Now let’s talk about how easy it is to screw up the process of taking applications and screening tenants. This is one of the most important parts of being a landlord — being able to properly select tenants will determine a huge amount of your success and happiness as a landlord.
So let’s get onto the screw-ups!
1. Application Mistake: Not Asking ALL the Questions
It’s easy to download a form from the Internet and print it out and give it to a prospect — but how many of those forms were put together by a lawyer (or worse yet, an editor) instead of by an experienced property manager or Realtor?
Naturally, you need all of those legal aspects taken care of, like proof of identification, permission to run a credit check, co-signer information (if relevant) and so on. But there’s more.
You also need to obtain references that are not landlords or family members, a list of their previous (at least two!) landlords, including contact information (and previous addresses), verification of their income and permission to run a credit check.
Then — and this is just as important — you have to actually follow through and do the legwork that all of that information enables.
In particular, take care to actually call all of their previous landlords and ask them about the applicant’s tenancy — including allowing them to fill in the dates of that tenancy.
Sometimes a clever applicant will put their friends’ phone numbers as their previous landlords, but not many of those friends are prepared with details like the exact dates of their friend’s move-in and move-out.
So we ask open-ended questions to try to expose these situations.
Needless to say, faking a landlord is an automatic “decline” from us.
2. Application Mistake: Trying to Profit From the Application Process
Don’t charge an application fee… we’re not allowed to do that in Ontario.
3. Screening Mistake: Not Looking in Depth at an Applicant’s Credit Report
The credit companies do us this great service of condensing a person’s entire credit history into a single number, and that number can tell you a lot — but it certainly can’t tell you everything you need to know about a person.
This is especially true of tenants. A score can’t tell you, for example, if their credit score is low because they regularly miss ordinary bill payments or if it’s low because they have one huge debt that they ignore because they know they’ll never be able to pay it off.
The people in that second category can make great tenants provided they have a solid record of paying their normal monthly bills.
In contrast, we’ve also seen applicants with acceptable credit scores who have nothing but collection accounts or consistent late payments on their credit report. Don’t know about you, but that’s not a tenant we want to manage.
If you’re one of the above crowd who would go so far as to trust an applicant to bring in evidence of their own FICO credit score, allow me to introduce you to a cute little thing called Photoshop.
Yes, it’s out there, and yes, people will and do use it to fake up all kinds of documents. Never trust a tenant’s paperwork — it exists to be verified, not to be used as-is.
4. Screening Mistake: Not Understanding Income
The industry standard seems to be that an applicant must have monthly income equal to three times the rent.
But are they supporting other family members too (unemployed spouse, one or more children)? There’s only one income number that matters: what the prospective tenant has available to make their rent payment.
This means looking at their take home income after payroll taxes and any other deductions, like child support or garnishments. Then subtract from that their car payments, student loans, credit card payments, etc.
Think you’re done? What about utilities? You should be able to estimate those for your suite, but what about food, clothing, medical, etc.?
The point we’re trying to make is that there is no perfect, guaranteed system, but you should put more thought into it than just the “3 x rent” rule.
By the way, don’t forget to be on the lookout for fraud here, too. We once had a prospect who claimed to be an administrative assistant for a small 2-3 employee company give us pay stubs and a T-4 showing over $80K in income.
That might be possible at a big firm, but not the little mom & pop shop our research turned up!
5. Screening Mistake: Not Asking for a complete rental application from co-signers
The only reason you might be considering a co-signer is that the prime rental applicant doesn’t qualify on their own for a variety of reasons.
Therefore you must do the same vetting for a possible co-signer that you are doing for the main applicant.
Often these are parents, sometimes retired, so you need to be diligent in asking the right questions and requesting the relevant documents to prove that they can indeed step in and help their family member if there’s a problem in paying the rent.
After all, they are truly the back-up for the main tenant applicant.
6. Screening Mistake: Thinking That a Bullish Market Means Good Applicants
It’s a common enough mistake — if the rental market is doing well, it means that more people are moving into rentals, which means that more good people are moving into markets.
When the market is on the uptick for as long as it has been lately, you start to get a little complacent because there are so many qualified candidates — but think about it from the shoes of a crappy tenant.
With so many good candidates squeezing them out of the market, renters with bad histories get desperate. If you think that someone using Photoshop to mock up a FICO score or using a friend as a landlord are unlikely, we’ve got some stories for you.
We’ve had applicants mock up entire employment histories, complete with excuses as to why each of a half-dozen businesses isn’t available to be called for verification. The truth is that as the market gets better, the worst applicants get better, too — better at lying, deception and fraud.
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