The Choice is Yours

Most landlords agree that credit reports provide a wealth of valuable information about an applicant. Although other sources can be used to verify some of the information supplied by the applicant in his personal interview, on his application, or identification documents, a credit report is the most complete compilation of data about the applicant’s use of credit, payment history, and overall financial management. This document is the one document a landlord needs to paint in the details to make an informed decision. The applicant’s historical credit usage can be a predictor of future money management. The landlord must analyze the risk exposure that the applicant’s data history presents.

Each landlord operates a unique business with differing characteristics and resources. Markets vary and regional economies impact the size of applicant pools to fill vacancies. The decisions on how to run his business are made according to sound business criteria but often take into account the landlord’s individual comfort level and resource capabilities. What works for one landlord may not work for another landlord. The landlord is free to choose products and services that help him, his business, operate efficiently and effectively.

Tenant screening products have expanded to provide landlords – of every size, market, and comfort levels – the information they need to quickly and easily manage their properties. From the traditional scored credit report to credit recommendations based upon specific rental criteria to the latest interactive web-based landlord-tenant information partnership, the landlord has a real choice in the type and delivery of a credit screening product that meets
his needs.

Traditional Credit Reports

Long considered the gold standard of tenant screening, a full, scored credit report is familiar to landlords and tenants alike. Many a tenant has been selected using a credit score as the criteria for his tenancy. However, the full credit report contains much more than just a score. It is in detail the credit life history of the individual as reported by his credit grantors.  The history may be long or short depending upon the individual’s use of credit over time.

With a full credit report, a landlord can corroborate personal information as supplied on the rental application – Social Security number, full name and aliases, date of birth, current residential address and previous addresses if reported, employer name, address and job position if reported, spousal information; review of the individual’s payment history including credit trades, revolving, and installment accounts, account numbers and balances, accounts placed for
collection or written off; and public records for bankruptcies, tax liens, and civil judgments. A separate inquiries section lists recent requestors of the report which could indicate the applicant is shopping rentals or is being reviewed by
another grantor.

This credit report is ideally used by the landlord who wants to see detail, and carefully analyze that detail to gauge his risks. This type of landlord prefers to go beyond a credit score but at the same time does not underestimate the risk that a score can represent. Management of larger properties, multi-unit properties or multi-location properties is often best served by this kind of full-service screening.

The Fair Credit Reporting Act (FCRA) requires end users of consumer reports to have a legitimate and lawful business reason (permissible purpose) to receive a report or information contained in such a report. Tenant screening companies require submission of applicable business documents to comply with this requirement.

In addition the credit bureaus have instituted more stringent requirements for data security protection to reduce instances of identity theft and fraudulent use of credit data. To comply with this credentialing requirement, landlords as the end users of credit data must pass a physical on-site inspection of the location where consumer reports are accessed and stored. Establishment of permissible purpose and successful approval of on-site inspection is required before credit bureaus will approve access to credit reports.

Rent Recommendation

Another type of credit screening product available to landlords is a “rent-decisioning” model that analyzes the applicant’s credit history and presents a summary of the credit-report based information. The credit risk summarization is a decision tool that is sometimes better known as a “rent right,” “pass-fail,” or “scorecard” rental recommendation.

This tenant credit screening product is a software-based proprietary risk analysis model programmed with the landlord’s specific credit criteria. The landlord customizes his scoring criteria for each property and specifies the action to be taken for certain types and dates of credit events. The model can use a simple rules base (similar to if…then) or a statistical based program to evaluate the applicant’s credit risk. Most decisioning models provide a credit recommendation to accept, to accept with conditions, or to decline based upon the applicant’s information and the scoring criteria supplied. A scorecard model provides a letter grade based upon the applicant’s credit score.

The rules and criteria set for the decisioning model should fully reflect the landlord’s credit policies and give emphasis to those issues that are of concern to his unique operations. In the rent recommendation model, a landlord does not have direct access to the applicant’s credit report. The model does the screening and prepares the recommendation report.

Some landlords prefer to use this type of credit screening for the very reason that it is a so called “third party review.” The landlord does not have to be as concerned about securing or eventual disposal of the applicants’ sensitive personal information and can feel more confident that screening is performed consistently and objectively, that is, without discrimination.

Consumer Initiated Option

An innovative new credit product provides screening options to the private landlord that hadn’t been possible before. The process of requesting credit reports is streamlined, requiring no membership fees or complicated enrollment.
There are two significant features of this product – no credentialing is required and the applicant plays an active role in the process. In fact, the applicant must give his permission to release a copy of his credit report to the landlord.

The process is done online using secure technologies to safeguard sensitive personal information. The landlord creates a property account and sends the applicant an e-mail requesting the applicant’s permission to release a credit report to the landlord’s secure account. The e-mail directs the applicant to the secure Web site where the applicant must first successfully answer personally identifying questions before proceeding.

The applicant creates his secure account and accepts or declines the landlord’s request. If the request is accepted, the landlord receives the applicant’s credit report in his online secure account. If the applicant declines the landlord’s request, the application is rejected and no report will be sent.

The landlord receives the benefits of no document submission and no on-site inspection. The applicant feels more secure about data privacy and receives the added benefit that because the request was consumer initiated, the request does
not affect the applicant’s credit score.

Choose One

With more options available now than ever before, there really isn’t any reason for a landlord not to take necessary precautions to protect his business and help reduce his risks.

Which credit screening product should you choose? You should choose the product that makes sense for your business operations and your comfort level.

Tenant Screening Products for Every Business Model

Whether you’re the hands-on type of landlord or prefer to contract out property management, you owe it to your business to routinely review what new services and products are available to investors and managers of rental property. Periodic review of your operational procedures is always a good idea. Working smarter is more effective than working harder. If there’s a new product or a different product that better fits your business needs you might just want to give it a try.

Tenant screening products now being offered deserve your review. Over the years tenant screening has come to include more than just credit reports. Tenant screening now encompasses verifications for identity, address, personal data, employment, source of income, rental history, and personal references; database searches for criminal convictions, evictions, judgments, bankruptcy, sexual offenders, and OFAC terrorist list; background investigative checks; and credit tools such as credit reports and leasing recommendations.

With multiple screening products landlords can tailor the type of screenings most effective for their unique properties and local markets. By using tenant screening products landlords help protect their rental investment. Thorough analysis and evaluation of comprehensive screenings can help lessen the threat of a bad tenant. A key point to remember is to always screen and to use the screening reports that fit your business model.

Identity verification at time of application is a critical first tenant screening of the individual applying to be your next tenant. Obtaining screening reports on an identity thief can be much worse than doing no screening at all. If there is any doubt as to proof of identity, there is no need to advance further time and efforts to qualify the applicant.

Many landlords choose to conduct credit screening as soon as possible in the application process. Better to know sooner rather than later if the applicant is a viable candidate. As has been stated many times a credit report is regarded as the most valuable tool to assess the applicant’s creditworthiness, that is, his ability to pay and to pay on time.

Traditionally a full credit report was the only tool to evaluate an applicant’s credit history. Now you have choices for credit screening – the traditional detailed credit report sent directly to the landlord; a rent recommendation to approve, decline, or accept with conditions based on the landlord’s set rental criteria; or a new innovative credit screening which uses e-mail to complete the request process.

Selecting the right screening tool is an important part of your screening process. To make an informed decision, you must be knowledgeable about your legal responsibilities under The Fair Credit Reporting Act (FCRA), credit reporting agencies (CRAs), and the requirements of your tenant screening services provider. Don’t wait until the last minute to set up a provider account or complete any required certification process. An applicant in search of a new home is eager to get settled. Unnecessary delay in processing may have an unfavorable impact on the applicant’s decision to choose your rental. The good tenant you’re looking for expects good customer service.
In general, credit screening is conducted through membership with a third party service provider. The provider is legally required to have certain documentation on file before granting landlord access to consumer credit information. This would include acknowledgment and acceptance of the user service agreement, permissible purpose, proof of business ownership, and various other business documents. Landlord certification or credentialing may also be required before access to certain credit screening reports can be granted.
Various providers have different names for the credit screening tools they offer. The following designations do not necessarily reference any specific provider or product offering. Landlords interested in credit products are advised to conduct their own research and analysis of providers and products.

Traditional Credit Report

A traditional credit report is the gold standard of credit screening. With a full credit report, you can corroborate information shown on the rental application; review the individual’s payment history including credit accounts, account
balances, and collection accounts; and view reports compiled from public records on bankruptcies, liens, and judgments. You can also see who has recently requested a copy of the applicant’s credit report.
The basic credit report has four sections: identifying information, credit history, public records, and inquiries.

Identifying information identifies the individual by name, alias (also known as), shows current and previous addresses, Social Security number, date of birth, telephone number, and current and previous employers.

Credit history shows the individual accounts (also referred to as trade lines) with historical and current records of payment activities. Each account references:

• The name of the creditor, the account number, and date when the account was opened.
• The kind of credit (installment or revolving).
• Whether the account is in the individual’s name alone or with another person.
• The total amount of the loan, high credit limit, or highest balance on the card.
• How much is still currently owed.
• Fixed monthly payments or minimum monthly amount.
• Status of the account (open, inactive, closed, paid, etc.).
• Payment history (How well the account has been paid).
• Account review inquiries.

If a charged off notation is seen, the creditor has given up, usually after having attempted collection, and then written off the amount.

Public records include tax liens, court judgments (including child support judgments) and bankruptcies. Ideally, the public records section should be blank.

Inquiries show a listing of everyone who has requested a copy of the individual’s credit report. Inquiries are divided into two sections. “Hard” inquiries are ones initiated by completing a credit application; “soft” inquiries are from companies that want to send out promotional information to a pre-qualified group or current creditors who are monitoring the account.

Your screening provider may provide the option to add a credit score to the credit report. A credit score is a numerical value that represents overall credit-worthiness. It is a mathematical formula based on the information in the credit files compared to information in tens of millions of others’ credit files. Credit scoring systems assign points to each factor that indicates ability and willingness to pay creditors in a timely manner. Factors that are considered in the scoring calculation are: payment history, outstanding balances, credit history, new credit, and type of credit. Under the Equal Credit Opportunity Act (ECOA), credit scoring systems cannot use certain characteristics such as race,
sex, marital status, national origin, or religion.

The total number of points, a credit score, provides a means to evaluate credit-worthiness quickly and in a relatively objective manner. In general, the higher the score, the better (meaning less credit risk).

A credit score serves as a general indicator of financial responsibility rather than an absolute measurement of credit risk. It is a prediction of the individual’s ability to pay and to pay on time. It is not a guarantee that the individual will be a
good or bad tenant.

Landlords requiring a traditional credit report must have a one time site inspection of their rental business office (the location where rental records are stored) before being granted access to applicant credit information. The site inspection helps ensure that the applicant’s personal identifying information is kept safe and secure to help protect against identity theft.

Rent Recommendation

A rent recommendation is a report based on a software-based scoring model programmed with your specific credit criteria. The model uses a simple rules base or a statistical based program to evaluate your applicant’s credit risk. The
decisioning model provides a credit recommendation for either acceptance, acceptance with conditions, or decline based upon the applicant’s information and the scoring criteria you supply.

The rules and criteria you set up for your decisioning model should fully reflect your credit policies and give emphasis to those issues that are of concern to your unique operations. In using a rent recommendation model, you do not have
direct access to the applicant’s credit report. The model does the screening for you and you receive an analysis of the applicant’s credit report as per the selected standards.

Online Screening – Email

The latest credit screening option is conducted entirely online through cooperation between the applicant and landlord. Designed to protect the applicant’s privacy and certain personal identifying information and to give the applicant some control over the process, the landlord creates an account through his screening provider, selects the type of credit report, selects payment method, and enters the applicant’s email address. The online system sends an email request to the applicant for approval to send credit information to the landlord. The applicant responds to the email and after answering personally identifying questions, and confirming payment arrangements, submits the credit report request to the credit bureau. The landlord receives a report at his email address.

Conclusion

The landlord’s mantra should be screen, screen, screen. Filling a vacancy without knowing something about the person who will be your partner (willing or not) for the length of the rental contract is creating a liability. A filled vacancy only begins the landlord-tenant relationship. There is no guarantee of how successful and profitable that relationship will be. Screen every applicant, whether family, friend, or that seemingly really nice applicant. If you do not screen, it is a high risk roll of the dice. Are you that lucky?

Co-Signers & Guarantors

Based upon a greater perceived risk, you may offer conditional acceptance to an applicant by requiring the applicant to provide a co-signer or guarantor. The terms co-signer and guarantor are often used interchangeably and they can mean the same thing. However, there can be a significant difference between a co-signer and a guarantor if the co-signer becomes a co-tenant due to the manner in which the agreement is constructed.  We will further discuss this potential problem below and for simplicity will hereafter use the term co-signer from now on, as that is probably the term most often used by residential landlords.

Approval of the applicant as your new tenant is contingent upon the co-signer being financially qualified and fully screened. If the potential co-signer cannot successfully qualify, his guarantee is worthless, and your offer can be withdrawn since the contingency was not met.

The conditional offer, depending on the source of the information used to condition the acceptance, may or may not require notification to the applicant of his rights under the federal Fair Credit Reporting Act (FCRA).
The notification, an “adverse action” letter, is a mandatory disclosure of an action taken that is unfavorable to the interests of the rental applicant; that is, creates a burden in order for the applicant to be approved.  The subjects of adverse action and FCRA requirements have been discussed in previous tenant screening articles.

Common adverse actions by landlords include:

• Requiring a co-signer on the lease;
• Requiring a deposit that would not be required for another applicant;
• Requiring a deposit larger than might be required for another applicant;
• Raising the rent to a higher amount than for another applicant; and
• Denying the application.

If your conditional offer was based in whole or in part on any information contained in a consumer report, you must send the applicant an adverse action letter. You must send an adverse action letter even if other factors influenced your decision.

If you offered conditional acceptance based upon information personally supplied by the applicant, such as the rental application, a personal request from the applicant to provide a co-signer, or during conversions held with the applicant, you do not need to send an adverse action letter.

The applicant should be made aware that the potential co-signer will need to complete a rental application, pay any applicable processing fees, and submit to your regular tenant screening procedures. In short, you will evaluate the co-signer as thoroughly as you did the applicant. Character, capacity, and credit are the areas of interest as you conduct screening.

In particular, you want to determine that the co-signer can take on additional financial obligations. This is important since the co-signer will be responsible for not only his own housing costs but also the tenant’s rent in case of default, and, perhaps, damages by the tenant. Does the co-signer have enough liquid resources to cover the tenant’s rent or other financial obligations for some period of time? If the tenant skips out, will the co-signer be able to pay as agreed – both the rent until a replacement tenant is found and any damages?

You will need to deduct the co-signer’s housing costs from his gross income before comparing that income amount to your income standards.  For example, if the co-signer has a gross monthly income of $4,000 and mortgage costs of $1,000, then his adjusted gross monthly income is $3,000. Accordingly, if you use a 3:1 income to rent ratio, the tenant’s rent cannot exceed $1,000 if the co-signer is to qualify under your terms.

As mentioned earlier, absent adequate language in the lease, a co-signer can be considered the same as a signer regarding the lease agreement. Accordingly, the co-signer can become a co-tenant who, even though not living in or doing business in the leased premises, has all the same rights as a co-tenant who resides in the subject unit.

A guarantor is someone who assumes certain financial liabilities for a lease, but does not actually sign the lease agreement and, accordingly, has no rights to the premises. Accordingly, the landlord usually wants the co-signer to legally be considered a guarantor. There are basically two different types of guarantees, broad and narrow. The broad form of guaranty makes the co-signer/guarantor liable for all financial matters including rents and damages. The narrow form limits the liability to the rent.

Whatever the title of the agreement, it is important that the language makes it clear that the co-signer or guarantor is only guaranteeing all financial aspects of the tenant’s lease and is not occupying the premises pursuant to the lease and that the co-signer or guarantor does not become a tenant.

If the co-signer agreement is not contained within the lease agreement or signed concurrently with the lease agreement, the lease agreement should contain a clause that the lease is contingent on receipt of the signed co-signer agreement. The co-signer should receive a copy of the signed landlord-tenant lease agreement as well as of any separate co-signer document.

If a co-signer does not sign the lease agreement in person (e.g., the out-of-state parent of a college student) it is very important that, in addition to providing copies of the same identity verification documents that should be required of the applicant, the co-signer’s signature be notarized in order to minimize the possibility of forgery.

Guaranty agreements can be written to cover only an initial lease term or to include future extensions and renewals. The agreement should include any assignee of the lease during the term of the original guaranty. If a lease is modified during the guaranty period, all parties, the co-signer/guarantor and the tenant, should be required to sign a new document related to the modified lease.

In community property states landlords should require that both husband and wife execute a co-signer or guaranty agreement in order to be certain of binding the community. For the same reasons, both husband and wife tenants should be required to sign lease agreements. It is best to have both signatures whether or not this is an issue in a particular state because it eliminates potential disputes regarding liability for a lease and any issues regarding the fine print in the statures. The same recommendation applies whether the co-signer or guarantor is guaranteeing a commercial lease for a limited liability entity or parents are guaranteeing a residential lease for a student child.
Having a formal, written co-signer agreement emphasizes the legal obligations of both co-signer and tenant and what the consequences will be if the tenant defaults. Language in the co-signer agreement should make it clear that:

• The  co-signer is jointly and severally responsible with the tenant for any and  all financial obligations of the tenant under the lease agreement  including but not limited to rent, deposits, fees, or other charges as a result of damage to the unit.
• The co-signer acknowledges that the landlord has no obligation to give notice to the co-signer if tenant defaults.
• The co-signer agrees to appoint the tenant as the co-signer’s agent for service of process in the event of any lawsuit that might arise from the agreement, releasing the landlord from any obligation to separately serve
  the co-signer directly.
• The co-signer acknowledges the landlord may demand that the co-signer perform per the co-signer agreement in the event of tenant default without first using any of tenant’s security or other deposits.
• The co-signer shall remain liable for the performance of an assignee or sublessee of the tenant unless expressly relieved by written termination of this condition by the landlord.
• The prevailing party of any legal action brought by either party to enforce any part of the agreement will recover reasonable attorney fees, court costs, and other expenses associated with collection of a judgment.

While it can provide a means to fill vacancies, particularly in tight markets or college towns, many landlords feel because of the additional time, effort, and costs to screen co-signers and coordinate the lease/co-signer agreement process, the practice of accepting co-signers is of little real value. As a practical matter then, a landlord can legally set his rental policies to refuse to consider co-signers with one exception.

If a disabled applicant with insufficient income but who is otherwise qualified under the landlord’s standards, asks the landlord to accept a co-signer to guarantee rent if need be, the landlord must make an exception to his rental policy and conduct screening on the proposed co-signer. If the co-signer qualifies under the criteria previously discussed, the landlord must accommodate the applicant’s request and accept the co-signer.

Pre-Leasing

Some landlords like to minimize downtime of units by “pre-leasing.” Although at first thought this might seem like a good idea because it can theoretically reduce the period for which no rent is being paid, it sometimes creates enough trouble to more than make up for the times when it was advantageous.

By the term “pre-leasing” we mean renting a property that is still occupied by an existing tenant, more specifically signing a lease with the prospective new tenant before the existing tenant gives up possession.

While the landlord has the right in most states to show the unit while current tenants are still in occupancy, it is not always a good idea to do so.

The procedure has the potential for creating conflicts between the landlord and the departing tenant. Because the departing tenant is already stressed out about the pending move, probably already packing and organizing for it, there is a greater potential for such conflicts. Conflicts can relate to disputes regarding invasion of privacy and proper notices of entry, even claims of theft.

While privacy is somewhat subjective, in most states notice of entry can be a practical problem if the departing tenant wishes to hold the landlord to the letter of the law.  Many states require the landlord to provide the tenant 48 hours notice prior to each non-emergency entry. Entry must be during reasonable hours. Not only is 48 hours, even 24 hours, a long time when potential applicants are looking for housing, but the tenant may not consider it reasonable to show the unit during the dinner hours or at certain other specific times on certain days.

While in theory the landlord could push the issue of entry at any reasonable time after the minimum notice period, in practice this should not be done. The landlord should not enter a rental unit against the tenant’s wishes except for reasons of safety or preservation of property. The landlord’s only recourse against failure of the tenant to cooperate is to file a lawsuit. Use of force or even excessive pressure could result in a lawsuit against the landlord, even
criminal charges.

Security of the departing tenant’s unit is of particular concern if the property is being shown when the tenant is not present. The tenant is more likely to make theft claims against unknown persons viewing the unit than against the landlord or manager who is doing the showing. The landlord should
remember that he/she is providing entry to persons on whom no screening has yet been done. There have been cases where the showing has served as a chance for a burglar to case the unit prior to breaking in.

If the current tenants are uncooperative or outright hostile, it is best to wait until the unit is vacant.

The matter of privacy and advance notice is best dealt with by discussing the issues in advance of marketing the still-occupied unit. Often, agreeing on a specific time of the day when showings might occur is helpful.

The issue can be minimized by following certain procedures, including the following:

• Discuss the property showing issue with the outgoing tenant, including whether he wishes to allow it in evenings or on weekends;
• Give the tenant as much notice as possible before entering;
• Try to limit the number of showings each week; and
• Offer to reduce the rent slightly if the outgoing tenant considers showing to be an imposition.

Another issue is related to both privacy and security. A sign in the yard or advertising in any other format that provides the address of the unit can cause problems for the departing tenant. The least problem is when it results in interested persons knocking on the departing tenant’s door or the door of another tenant in another unit of the same property. The worst problem is if it results in a home invasion because someone broke in expecting the unit to be vacant. If a sign is put up, be sure to include the words “Shown by Appointment Only, Call (phone number), Do Not Disturb Occupants.”

The prospective applicants for the coming vacancy may be turned off by the housekeeping of the departing tenant and/or the current condition of the unit. At the very least, the unit may not appear to be worth the rent being asked. Even worse, it may be considered not even habitable to discriminating potential applicants. Obviously, the degree to which this is an issue will depend primarily on the housekeeping habits of the departing tenant, but will also depend on the condition of the unit compared to the condition it will be at move-in of a new tenant.

It is difficult for a prospective new tenant to properly evaluate a unit that is overly filled with furniture and other belongings, including a lot of already packed boxes, some of which hide defects that would be objectionable to the prospect. As examples, there can be carpet stains or tears and/or dirty or damaged walls, under and behind furniture, respectively. When such defects are found after the unit is vacant, the landlord must correct them or hope that the tenants will be happy living with them after being surprised at move-in, with the latter almost certainly being wishful thinking.

When the prospect sees the condition of the unit before it has been rehabilitated, he/she may consider the quoted rent to be too high for what can be seen and may be concerned about depending on the landlord’s promises regarding work to be done. Offering to put promises in writing can help, but many people can only see what exists and cannot visualize promised work or their expectations may be more than what is done. The matter becomes even more problematical if the landlord discovers once he has possession of the empty unit that significantly more work than expected will be required.

Potentially most troublesome, is what can result from the landlord committing to a replacement tenant before the departing tenant has actually vacated the unit. When the unit for which applications are being taken is still occupied, one must be concerned that the departing tenant may not vacate in a timely manner. A landlord who has signed a lease with a replacement tenant and then finds that the existing tenant fails to vacate as scheduled can end up between a rock and a hard place.  At best, there is an unhappy beginning for the new landlord-tenant relationship, and, at worst, there may be a lawsuit, even further delaying re-leasing of the unit.
For landlords who wish to pre-lease in spite of the disadvantages, there are ways to minimize the potentially greatest risk of being unable to give possession to the new tenant on the date promised. The risk of problems can also be reduced by having lease clauses that clearly define adequate move-out procedures and by providing notice to the departing tenant as previously discussed.

The best protection for the landlord is to put some of the risk on the incoming tenant by lease clauses or separate document in which the incoming tenant understands that possession is contingent on the old tenant vacating by a specific date, meaning that possession will be given within the time required for preparing the unit after the vacating. This may, of course, eliminate some potential candidates from the pool of applicants and even seriously deflate the pool in a bad market.

The bottom line is that landlords should consider the overall picture when deciding whether to pre-lease. The vacancy period between the tenants is usually most dependent on the time that will be required to clean, paint, and perform other work required between the tenants. Under normal market conditions, pre-leasing does not provide much advantage over not showing the property until possession has been returned to the landlord. A
landlord must decide whether that small advantage is worth the risk of extra trouble associated with interfacing with the departing tenant, the other issues
related to an occupied unit, and the potential for serious problems.

Consumer Reports and Adverse Action Notices

Tenant screening is a process of investigation, analysis, and selection/rejection of rental applicants. Not everyone can be your next tenant and not everyone should be your next tenant. Your decision to accept or reject an application will be based upon information you obtain from various sources and by qualification under sound business criteria.  The circumstances of a rejection determine what you must do by law to notify an applicant that his application has been rejected. Handling the situation in an appropriate manner and doing so legally is the subject of this article.

Landlords using consumer reports for evaluation of rental applicants must follow the provisions of the Fair Credit Reporting Act (FCRA). A consumer report contains information about a person’s credit characteristics, character, general reputation, and lifestyle. A report also may include information about someone’s rental history, such as information from previous landlords or from public records like housing court or eviction files. Consumer reports include

• Credit reports from a credit bureau, such as  TransUnion, Experian, and Equifax or an affiliate company,
• Reports from a tenant screening service that describe the applicant’s rental history based on reports from previous landlords or  housing court records,
• Reports from a tenant screening service that describe the applicant’s rental history and also include a credit report the service got from a credit bureau,
• Reports from a tenant screening service that is limited to a credit report the service got from a credit bureau; and
• Reports from a reference checking service that contains previous landlords or other parties listed on the rental application on behalf of the rental property owner.

The FCRA is designed to protect the privacy of consumer report information and to guarantee that the information supplied by consumer reporting agencies (CRAs) is as accurate as possible. To be covered by the FCRA a report must be prepared by a credit reporting agency (CRA). The most common type of CRA is the credit bureau.

Landlords often ask applicants to give employment and previous landlord references on their rental applications. Whether verifying such references is covered by the FCRA depends on who does the verification. A reference verified by the landlord’s employee is not covered by the Act; a reference verified by an agency hired by the landlord to do the verification is covered.

The FCRA requires landlords who deny a lease based on information in the applicant’s consumer report to provide the applicant with an “adverse action notice.”

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes not only a landlord’s denial of a rental application but also a landlord’s action that imposes a burden not required of all tenants. Common adverse actions by landlords include

• Denying an application
• Requiring a co-signer on the lease
• Requiring a deposit that would not be required for  another applicant
• Requiring a larger deposit than might be required for  another applicant raising the rent to a higher amount than for another applicant

The landlord must provide the notice if the adverse action in any way is based on a consumer report that played a factor in the landlord’s action, even though its action is based primarily on an applicant’s income or prior reputation as a tenant. In fact, even if the information in the report plays only a small part in the overall decision, the applicant must be notified. This means that the landlord must usually send a notice if you hire a tenant screening company or even if just
looking at a credit report. Disclosure of this information is important because some consumer reports contain errors.

As examples, landlords must send an adverse action letter to applicants who are denied a lease if the following describes the decision related to denial even if other factors also played a part.

• A tenant screening company is hired which gives the landlord a report that includes negative information leading to rejection of this applicant,
• A consumer screening agency is used that supplies only a credit report and the applicant is rejected on the basis of information in the report,
• A local landlord or owner association has an arrangement with a tenant screening company that provides a member with a report on an applicant that results in the landlord deciding that the applicant is unacceptable,
• The landlord pays someone on a contractual basis (as an independent contractor rather than an employee) to do tenant screening and the contractor’s report leads the landlord to conclude that he shouldn’t accept the applicant,
• The landlord contracts with a property management company to investigate applicant and the landlord rejects an applicant based on what the management company says,

An adverse action report is generally not required if the basis for the rejection is one of the following:

• Information obtained from applicants themselves on the application form or in conversations with them or
• Oral or written information provided by an applicant’s reference.

Furthermore, landlords usually needn’t send a formal adverse action letter if the following describes the situation.

• The applicant is not accepted because the landlord, when asked by the applicant, won’t vary a rental term such as the rent or deposit amount or the pet policy,
• Information supplied on the rental application indicates that the applicant cannot meet the landlord’s criteria – e.g., no income,
• The landlord learns from a conversation with the applicant that he has to move in by a certain date because he’s being evicted and the eviction is considered to indicate a poor risk,
• The landlord or his employee calls the applicant’s past or current landlord, employer, or personal reference and which provides information that leads to rejection, or
• A self-employed applicant provides tax returns that show an income below the landlord’s qualifying criteria (e.g., “3 times the rent”),
• Upon analyzing an employed applicant’s pay stubs the landlord discovers that the applicant was untruthful regarding place of employment or income when filling out the application form.

Section 615(a) of the FCRA requires landlords, when they take an “adverse action” against a rental applicant based in any way on a “consumer report” from a “consumer reporting agency.” to provide an adverse action notice to that consumer. In particular the law requires landlords to provide tenant applicants with a notice that informs them about the adverse action, identifies the consumer reporting agency that provided the report that contributed to the landlord’s action, and
specifies consumers’ rights under the FCRA.

When an adverse action is taken that is based solely or partly on information in a consumer report the FCRA requires the landlord to provide a notice of the adverse action to the consumer. The notice must include:

• The name, address and telephone of the CRA that supplied the consumer report including a toll-free telephone number for CRAs that maintain files nationwide,
• A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it, and
• A notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.

Although the law can be interpreted to allow oral adverse action reports, it is best to mail an adverse action letter to rejected applicant. Although emailing is probably better than a phone call, it really does not provide the paper trail that might be needed if the applicant claims he never received a letter. It is best to send the letter Certified Mail return receipt requested, providing proof that the letter was received by the applicant on a specific date. At a minimum send it with a
Certificate of Mailing proof of mailing, as this will at least prove when it was mailed.

Landlords who fail to provide required disclosure notices potentially face legal consequences. The FCRA allows individuals to sue landlords for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees.  The law also allows individuals to seek punitive damages for deliberate violations of the FCRA. In addition the Federal Trade Commission (FTC), other federal agencies and the states may sue landlords for non-compliance and get civil penalties. However, a landlord who inadvertently fails to provide a required notice in an isolated case has legal protections, so long as he can demonstrate “that at the time of the violation he maintained reasonable
procedures to assure compliance” with the FCRA.

The above discussion relates only to federal law. As for many property management issues, landlords must also understand and abide by any more restrictive consumer credit laws that might exist in their particular states.

Screening In a Bad Economy

As we move toward the end of the year, high unemployment rates continue their impact on rental housing affordability and availability. Landlords are facing increased competition for qualified applicants to fill their vacancies. In some markets, properties are staying vacant much longer than even just a year ago. It is a renters market in many areas of the country where supply of rental housing exceeds the demand, sometimes by significant margins. How much of an impact the current economic conditions have on your business may well be determined by your perspective.

While it may be true that the pool of applicants to fill vacancies is likely to include less qualified applicants and while it is true that more people are unemployed and/or have had other problems that affect their rental qualifications, logic would indicate that an unemployment rate that is 5 percent higher than usual does not translate into 100 percent of applicants being unqualified.

So while it isn’t business as usual it is still business. As we have discussed before, risk management becomes ever more important during changing conditions. Tenant screenings remain a critical component of risk management practices.

Unfortunately, we are seeing evidence of landlords reducing screening efforts based on their thinking that there is now less reason to bother with screening because all applicants will have blemished credit records. Unless this is your first landlord experience, you will have come across bad credit scores before. Current conditions notwithstanding, what was your procedure to accept or reject?

However, we believe landlords should be putting even more effort into adequate screening during bad times using a wide variety of screening tools.

While landlords may choose to lower the minimum qualifying credit score, some of the risks of doing so can be offset by more aggressively utilizing other screening tools. This includes a closer examination must be made of the other detailed information provided on credit reports, more extensive rental history checks with previous landlords, check of eviction records in multiple jurisdictions, careful employment and income verifications, and extensive criminal record checks.

A brief review of some of those screening tools follows.
Credit Reports

A credit report is the most important screening tool and should be utilized even if no other tool is used.  It is the one tool that does not require cooperation of previous landlords, cooperation of employers, knowledge of which county in the country may have a record of eviction, or knowledge of which state or county may have a record of conviction. Furthermore, credit reports provide a variety of information that often provides clues regarding which of the other tools might be useful and which state or county should be of interest.

With a full credit report, you can corroborate information shown on the rental application; review the individual’s payment history including credit accounts, account balances, and collection accounts; and view reports compiled from public records on bankruptcies, liens, and judgments. You also see who has recently requested a copy of the applicant’s credit report.

If the report shows a positive pattern of responsible credit management before the date of a significant affecting event (foreclosure, bankruptcy, major medical bills, divorce, etc.)  you could infer that the event was the contributing factor resulting in derogatory items in the credit file. While the event cannot be overlooked, the data can be analyzed in the overall context of credit use and payment history. As is often the case, honest discussion of events with the applicant may give more detail that may allow the applicant to be considered for the vacancy.

Past Rental History

It is important to check each applicant’s rental history in addition to his credit history because many types of tenant problems do not make their way into a credit report.

When checking rental history be sure that you are really speaking with the actual past landlord. There are many ways to do this including checking ownership records and obtaining the correct phone number independently of the applicant.

Some current landlords may be unwilling to say anything derogatory about bad tenants because they would like to be rid of them and would be happy to transfer the problems to you. Accordingly, it is always best to also contact the applicant’s landlords prior to the current one, the reason most experienced landlords require the applicant to provide rental history for at least the past three years. For an applicant who has rented the same unit for more than a few years, it can be difficult to get history from more than the current landlord, but a long-term tenancy often is indicative of a good tenant.

At a minimum, you will want to confirm basic information such as dates of residency, the rent amount, the security deposit amount, and whether the landlord would rent again to this tenant. If only one question could be answered, it would be “would you rent to this tenant again?”

Employment & Income Verifications

Employment and income documentation can consist of requiring the applicant to produce the last several paycheck stubs. Note that last year’s W-2 provides no certain information regarding current income, although it might be useful as additional verification if other items are questionable.

Self-employed individuals can be asked to provide copies of 1099s and tax returns (as can employee applicants), but one must keep in mind that it is easy to createW-2s, 1099s, and tax returns that say whatever is desired using a personal computer.

Verification of non-earned income, including interest, dividends, and other investment cash flow and entitlement items, including disability, social security, and private retirement, are all relatively easily verified because the recipients are
provided official statements of the amounts.

Eviction Searches

It is good practice to conduct a search of eviction records as recorded in the court of jurisdiction for the counties where the applicant is known to have resided. You may want to review the rental application, the applicant’s driver’s license or motor vehicle registration, and current/previous address history as shown in the credit report to determine applicable search areas. Most tenant screening vendors offer regional, statewide, and national eviction searches of landlord-tenant filings.

Criminal History Checks

A criminal history check generally includes a search of statewide, multi-state, or regional criminal records databases and sex offender registries. For a more detailed search, most screening vendors can provide a “hand search” of a specific county’s criminal records index and court documents.

Criminal background reports generally include the defendant’s name (and any aliases), the defendant’s date of birth, gender, race, physical description, dates of the offense, and the date of disposition or conviction. To help ensure accurate results, be sure you have the correct spelling of the applicant’s full name, a verifiable date of birth, and a list of known aliases used by the applicant before purchasing a report.

A search of convicted sexual offender records may be included in a comprehensive criminal report or in case of some vendors, ordered as a separate report. Be aware, however, that some states restrict the use of this information to deny housing.

In general, landlords are free to reject someone with a criminal background, as ex-cons are not a protected class under federal fair housing laws. An exception is that past drug use, even when resulting in a conviction, is considered a disability under federal law.  Those currently using drugs or those who have been convicted of drug manufacturing or dealing are not protected. Landlords must also consider any protections provided by state or local laws.

Preparing For Vacancies

Some landlords do not adequately prepare for vacancies. When landlords don’t prepare, they can only react, and reacting to rather than preparing for vacancies usually makes the vacancies more costly.

Changing conditions in the economy, changing conditions in tenants’ needs and wants, and effects of life events will have significant impact on the landlord’s ability to fill vacancies. Timing of vacancies is not always controllable by the landlord, but planning how to handle vacancies is under the landlord’s control. By having a plan, the landlord may ease some of the stress and minimize downtime and expense in filling vacancies.

Scheduling

Adequately preparing for vacancies includes keeping track of when vacancies might occur. Although landlords cannot always totally control the timing of vacancies, there are some things that can be done to minimize surprises. This includes the very basic item of not scheduling your vacation near the date of a potential vacancy and being sure that your favorite handyman or other vendors used in preparing vacancies for re-leasing will be available at the time of a likely vacancy.

Landlords have potential control over scheduling vacancies by properly choosing the termination date of lease agreements. Even month-to-month  agreements give some control if the landlord writes all agreements so as to terminate at the end of a month rather than related to a mid-month date of lease origination.

Tenant’s Notice of Intent to Vacate

Neither landlord nor tenant want any surprises or delays during the final days of the lease term when stress levels are usually already at a higher level. The
landlord will want to start as soon as possible to begin clean-up and repair and the tenant is under pressure to coordinate his move and perform according
to his ending lease and a new lease or home purchase elsewhere.

Lease agreements should include a clause that requires the tenant to give written notice by a specified number of days prior to the end of the lease term of
intent to vacate. Written notice to vacate is a requirement by law in some states. A notice requirement reduces the chances of misunderstanding or
misremembering the important details by either party.

A written notice is of benefit to the landlord should the tenant not move-out as planned.  The tenant, through no fault of his own, may be held up because his new residence is not ready as scheduled and want/need to stay over a few days. The landlord having anticipated the move-out date may have signed a lease with a new tenant and promised a set move-in date for the new tenant that he cannot now deliver. The new tenant may choose to sue the landlord for default of possession date and the landlord can then in turn file suit against the holdover tenant for failing to move-out as noticed. The written notice will be of value in proving the landlord’s case in court.

The written notice signed by the departing tenant will also help convince the tenant to make other temporary arrangements regarding housing if necessary so as not to delay the replacement tenant’s move-in. When there is not a waiting replacement tenant, the departing tenant will probably be less likely to argue about whatever rent the landlord demands for a holdover period.

On a related issue, landlords should require advance commitment from tenants who they wish to retain. Landlords should deliver or mail  renewal/extension agreements to tenants well in advance (say, 60 days) of lease expiration dates and require response by at least 30 days prior to expirations.

Landlord’s Notice to Tenant of Non-Renewal of Lease
In most states a landlord has the option to not renew or extend a lease beyond the termination date. In most jurisdictions, the landlord does not need to provide the tenant any reason for not renewing or extending the lease term. When a reason is not required by law, it is almost always better to not provide a reason, as an improperly stated or misunderstood reason could give rise to a claim of a fair housing violation.

Some landlords may think it unnecessary to provide additional notice to the tenant that the lease term is expiring on a certain date and such notice is not usually required by law. However, doing so well in advance is of value to the landlord because it serves as a record that the tenant was notified that the landlord did not wish to renew the lease.

If the tenant stays on after the expiration of the lease, the tenant becomes a holdover tenant. Despite the expiration of the lease, in order to remove the holdover tenant from the property, the landlord in many states must serve the holdover tenant with a notice to vacate the property, stating the date upon which the tenancy ended. If the tenant does not vacate by the end of the notice period, the landlord can file an eviction lawsuit. Some states do not require a notice to a holdover tenant and allow the landlord to immediately file an eviction lawsuit upon expiration of the lease.

Most month-to-month tenancies can be terminated with 30 days written notice to the tenant. However, as a particular state may require a longer notice period for certain tenants – e.g., those who have been occupants for at least a specified period. Landlords should consult their state’s landlord-tenant law for current requirements.

Market Surveys

A market survey is the first line of defense against the costs of filling vacancies.  Supply and demand for rental units and in particular, type of property,
condition, and location, will have a significant impact upon a landlord’s ability to attract and retain good tenants and to command market rents. Accordingly, minimizing the length of a vacancy is dependent on asking the appropriate rent when marketing the vacancy.

As conditions change, the landlord can adjust his rents and, when necessary, his qualification criteria, in order to stay competitive in his market area.

Have a Maintenance Plan

Not Staying on top of needed maintenance and repairs is one of the most shortsighted and costly mistakes that landlords can make.  It is easiest to stay on top when one has a good maintenance plan in place.  It is impoirtant to stay on top for a number of reasons.

First, the best tenants will not want to live in badly maintained property.  Accordingly, badly maintained units attract less qualified applicants.

Second, if the property is not kept in good repair and the problems are not repaired during a vacancy, the new tenants will start out having a bad experience.  Furthermore, the fewer defects for a property when a tenant can have when the tenant moves out.

Third, many types of maintenance items that are not taken care of when initially discovered, or within a short time thereafter, not only become worse as time passes, but can eventually be the cause of other problems that are substantially more costly to correct.

Fourth, without a plan, you have less control over your expenses.  Emergency (unplanned) repairs will usually be more costly in terms of money, stress, and tenant dissatisfaction.

Fifth, failure to take care of repairs, particularly those related to health or safety can result in withholding of rent, a government inspection, and/or citations with fines.

Types of Maintenance

We like to divide the tasks that should be part of a maintenance plan into eight categories.

Emergency – This maintenance must be resolved within a very short time in order to minimize harm to individuals or prevent further property damage.  In order to minimize the implact of many types of emergencies, it is a good idea to provide tenants with basic information including location of utility shut-off valves and switches, instructions on how to turn off utilities, and when such action might become necessary.  Also, since even the best maintained properties can experience unexpected problems, a good idea is to be prepared ahead of time with a list of contractors and tradespersons who can be called to handle maintenance problems during and after regular business hours.  The do-it-yourself landlord is best prepared with a ready tool box kept in his vehicle.

Deferred –  This is maintenance, which, while not necessary critical, should have been done long ago.  A policy of deferred maintenance will likely result in higher cost for labor and materials, including for collateral damage, when work must finally be done as emergency maintenance.

Preventive –  Maintenance preformed on a regular schedule, as a result of a regularly scheduled inspection, or noticed during a visit to the unit for other purposes can prevent or minimize costs of emergency repairs or replacements.  Preventive maintenance also extends the operating life if the building and its systems and usually saves money in the long run.  By having a schedule for inspection and for repair of any items found, the landlord can avoid minor problems becoming major (think expensive) repairs.

Corrective –  This is maintenance that gets the property back to good working order when there has been a breakdown or malfunction.  Preventive maintenance significantly reduces the need for corrective maintenance.

Custodial –  This is routine upkeep of the property.  for many single-family properties, routine maintenance responsibilities are transferred to te tenant by the landlord’s lease agreement.

Cosmetic – Unsightly repairs and maintenance are noticed by the type of tenant that you would like to have in your unit.  Tenants who don’t care about such “cosmetics” are more likely not to care about how they treat your property.  Paying a little more to have drywall properly repaired by someone with adequate ability and other issues of a cosmetic nature will make it maore likely that you will attract good tenants.

Upgrades – Upgrading your property can mean improving the quality of your tenants and your cash flow.  Improvements such as new light fixtures, better floor and window coverings, or additional amenities make a property more desirable to the type of tenant you want and may bring significantly higher rents.  One example of and upgrade that usually both reduces long term expense and increases rents is replacement of vinyl flooring with ceramic tile flooring.

Renovation or Rehab – Unlike the TV home improvement show where it seems that renovations and rehabs happen quickly and effortlessly, in the real world they can take a long time and involve a great deal of work, particularly if you’re trying to do it yourself while holding down a day job.  If one is not careful, they can also cost a lot more than expected.  Major work is not always cost effective, partcularly in the short term.

In Summary

The positive benefits of good property maintenance are (1) better tenants who pay their rent on time and take good care of your property, (2) increased tenant satisfaction that can lead to longer tenancies,  (3) improved landlord-tenant relations, reducing stress, (4) higher rents, (5) less likelihood of regulatory complaints, (6) less worry about governmental inspections, and (7) reduced vacancy costs.

Tenants who are content with their rental units usually don’t move unless required by external circumstances.  One of the ways to keep good tenants is to be diligent in providing good maintenance.

Lease Buyouts

It is often advantageous for a landlord to allow a tenant to buy out his lease.

Reasons for Buyouts

There are basically two reasons for a lease buyout. One is the tenant wanting or needing to break a long-term lease. The other is the landlord wishing to be rid of a tenant even though the tenant has not defaulted on the lease in a manner that
allows the landlord to terminate the lease for cause.

Examples of a tenant-initiated buyout are (1) the tenant needing to downsize to a lower rent or upgrade to more bedrooms (or larger commercial space), (2) the tenant being offered an improved employment opportunity in a distant city or another state, (3) a marriage requiring consolidation of housing, or (4) a married couple splitting up and needing separate housing. When the tenant approaches the landlord regarding early termination of a lease, the landlord has the option to refuse. Of course, in most states if the tenant simply breaks the lease and leaves, the landlord is obligated to minimize damages and re-lease the property as soon as possible rather than leave it vacant and require the tenant to continue paying the rent for the remainder of the lease term.

Examples of a landlord-initiated buyout are (1) a tenant who is often the cause of complaints from other tenants, (2) a tenant who regularly complains about petty issues, or (3) the landlord becoming aware of the tenant’s deteriorating financial situation that will likely result in default.

Advantages of Buyouts

A lease buyout can be primarily of advantage to one of the parties, but is often of benefit to both the landlord and the tenant.

The tenant is able to terminate his lease without financial penalties beyond the buyout fees and without risk of a lawsuit and/or damage to his credit record.

The landlord eliminates the need for eviction and/or other legal actions when the tenant eventually quits paying rent due to his financial situation. Depending on the amount of the buyout fee and market conditions, the landlord may be able to fill the vacancy without any loss of income. Departure of the tenant may also minimize the need for cleaning and repairing the vacant unit if the buyout agreement makes condition of the property a contingency of the deal.

Determining Buyout Fees

What might be considered a reasonable buyout fee to either the landlord or tenant or to both parties can vary widely depending on the reasons, the current rental market, and various other factors.

The landlord usually has the upper hand when a tenant approaches him regarding early termination of a lease. However, the landlord must temper his desire to maximize his profit by sticking it to the tenant. The maximum amount of
compensation the landlord can obtain for allowing termination of the lease depends on various factors including the tenant’s financial condition. If his condition is dire, he will likely leave anyway and may even be “judgment proof.”
The landlord must remember that although the tenant wishes to avoid damage to his rental history by simply leaving, the landlord may be stuck with a significant financial loss if the tenant stops paying rent long before giving up
possession, leaves the premises in bad condition, and “disappears” so that it is difficult to serve for legal action.

It is usually best to take the middle ground and calculate the fee based on a conservative estimate of the actual costs of an early vacancy, remembering that there would be a vacancy at the end of the tenant’s lease anyway. Items to consider usually include (1) costs of preparing the premises for the next tenant, (2) lost rent during preparation down-time, (3) marketing expenses (including advertising and commissions), and (4) lost rent during the marketing period until rent begins from a new tenant. Items 1 and 2 can be significantly affected by the condition that possession of the property will be returned to the landlord. Items 3 and 4 depend on current market conditions.

In an improving rental market it can actually be significantly advantageous that the lease be terminated early, particularly when the departing tenant was at a low rent and the lease still has a long time to run. This is of most importance for
commercial property where leases typically are multi-year in length, with limited increases along the way. Under such circumstances, the landlord might only ask for a token couple of weeks or a month of rent to cover item 4.

At the other extreme, in a deteriorating market one must make a guess at how many months will be required to find a tenant who will pay at least the rent that the departing tenant was paying. This might require many months of rent to cover item 4. One must also add in additional costs if the new rent is expected to be lower than that of the departing tenant.

The Buyout Agreement

The complexity of a buyout agreement depends on a number of things including the reason(s) for the buyout, but the thing common to all buyouts is that the agreement should be a written document that covers all material issues. Accordingly, as soon as agreement has been reached between the two parties regarding the terms, prepare a written document.

Among issues that should be covered in the agreement are:

State that the document is the full and final agreement regarding the lease.

State whether or not any part of the deposit will be applied against the buyout fee, whether or not any part will be refunded if the unit is immediately re-leased, or whether no credit for the deposit is to be given.

Most states require, at least for residential rentals, an accounting for any part of the security deposit not refunded within a specific time frame. The buyout agreement should cover this issue in a way that will eliminate the need for
further action regarding an accounting.