Professional Tenant Screening Adds Protection
Owners of investment properties may find themselves wondering if there’s value in contracting a property management company vs managing it alone or hiring Joe Smith as an unlicensed property manager. Well, yes- there’s tons of value (which I could go on and on about, but I’m going to stay on one topic here). One service that all licensed property management companies will offer their real estate investors is a thorough screening process.
Let’s review the benefits of having your management company conduct a screening process, including a credit check on prospective tenants:
- Income Source Review
If a prospect does not currently hold a job or is not bringing in income, that’s a pretty good indicator that they are not going to be able to make their monthly rent payments. If the tenant is not gainfully employed, they will be denied. While this seems like a no-brainer deal-breaker, this is also relevant for applicants that claim they are “actively looking” or “have money in savings”. With a one-year lease commitment, it’s best to ensure and request proof of current employment.
- Significant Debt
Our third-party screening application will pull a prospective tenant’s debt history. We are able to review items that are in collections, see where the prospect is behind on payments and how much debt they currently have. The reason we consider debt is because while a tenant may be gainfully employed with a good rent to income ratio, significant bad debt may make it impossible for them to keep up with their rent and outstanding bill payments.
- Rent to Income Ratio
Our screening process will also confirm if a tenant can afford their rent. Our Lease Administrator reviews the dollar amount the tenant is currently earning and ensures there is enough room for them to pay their current bills along with the posted market rent. If a prospective tenant has a monthly income of $1500, it doesn’t add up to approve them for an apartment with a rental amount of $1100; Leaving them only $400 to pay for living expenses and other bills.
- Payment History and Patterns
Our screening agency also analyzes the prospective tenant’s payment history on items such as previous rent, phone bills, credit cards and other loan payments. If the applicant is consistently late on their scheduled payments, it doesn’t work in their favour for the application process. Not only does this negatively impact their credit score, we rightfully so steer clear of tenants that are habitually late for other payments as it will likely be a pattern for their rental payments as well. Tenants with “bad debt” that has been outstanding without and payment attempts will immediately be declined.
The first four points may seem harsh, they do have an underlying message: We don’t want tenants to get in over their heads with bill payments, and neither do they!
- Rental History
Tenants are required to disclose their previous rental history and previous landlords. This will allow us to go through their rental history record and ensure they were good standing tenants that paid their rent, did not cause significant damage to their unit and abided by the rules and regulations of their past rental properties. If a prospective tenant has no rental history, they could be asked to provide a co-signer with their application.
This screening process not only added protection for our real estate investors, but it prevents prospective tenants from being in a situation where they are overwhelmed with bills and rental payments.
Article by Katie McMillan