applicant Screening is the easiest to rush and has the most consequences - both positive or negative.

This guide is the authoritative step-by-step guide teaching the process to get your property rented to great tenants with minimal headache, stress, or costs.

 


Tenant Screening Best Practices 

How to Screen Applicants for your Rental Property


Skip to Section

What NOT to do when Screening an Applicant

What Is Tenant Screening?

Qualities of a Great Tenant

Setting Your Minimum Requirements

Protected Classes, Discrimination, and Fair Housing Laws

Application Structure

First Come, First Serve Policy

How to Run a Background and Credit Check

Calling Previous Landlords

Employment Verification

Should You Allow a Co-signer?

How to deny an Applicant after Screening


What NOT to do when Screening an Applicant

There is pressure when screening an applicant.  The owner wants the unit rented, the showing agent wants the unit rented, the asset manager wants unit rented, and the applicant wants to the rent the unit.  An approved application is great news!

HOWEVER, a hurried process can be a disaster down the road.  

In short, what not to do is skip a step outlined below.

  • Do NOT alter your minimum requirements, ever.
  • Do NOT discriminate for any reason- people either meet your requirements or they do not. Do not pick and choose.
  • Do NOT waiver on income verification. 

This sounds easy in theory, but in the real, pressure filled day to day operations, it's easy to let one of these slip. 

What is Tenant Screening?

Before we jump into the nitty gritty, let's be sure we are all on the same page.  Tenant Screening is the formal process of running an application of a prospective resident of your investment real estate.  Sagareus's screening process includes a credit check, criminal background check and eviction history check.  Once these are cleared, we ask for verification of income and contact previous landlords. 

applicant screening rental property washington

Qualities of a Great Tenant

If pressed, you might say qualities of a great tenant are clean cut, quiet, professionals or perhaps graduate students. 

These criteria border on discrimination, they are not direct discrimination, but there is no way to measure any of the above.  You might as well say, I just want someone like me to rent my property. 

The correct answer to the question is:

The qualities of a great tenant are the qualities of the person who meets or exceeds the minimum requirements to rent my property and adheres to the lease terms throughout their tenancy.

 

Setting Your Minimum Requirements

What are the basic criteria you will allow to rent your property? We need criteria strict enough to avoid unnecessary risk but not so strict they reduce the applicant pool.

To set effective minimum requirements, you must understand your property and the demand it will create.  

A basic criteria example is:

Gross household income must be equal to or greater than 2.5x rent  (In aggressive markets, we've increased this to 3x rent) . Income Verification is required with any combination of the following:

  1. Last 2 months pay stubs
  2. Offer Letter from employer HR department
  3. Bank Statement showing 2.5x total rent amount of lease term

Example: 6 month lease at $1,200/month requires $18,000 in bank account.  2.5 x 1,200 x 6 = $18,000.  This allows people just moving to the area, looking for employment, to still qualify.  There are also situations where 1 of 2 household members has a job, while the other is looking for employment.  The difference can be covered with savings as well.

Minimum Credit Score of 600 for minimum security deposit requirement.Applicant screening seattle bellevue rental property

  1. Credit Score: 550-599= 1 month security Deposit + first & last month rent pre-paid
  2. Credit Score: 500 -549 = 6 month lease to start + Double Security Deposit + last month rent pre-paid
  3. Credit Score: 450-499 = 6 month lease to start + Double Security Deposit + first & last month rent pre-paid
  4. No eviction history or Collections amounts owed to properties or property management companies on record will be considered for tenancy. 

A felony of any type or any criminal record against a person, property, or related to drug possession, use or distribution will not be considered for tenancy. 

  1. As of Feb. 19, 2018,  City of Seattle Fair Chance Ordinance took effect which "prevents landlords from unfairly denying applicants housing based on criminal history. It also prohibits the use of advertising language that automatically or categorically excludes people with arrest records, conviction records, or criminal history."

This is also a great place to disclose your Pet Policy & Utility Billing Procedures.

Protected Classes, Discrimination, & Fair Housing Laws

For the third time, never set different criteria for different people for any reason, ever. 

The basics of Fair Housing Law are, well, pretty basic. Don't discriminate against people based on color, race, religion, gender or disability. 

Depending on the city your property is located,  there are various protected classes that are not protected classes in other areas, such as sexual orientation, participation in the Section 8 Program, criminal history, etc. 

HERE is a pdf of the specific from the Fair Housing Center of Washington non-profit organization. 

6 Must-Include Sections for Proper Tenant Screening

The application needs to request the same information from everyone. You'll need to collect AT LEAST the necessary information to run credit and background check as well as document rental and employment history:

  1. Name
  2. Contact Information (Phone & Email)
  3. Date of Birth
  4. Social Security Number
  5. Current Employer / Income
  6. Rental History

I also like to get an Emergency Contact Name & Number for the tenant file, any pets, and vehicles.  HERE is a link to Sagareus's Application to use as a model. 

Most applicants will prefer an online option.  I also prefer the online model for the obvious reason of no paper, but also because this date & time stamps the application submission automatically.  I can then adhere to the first come, first serve model.

For answers to more questions, please visit Sagareus Property Management Services featuring Property Owner FAQs.

First Come, First Serve

In 2016, the City of Seattle passed a First Come, First Serve law requiring landlords to offer the rental to the first applicant.  Then a judge repealed this law, calling it Unconstitutional. 

I agree the City Council should stay out of it. Creating such a law requires landlords and professional managers additional administrative requirements, such as date & time stamping order of applications received among others.  This extra work load increases costs which ultimately drive up housing costs.  But government intervention into private affairs usually does... I'm getting off topic....

Regardless of what City Council is doing, the First Come, First Serve policy is a best practice in tenant screening.   

This is the most fair way to offer housing and prevents the risk of conscious or unconscious bias of any kind. 

First applicant that submits a complete application (which includes proof of income) is offered the unit first.  They have 7 days to execute the lease.  If they decline, we continue accepting applications.  For everyone, every time.

How to Run a Background Check and Credit Check

You need a 3rd party screening company, a popular choice for self-managing owners is called My Smart Move by TransUnion.   This product will create an online application for you to send to your prospective tenants.  One downside is a the double approval requirement--  prospective tenants will need to submit their application, then you will run the application, then they will need to approve you running the application. This seems redundant because it is, but it is a security feature to prevent credit fraud.  Another downside is a 48 hour turnaround time. 

To get immediate tenant credit check results and single authorization, a company needs to go through a screening process with the credit processing company.  This involves filling out an application, paying a fee, and having an inspection completed with a representative from the credit company.  This inspection is designed to prove you are a legitimate company.  They want to see letterhead, business cards, etc, anything that proves it's not a "front company".  Credit check companies will also document locking doors, password protected computers, and locking file cabinets for security of individual credit reports. After all of this, you are now able to run screenings and get results back immediately, greatly streamlining the process.

Most self-managing owners, operating out of the home, will not be able to qualify for this.  Don't worry!  My Smart Move works very well, it's just a little extra leg work and time. 

How to Read Criminal Background Report

Deciphering what exactly is happening on these report takes some practice, and a few google searches.  applicant screening rental property washingtonI've learned quite a bit about various types of criminal offenses (which vary by state) and credit reports. 

If you see a criminal history that was dismissed, that is not a conviction.  You cannot hold it against someone that they were charged with a crime and found innocent!  Sometimes these can be very offensive crimes, but guilt was not proven so innocence is assumed (see US Constitution for further details). 

Sometimes you'll see items like speeding tickets, in some states, speeding over 15 MPH is a misdemeanor, I've seen "40 mph in a 25 mph zone"    Another common misdemeanor is MIP, or Minor in Possession of alcohol.   This could be a 25 year old applicant that was charged with a MIP when he was 20 years old. 

This is why having the criteria that misdemeanors will be considered on a case-by-case basis is an important distinction. Neither of the examples above raise concern for Sagareus because they are not criminal records against a person, property, or related to drug possession, use or distribution, but I'll leave that consideration up to you.

How to Read Credit Reports

Credit reports will show a score right at the top.  Still, I scan reports looking for debts owed to a property, property management company or a Rent collections agency.   Usually, property management companies use collection agencies with telling names, Sagareus uses the collections agency RentDebt, for example.  

Collections owed to previous properties is an instant decline.  Every applicant will have a reason for why this happened, the situation is never their fault, and there were extraordinary circumstances.  I wish them well and point to our Policy. 

Other than this, I don't spend too much time breaking down someone's score, I just look at the score, apply the appropriate security deposit measure, and continue the screening.

Previous Landlords Reference Check

This is more difficult than it sounds. Often, companies will require written authorization from tenant to obtain information; You'll need to send them a copy of the application, which authorizes you to obtain information. We always black out the tenants social security number as a security measure as well. 

Sometimes, applicants will write a previous roommate or just a friend to be their rental reference, usually because they don't want you talking to their previous landlord.  Ask the following question to determine if you are talking to a professional manager or a false substitute:

1) What dates did "applicant's name" rent from you?

Then verify the dates listed in the application. This question in addition to the general demeanor on the phone will usually give you a pretty good indication of with whom you are speaking.

My basic questions for previous landlords are:

2) Was he/she ever issued a 3 or 10 notice?
3) Did he/she provide proper notice to vacate?
4) Would you rent to this person again?

Some variation of these questions would do fine.  Try to have quick, easy questions, the person on the other end of the call is busy as well!

Employment and Income Verification

Here your applicant submits via email any of the following:

  1. Last 2 months pay stubs
  2. Offer Letter from employer HR department
  3. Bank Statement showing 2.5x total rent amount of lease term

Example: 6 month least at $1,200/month requires $18,000 in bank account.  2.5 x 1,200 x 6 = $18,000.  This allows people just moving to the area, looking for employment, to still qualify.  There are also situations where 1 of 2 household members has a job, while the other is looking for employment.  The difference can be covered with savings as well.

I've witnessed a temptation to not really look at these documents.  Once they are obtained, they are added to file, the checkbox is checked and the applicant is approved!

WRONG!

Open the documents and do the math.  Do the dates line up? Did they sort of pick and choose which pay stubs to send you, or in other words are they fully employed or do their hours vary?  

Do they actually hit the 2.5x mark?  This is math, there is no grey area.  They either meet or exceed 2.5x rent or they don't. 

Really close does not qualify.  This is the hardest part, because it can feel like, does $100 really matter?  

Well, does it?  If you want your criteria to be 2x rent, then change your criteria on the next one. But if its 2.5x, its 2.5x. 

If you waver on this, you open yourself up to questions like: Did you change your criteria for that person because she is single woman? Or because she is white?  Or because she is heterosexual?  Would you have changed your criteria if that person was black? Or male?   

Of course, you have no way to prove any of the above because its subjective. 

To answer the question above:

Yes, $100 does matter, stick to your set criteria.

 


Should you Allow a Co-Signer?

I don't like Co-Signers because people have varying ideas of what a co-signer is.  When you call a co-signer for payment, they don't send payment, they call their irresponsible son to make payment... and rent is still not paid.   On most properties, co-signers are not allowed.

We allow Co-Signers on properties that are nearby universities and community colleges, but have clear language that states the Co-Signer is basically a Tenant.  If rent is late, we will contact co-signer for payment just like tenant.   The Co-Signer completes the application and is screened exactly like a tenant. 

Denying an Applicant

If an applicant does not meet minimum criteria, then they are denied.  If they do not accept your offer for tenancy, including proposed move in date, they are not denied.

This is an important distinction.  If I approve an applicant, they have 7 days to execute a lease.  If they choose not to because they want me to hold the unit for say, 20 days,  I will not do that.  I will continue to attempt to rent the unit.  I did not decline the applicant, they declined the terms of the lease.

If I make no offer because they do not meet the minimum criteria, I must send them an Adverse Action form indicating why their application was declined.  I typically call or e-mail the applicant as well, letting them know, but by law must mail them the Adverse Action.  

I will e-mail the Adverse Action and upload to their applicant file as record the form was sent as well. 

Tenant Screening Best Practices Conclusion

Tenant Screening is the most important procedure in property management.   You must be fair to all applicants and protect your asset.  A clear, written policy that you adhere to 100% of the time without fail is the ultimate best practice in tenant screening.


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