Due Diligence
Evaluating business risk and implementing best practices to control business risk underlies the selection of a new tenant. The beginning of a new calendar year gives opportunity to review your business rental policies and practices and to determine whether those policies and practices have been good for your business. Your best practices for the coming year may require modifications or additions due to outside market influences – e.g., new and proposed legislation – or revision to deal with current conditions in the local market. However, there is a universal business practice that remains a landlord constant which should be the core function of your business risk management practice – Tenant Screening.
Tenant screening is the assessment of the applicant’s potential future risk of material default of lease terms and conditions if the applicant were to be offered tenancy and the tenancy resulted in financial loss. Tenant screening may also disclose information that the applicant is currently a business risk who does not even qualify under your usual rental standards. Your business policies direct your business decision to accept or deny the rental application.
In every landlord help article, landlords are advised to conduct tenant screenings as THE best business practice to reduce known business risk. There is good reason that we repeat this advice. Landlording is a risky business and you must take appropriate measures to help reduce your exposure to known risks. High risk tenant behaviors such as non-payment of rent, nuisance disturbances, property damage, and direct threats to the safety and welfare of others are liabilities that you cannot afford to take on. Such behaviors are costly, time consuming, and all around bad for business. You do not need bad business. If you cannot avoid risk you must have a risk reduction policy that helps you minimize your business risk. Legal and sound business rental qualification standards, aka your tenant screening policies, help you reduce known likely risks and avoid potential risks not even yet considered. With that in place, a strong lease agreement terms and active enforcement of rental policies will help protect your business against bad tenant outcomes.
How do you determine if your current policies are adequate for your business? There should be no doubt that your policies are legally compliant to all applicable levels of governance. That you have the proper compliance level is always going to be an item on your due diligence list. The regulations, restrictions, and prohibitions for and against a variety of legal issues and landlord-tenant matters that involve federal, state, and local government agencies can be overwhelming and cumbersome in determining the compliance level. In general you are required to set your compliance to those laws, statutes, and ordinances that provide the most stringent protection for fair housing rights, tenant rights, and consumer privacy protections.
You must always conduct routine due diligence for new and proposed legislation that can impact your rental business. The number of states that have passed or have pending legislation regarding use of consumer credit reports and criminal background checks has increased substantially during the last several years. For landlords in some market areas, the business of landlording has become more complex with many cities setting ordinances that highly regulate tenant screening practices. As a business owner you must know what your regulatory climate dictates and determine whether your business is in full compliance. Not all rules and regulations are bad for business. Protections for business can work for both landlord and tenant.
There is a greater responsibility for landlords under their obligation of duty of care to tenants to protect them from known risks to persons and property. That duty too falls under the landlord’s due diligence to actively manage his properties according to legal requirements for habitability and tenants’ rights by statute.
The adequacy of your rental policies and practices in meeting your business performance goals require yet another level of due diligence. Business accounting and owner reports provide financial data to determine if your business policies generate your required level of profitability. Accounting procedures and retention of past operational records also affect how a landlord will weather an IRS, state, or municipal audit of tax returns or other aspects of your rental operations.
While your business policies and practices may be legally compliant, they may still fall short of your required level of profit and loss. You may need to assess your rental standards to determine if your standards produce a qualified applicant who has the required ability to pay market rent and perform according to your lease terms and conditions.
Due diligence conducted to evaluate business policies can contribute to a better bottom line. Inefficient practices may be costing your business more than you realize. While your tenant screening can produce a good tenant, your policies and practices may determine if the tenant stays for the lease term and whether a good tenant choses to renew the lease. Tenant retention can be an additional benefit derived from tenant screenings. Screenings that show good financial management by the applicant, a history of stable employment, and satisfactory references from previous housing providers can be positive indications to pursue offering the tenant a long-term lease. If a good tenant encounters difficulty in your procedures for rent payment or experiences a lengthy delay in requested services or needed repairs, a tenant may decide to move elsewhere for better customer service and less hassle.
You should routinely review your rental forms and update them to current requirements and conditions to better protect your investment. Lease clauses in particular should be kept current to legal requirements and specific in landlord and tenant duties and responsibilities. Keep in mind that if a landlord-tenant matter is not addressed in a state landlord-tenant statute and you have not addressed that same issue in your lease agreement, you have little to no defense against a tenant claim of discrimination, unfair treatment, or subsequent award of legal remedy for any number of liability issues.
Any changes or modifications to your standards should be adequately documented as to dates of the changes, vacancy periods, and business reasons for the changes. Do not leave yourself open to charges of discrimination by changing standards or offering different terms on a selective basis. Be well versed in fair housing laws on all government levels to ensure you do not discriminate against any prospect, applicant, or tenant. Even well-intentioned or inadvertent behavior that unfairly targets or favors certain individuals can become a violation of fair housing laws.
A business policy is a policy established for a reason. Deviating from your standard policies and practices in a rush to fill a vacancy can create potentially troublesome situations. Despite your good intention to help an applicant in need, your actions could become grounds for claim of discrimination in a fair housing complaint.
Due diligence in screening applicants extends to the landlord performing to his responsibilities in analysis and evaluation of applicant furnished information. The landlord’s application form, the applicant personal interview, verifications, and references disclose applicant personally identifying data that must be kept secure, confidential, and used only for permissible business purposes. A landlord should not ask for more information than he needs for business purposes.
Your business is a local business that is directly impacted by local market conditions. Due diligence is required at the local business level to keep current with market conditions, changes in supply and demand, renter demographics, and comparable properties and amenities in your neighboring area. You can better manage your business when you know your current market status and plan accordingly if you want or need to make market adjustments.
Due diligence in itself does not run your business. Due diligence is a business tool that can protect your business. Knowledge gained from adequate due diligence enables you to act responsibly and decisively in a timely manner.