Imagine meeting someone at a bar, and after spending 15 minutes with them, deciding that you’re going to let them live in your house with you. Crazy, right? Well, as a landlord, you basically get about 15 minutes on average with each prospective tenant, and you’re letting them live in your house (usually without you even being present). The only different between your situation and that of the barflies is that you have the benefit of a paper application, a credit score, and hopefully a recent bank statement and a couple of pay stubs. This post is about how to screen tenants by making the most out of the limited information you’ve been given.
How to Screen Tenants — Step 1: Basic Documentation to Get From the Prospective Tenant
The basic tenant application package I ask for includes (1) a rental application, (2) a written consent to run the tenant’s credit report and/or background check, (3) at least 2 pay stubs, and (4) the most recent bank statement(s) showing that the tenant has at least the amount of the security deposit in their bank account.
If you need a sample rental application form, there are tons of places to look. One of the first places I look is a local eviction attorney’s website, where they have a ton of California-specific landlord forms. Generally speaking, you should try to find forms that are specific to your state. But rental application forms are pretty universal, so you’re probably okay using a form created in a different state. If you can’t seem to find anything you like online, you can buy a beginner’s landlord book that will probably include some forms, or you can ask a realtor friend to provide you with your state’s department of real estate form. Or, if you’re really scrappy, just go to your nearest apartment building and ask to see an available unit, and then take an application packet home to “fill out” (i.e., plagiarize).
If you are planning to run the tenant’s credit (and you absolutely should), just plug in with the company you want to hire to perform the credit check. They will certainly have forms for tenants to fill out giving their written consent for you to run their credit. Remember that if you’re running tenants’ credit, and you deny applications to some of them, you will need to follow up with a tenant adverse action letter. This gives the tenant the ability to obtain a copy of his or her own credit report, so they can verify that all of the information there is correct. Although I think it’s generally a good idea to give tenants a copy of their own credit report as a courtesy when you run it anyway. Doesn’t cost you anything other than the cost of copying the pages.
Run the Tenant’s Credit — No Exceptions!
You may think you’re good at “reading people”, but there’s really no substitute for running someone’s credit score. There are some good con artists out there who can charm the pants off of you, but there’s no substitute for the black-and-white truth of a credit report. RUN IT. If a tenant hands you their free printout of their credit report that has no score on it, you could decide to accept that instead, but I would only do it if you’re really, really experienced at running credit and reviewing credit reports. The score may not be everything, but it is very helpful in giving you some context. The other thing is that when you run a tenant’s credit yourself through your chosen company, you can add on different information, including information about prior evictions (CRITICAL!) and criminal background checks (semi-optional, depending).
As for the detail of the credit report, landlords are all different when it comes to how thoroughly they screen. I know some landlords who look at the tenant’s credit score only. I tend to look more closely, and here’s why: the credit report is a really great tool for figuring out whether a prospective tenant is a liar or not. Before you run a prospective tenant’s credit, you could ask them whether there’s anything they want to tell you in advance. If there’s a sob story to tell, they will probably tell you then. If the tenant goes overboard telling you about all the heartache they’ve ever been through, and about how their credit is bad but it’s only because they feel strongly about paying back what they owe instead of giving up and filing bankruptcy, RUN.
I’ve had a couple of tenants tell me that their credit was pretty good except they had a medical issue and so there’s an unpaid medical bill or two on their credit report. I’ve run their credit, and sure enough, they were telling the truth. I have no problem renting to those people, so long as their income is sufficient and everything else checks out okay.
But I’ve also seen prospective tenants who gave the sob story about one of them losing their job during the recession, and they lost their house, but they’ve been dutifully paying creditors and trying to rebuild their credit instead of filing bankruptcy. Those tenants were straight-up liars. The foreclosure had happened a few years ago, and since then they had opened a half-dozen NEW retailer credit cards, and had maxed them out in addition to their already maxed-out other credit card balances.
Evaluate the Paperwork the Tenant Gives You
Once you get your prospective tenant’s bank statement and pay stubs, really take a look at them. Does the tenant make 3 times the rent amount or more? I know in a lot of other markets, landlords might only rent to tenants who make 3.5 or 4 times the rent, but in Orange County, California, rents are high enough and lower wage earner salaries are low enough that it’s not uncommon to see tenants who are paying half of their take-home pay on rent. If you have the option to go for a higher rent-to-income multiple, then do it. At least you know the tenant will better be able to shoulder the burden of rent increases in the future. But if you have an applicant that has stellar credit and a lengthy work history (2 years should probably be your minimum), then a multiplier of 3 might be okay.
Who’s Going to Live There?
How many people are going to live there? You’re not allowed to discriminate against families by renting only to single people, or to couples without children, but you are allowed to set an upper limit on the number of people living in your rental unit. The HUD rule is that you can limit occupancy to 2 tenants per bedroom, plus one for the rental unit as a whole. Got a one-bedroom unit? You can limit the number of occupants to three. You can’t set your limit at one or two. Got a two-bedroom unit? Your number is five.
The HUD limit is just a minimum standard, so you can always accept more people than the HUD limit if you want to. But more tenants equals more wear and tear on the carpet, the walls, the appliances, the showers, you name it. Plus, in my experience, tenants who have snuck in extra people and exceeded the limits I’ve set tend to live in squalor. There are only so many ways to have storage space for 8 people in a 2-bedroom apartment, and so everything tends to spill out everywhere. Once they get used to living in a total mess, they stop caring about cleaning your appliances and taking care of the property.
Also, watch our for stealth renters who claim to just be coming along with the “real” renter on the tour of the property. That creepy-looking boyfriend walking around with your prospective tenant? Yeah, assume he’s going to live there, too. Either get an application from him, or find a different set of tenants. And if you’re on the fence about whether or not to conduct a background check, for SURE you should get a background check on the stealthy significant other. There’s usually a reason the prospective tenant wants the boyfriend or girlfriend not to be listed on the lease.
Call at Least One Prior Landlord
The last thing I normally do is contact a prior landlord. I never contact the current landlord, because the current landlord might be trying to get rid of the tenant. If the tenant has been causing trouble at their property, they might give a glowing review to the tenant to try to get him/her out. But if you call the landlord from before that, you might get more of the truth.
Also, be aware that some of these tenants use their friends to pose as their landlords. It’s not always easy to tell if they’re lying, but keep your spidey senses alert to try to figure out if it’s a faker or the real deal.
How do you screen your tenants? Has your method generally been successful?