How To Screen a Tenant

How To Screen a Tenant Transcript:

Welcome to the Grow Real Estate Investing Podcast.
I’m Joe White and this podcast I am going to give you a How To Screen Tenants Guide.
Why?      So you will never have a tenant issue ever again.

Many of you who have watched my real estate investing podcasts already know, I own a property management company here in Philadelphia.  

And an absolute must have skill for a property manager to have is the ability to effectively screen tenants.  Our business is to find the bad tenants before they become our tenants.

Tenant screening is how my property management company avoids problems for our company and certainly for the property owners that we represent.
Effective tenant screening stops a situation long before it ever occurs.

It surprises me that only a very small portion of new incoming clients seek our property management services because they know we will maximize their investments. Meaning, they don’t hire us because we are good at managing property and because they know we will greatly decrease their expenses and greatly increase their revenue.

Very few landlords come to us because they feel we will cost them far less than they pay us.
Most property owners reach out to property management companies to avoid hassles.

They see us as an expense that is either necessary to avoid aggravations or because they are stuck and they don’t know what to do.
And the hassles and aggravations are most often caused by poor tenant screening.

So you should use a property management company; because they are going to make you far more money; then they even come close to costing you.

Plus they will save you time, the hassles and they will make your rental property investing scalable.

 

But you don’t need to use a property management company just to screen out bad tenants. That can be easily learned.

And it should be learned because this is a very big problem for rental property investors.
Besides seeing this from seeing this from rental property owners seeking our services, I also see this as I buy my own rental properties.

Not only are we a property management company; but we are also active real estate investors. Thus the real estate investing podcast.
And I am always looking for discounted properties that my wife Lauri & I can buy.

Not to mention that  we are always looking for discounted properties for our clients, who are also often very active investors using us to build their rental portfolios.

And our main source of discounted property that we find?
You guessed it - Fed up landlords.

We call them, and ask if they would be interested in selling.

Sometimes when we contact them we catch them when they are having a bad day and they are happy to hear from us. Their bad day, full of tenant woes, can be a very good day for us.

The real estate investing world calls this marketing target Failed Landlords.
Their failure usually being that they are doing improper tenant screening or they don’t have the sense to leverage a property management company to get around that poor skill.

And that’s no sin - it's just unfortunate.

It's sad because it's often just  a very slight adjustment to go from fail to success.

A tweak in screening can get you a good tenant and instead of a bad tenant as there is no better way to solve a problem than preventing it from ever having occurred in the first place.

Consider this:
Obviously as a property management company, we are dealing with a much higher volume of tenants than most landlords ever experience.; 

  • But even so my company has never had to evict a tenant that we have screened.
  • Nor have we ever had a tenant cause more damage to a rental property than their security deposit covered.  

Stop and hear those two things again…

Out of all the tenants we have screened, we have never had to evict a tenant that we have placed….

Nor has a tenant that we screened ever caused more damage to the unit than their security deposit covered.

And during the pandemic not one of our tenants reached out to us with a difficulty in paying their rent.
We were ready for it and created protocols for it; but It simply didn’t come up.

Think about that….
The number one landlord fear is evictions.    The second landlord fear is: tenant-caused damage to their property.

By the end of this tenant screening podcast, hopefully this property manager skill will also be your skill. 

That’s achievable because it's really not that hard, nor will it take you long to master it.

And once you master tenant screening you will quickly move on to the next important thing for a rental property owner to focus on.

Let's get into it:

 

Cosigners - Not As Valuable As You Think
A cosigner is someone that is agreeing contractually to be financially responsible for the amounts named in the lease - should the residents not pay.

That’s helpful to a limited degree; but from a boots on the ground perspective it's not as valuable as you think. If there is a problem, the compensation you are most likely  going to be able to get will be the money you already have. Probably the security deposit and possibly the last month’s rent.

It's been our experience that going after tenants that break leases or cause excessive damage or have to be evicted, that we have a very low percentage success rate recovering past the amounts that have been held back. Meaning besides the security deposit or last month’s rent, it's very hard to get from the tenant’s side and additional amounts owed.

I do have lots of experience in this. As I said before we get plenty of landlords that come to us in distress, and we often have to do some work to unravel things for them.

But before I get ahead of myself and get in trouble giving legal advice, remember, I’m not an attorney. This is just my thoughts. For a more accurate opinion, get an attorney.

So a cosigner made an agreement by signing the lease, and a lease is a contract; but this isn’t just contract law. Its landlord / tenant law and if this goes to court, its landlord / tenant court where you will end up. Very few states are considered landlord friendly. Meaning, the tenant is already greatly advantaged in landlord / tenant court. Some courts see tenants as disenfranchised and most courts see landlords as privileged, businesses and not actual humans trying to make mortgage payments and property tax payments. Your chances in court are worse than you think just because you are on the wrong side of the aisle. Even if the judge isn’t one sided by nature, the mere fact that many big cities actually have tenant activist groups and attorneys, sitting in that very same courtroom, just gunning for you because you are a landlord, creates a big hurdle.

The reality is that the court will likely expect you, as the landlord, to be extremely accommodating. Accommodating being financial.

But more important is the thought that  just because you can go to court, and possibly even could win in court, doesn’t mean that it makes sense to do it.
You are an investor and we win by numbers; we don’t win by beating bad tenants to teach lessons. Not unless that actually puts more money in our pockets than it costs us to do so. Courts can be expensive and extremely, extremely time consuming.

So just because a cosigner agrees to be responsible doesn’t automatically make it so. Another dynamic we see is that the cosigner sides with the tenant. They often believe the tenant and not you. And they don’t pay, when they feel the tenant is being wronged.

One thing we do is create a photo collage of the state a unit was left in. This often stops that pretty quickly. A one page photo collage demonstrating someone’s character is pretty damaging.

I don’t want to say that you shouldn’t get cosigners. They do have value. If you are going to get money from a tenant that owes it; your greatest power, in my opinion, is with a threat against their credit.

And if a cosigner has their financial footing strong enough to be a cosigner, they probably are more concerned with their credit and that might make them pay. I will say that with multiple cosigners, like with student housing rentals, where there are  cosigners for each of 3 or 4 roommates, we are likely going to see one of those cosigners pay to protect their good name.

One thing to note about cosigners is to not give them the same rights as tenants. If they are not a resident they do not get to be part of the tenancy other than the financial liability. They are only part of this if monies owed can not be secured from the tenant.

There are two reasons: 1st, you will don’t want to get additional calls, emails and texts from the cosigners. The second reason is the cosigner has no rights to know about the tenant’s private affairs. Only contact the cosigner if money is owed and attempts to collect it from the tenant has failed.

The bottomline is that cosigners can be a safety net; but really just a small one.

Tenant Screening Is About Character - Not Financial Capability

Cosigners aren’t overly valuable because it's hard to get money out of people; but also because tenant screening isn’t about their ability to pay, it's about their willingness to pay.

It's about character. A bad tenant will bang your door and walls bringing a bike in and out of your rental twice a day. A good tenant won’t. It's the difference between having holes in your wall and scuff marks and not. Good tenants care for the property and they aren’t a detriment to the neighborhood, thus reducing everyone’s equity. Bad tenants over load washers, don’t change furnace filters, flush the unflushable down toilets. They slam doors and cupboards, they are loud and make the neighbors angry.

And they certainly aren’t concerned about owing someone money and paying their debts. 

 tenant with good character pays their bills on time. They do it simply because they owe it and because they know it's important to build their & keep their good name.

Roommates
Roommates are similar to cosigners in that a tenant needs to stand on his own two feet or you should expect problems.

It's not uncommon to get a bad applicant that applies with good applicants and you will need to make a decision. I’m not saying not to move forward. Vacancy can be very expensive. Just be calculated with it.

I recommend you view roommates collectively when considering their financial ability to pay.

But view roommates separately as you evaluate their character. 

Like most things, owning a property management company is affected by the 80/20 rule. 20% of our tenants take 80% of our resources.

This includes situations where one applicant is good enough to rent the property all on their own as a sole tenant.
Again, a tenant that is bad on paper will likely be a bad tenant. They will damage your property and they will cause you problems. It doesn’t matter if the other tenant can pay or not.

We have had situations where the entire house lost substantial portions of their deposits; just from the one bad tenant.

And they can often be a bad roommate. Remember, these roommates may have never lived together before and your screening likely told things about each of them, that they don’t know about each other.

Bad roommates increase vacancy. The roommates that can’t stand each other will flee the situation the first chance they get and off they go, leaving you vacant and looking for new tenants.
This includes couples. Many times I have felt like we were the 1st warning to a boyfriend or girlfriend that their chosen partner might not be who they thought they were.

Legally we can’t share the information we discover during a credit check with either party, and I will go over that shortly; but the fact that we accept one room mate; but not the other is a pretty good indicator to them that their relationship might have some unknowns.

One thing we do sometimes are restrictions. Tenants 1,2 & 3 may live there with no restrictions; but tenant #4 can not live there without the others.

Bad Tenants Don’t Think They Are Bad
Do not ever take your cues from tenants. Don’t rely upon them to tell you if they are going to be a good tenant or a bad one. Don’t rely upon their body language, reactions or bother looking deep in their eyes to travel inside of their very souls to see who they are.

People don’t think they are wrong; especially tier future selves. Our futures selves have it all worked out don’t they? A year from now I won’t be in debt, I’ll figure out how to save more, eat better and get to the gym regularly

The worst tenant applicants we get are the ones that contact us the most after we are forced to turn them down. They are often shocked. They seem genuinely stunned that we turned them down.
How can they be so surprised? Because they don’t see themselves as being a bad tenant or being a bad person.  The worse the tenant the more they seem to be entitled. 

To you paying your rent on time and caring for someone else’s property makes sense. But not to someone who feels entitled.

So don’t trust your read on someone. You want a read on a potential tenant? Walk them to their car. If it's dirty, cluttered inside and has a few dents that seem to have occurred from a few different encounters, then you know how your property will look if you rent to them.

People Do Change

People change. You change, I change. For the most part, for the better. Nothing stays the same and that is the same with people.
I truly hope that this time next year that you will be a better version of yourself. A little fitter, a little wiser and hopefully with a rental property or two added to your portfolio.

And your tenants are changing, hopefully also for the better. Hopefully they are getting better skilled at their jobs, getting promotions, building credit.

But they might not be. They might be getting worse. They might be self-medicating, they might be experiencing depression, divorce. They might have any number of things pulling at them to go backwards in their life and you need to realize that how they appear on paper while you are screening them to become your tenant; might be the best version of them you are going to see.

Keep your tenant selection criteria high enough to allow some back sliding. If a tenant is 20% worse than what your screening report shows, what does that mean to you and your property?

If they have an 850 credit score, perfect credit, perfect past tenancy and they make 10 times the rent; then a 20% worse version of them obviously isn’t going to affect you. 

So stay off of the fence with your tenant screening. Give a little room for the unknown.

Fair Housing & The Fair Credit Reporting Act

Perhaps this is the most important part of this podcast. But I’m not going to go too deep on these as I have another podcast focused just on Fair Housing and the Fair Credit Reporting Act. That’s how important they both are.

Proper tenant screening avoids bad tenants; but it also involves avoiding very expensive and time consuming legal issues.
Which means following Fair Housing Laws and The Fair Credit Reporting Act strictly.

There are agencies and other entities that employ people whose job it is to call, text and email landlords to actively catch them breaking these laws. They will contact you as a non-protected class and contact you again as a protected class. They will gauge the difference in how you interacted.

Just know that there are those invested in catching you breaking these laws. And right and wrong might not always be part of what they do. If they can build a case on you, they will.

But while we are talking right and wrong these agencies are also extremely important and their existence is a good thing.
I’m guessing most property managers will agree that there are far more bad landlords out there than there are bad tenants.

The comments and questions I see from landlords on blogs and forums are horrifying. Not once have I gone to the landlord / tenant court here in Philadelphia without thinking “man, lock that guy up!”.
Again, I’m not going to go into this fully as I have another podcast addressing these.
So watch that or internet search the Fair Housing Laws & The Fair Credit Reporting Act. You can find easy summaries on each of these by a quick internet search.

Do that and two things will happen:
1 is you will be surprised what you are not allowed to do 

and 2nd you will likely agree that you should be doing all of it.

The laws make complete and total sense.
Like advertising that there is a church on the block... Not allowed. And when you stop and think about it, that does make complete sense.

So when you get a call from a potential tenant asking how close your rental property is to the neighborhood church, temple or synagogue because they like to walk to daily services... you will know it's illegal to answer that and that call might be fake. You are just trying to be helpful and the agent on the other line doesn’t care. They caught you!

I’m not saying this shouldn’t be the law. I’m saying you need to know that law.

Have Clear Criteria & Give It Before The Tenant Applies

This is somewhat common sense; but let potential tenants know exactly what your rental criteria is. Especially if you are going to charge them for the screening costs. If you require they make 3 times the rent in monthly income and require a certain credit score, no prior convictions, tell them that. Also tell them what pets you will allow and not allow. Be very clear and precise.

For one, it's the right thing to do. Who would want to apply for a place then find out the requirements?

And back to Fair Housing Laws, you need very clear and set criteria and you need to treat everyone exactly the same. No deviation.

Obviously get a good quality criminal, Credit & Background Check Service. Honestly not the time to skimp on something.

Defuse Hard Feelings

Be human. These are humans. To know all is to excuse all. Compassion is required to be successful at rental property investing. If you think it’s us against the tenants you won’t do well. My real estate investing podcast is all about protecting you and reducing your liability. I don’t talk about compassion. You need to bring that part of it for yourself

What we do know is that these people are trying to figure life out just like you and I are.

And quite possibly they haven’t figured it out enough for you to expose yourself to them; but always do your best to reduce hard feelings.

That’s reason enough; but a selfish reason to always treat others with respect is that angry rejected tenants can cause a lot of problems.

Not too many years ago, probably 97% of the tenants that we had to turn down would contact us to argue.
They would call and hard feelings would become harder feelings. Many would call & email us for days.

We typically would get 3-4 days of conflict dumped in our laps when a tenant didn’t meet our criteria. We don’t enjoy conflict and conflict catches my mind for hours and chips away at my actual job. Nor can I  have angry individuals targeting our client’s properties. We have never had an issue with a rejected tenant damaging a property; but if a rejected tenant frowns every time they walk by one of our rentals because it causes them bad memories, well that’s not an advantage to the unit.

I would say it is a disadvantage so from a business perspective let's avoid that.

Over time we refined our interactions with tenants that we have to turn down and currently we are only getting 23% or so that contact us back. And only once. They usually respond to our rejection and leave it at that.

We make it clear that there is nothing that can be done to change this. We make it clear that it's merely based off of our criteria and not a personal decision against them. The idea is to leave the person with dignity and to not feel judged. 

Okay, I think that should get you where you need to be. Hopefully you are now a master at tenant screening.

I am Joe White, wishing you happy real estate investing

Author:

Joe White

Joe White is a Philadelphia Property Manager and Real Estate Broker. He is the owner of Grow Property Management and has been involved in the management, sales and purchases of Philadelphia area rental investment properties since 2008. He is an author and works as a real estate investment consultant and construction manager.

View all posts by Joe White
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