Tenant Fraud

A recently published independent consulting study commissioned by TransUnion to evaluate fraud in the rental industry found that more than 80% of property managers participating in the study had experienced tenant fraud.

Accordingly, to protect their businesses, landlords must increase their due diligence efforts, strengthen their tenant screening practices, and keep vigilant against tenant fraudulent acts. Discovering fraud after a tenant has skipped a rent payment is too late to prevent loss.

Properly utilized, tenant screening can serve as a first alert to tenant fraud. Tenant screening supported by a committed policy of full investigation and direct verification of applicant data helps to protect the landlord’s business. Rather than take an applicant’s information at face value, a landlord should independently verify applicant information, whether given orally or on the written application. If something seems too good to be true, it probably is. A little skepticism on the landlord’s part may be a good thing to prevent fraud.

What can a landlord do to protect his business from tenant fraud? A key issue in fraud protections is thorough knowledge and understanding of applicable laws that regulate landlord-tenant matters. Rental fraud often occurs because a landlord is unfamiliar or unsure of applicable laws and legal processes. Tenants with the intent to defraud take advantage of a landlord who doesn’t know the law and hesitates in taking action.

The simplest, most direct fraud control to avoid loss of rents is to recognize fraudulent behaviors, be alert to red flag issues, and thoroughly vet applicants throughout the application and interview process. The timing of the investigation and verification process is critical to identify fraud before advancing the applicant to consideration for tenancy. Once a tenant is installed, a landlord must use the legal system to remove the tenant from the property, which may take several months and be at great expense.

Vigilance is also a key factor in identifying red flag issues and preventing tenant fraud. A landlord must be alert to discrepancies, omissions or inconsistencies in information in the application itself, as discovered during applicant interviews, or revealed in reference verifications.

A landlord should never be in a hurry to fill a vacancy without conducting adequate investigation and verification of applicant information. Patience and persistence in the landlord’s due diligence efforts can be a first line of defense in protecting the business from intentional harm from fraud or rental scams. An applicant intent on committing fraud is counting on a landlord being too busy to notice inconsistencies in his story or too desperate to rent up the unit. If the landlord is unfamiliar with landlord-tenant laws, or unwilling to take the time to follow stated rental practices, there is greater risk for tenant harm.

Adequate due diligence to complete all necessary tenant screenings is not a waste of time and money when compared to the costs of lost rents, eviction, and property damage that can occur if tenant fraud is involved. No matter how good an applicant looks on paper and in person, a landlord should always follow his stated policies and practices of tenant screening. An applicant in a hurry to move-in is a potential red flag. While there can be good reason for a quick move-in, an applicant who is legitimately looking for a rental should be knowledgeable of the rental process and should have allowed adequate time to search the rental market. The landlord has a duty of care to protect his current tenants by enforcing his policies and practices for screening and selection. Installing a tenant without adequate screening could be cause for claims of landlord negligence.

Common Tenant Frauds

Identity theft is true name fraud. Fraud occurs when an individual’s personal information is used without their knowledge by another individual to commit a criminal act. An applicant may use bits and pieces of the identity theft victim’s personal information, such as the victim’s name, date of birth, or Social Security number, as his own information on the rental application. Unless the landlord discovers red flag issues or obvious discrepancies, the applicant may be approved for tenancy based upon the qualifications of the identity theft victim. When the fraudulent tenant defaults on his lease, the landlord will discover that his tenant was never who the landlord thought he was.

Manufactured identities are another type of tenant fraud. A fictitious identity is created through the use of digital fraud. If a landlord installs this tenant, the person using the false identity now has the means to obtain credit or commit other types of fraud. The fraud may not be discovered until the tenancy is well along and may only be discovered if there is a material default of the lease. Once again the landlord will discover that his tenant was never who the landlord thought he was.

The use of online rental applications may contribute to tenant fraud. An online application provides a level of anonymity that can create problems for a landlord since the landlord has no knowledge of how the application was completed.

When accepting applications, landlords must ask for proof of identity. The industry standard is to require two forms of identification with one document containing a photograph of the individual. Most landlords consider a state issued driver’s license to be a reliable identification document. Because the document is official looking, many landlords take only a cursory glance, assume the document is valid and accept it without question. However fraudulent documents can easily be produced by applicants and tenants whose intention is to create rental fraud. Any document used in support of a rental application should be independently verified at the appropriate source or level of agency that purportedly issued the document.

A state issued driver’s license provides a great deal of personal information that could be used to further verify applicant information. The license generally contains the legal name of the driver, a photo identification, date of birth, and descriptive personal information of the driver’s sex, height, weight, eye color, hair color, or restrictions such as glasses. A landlord should certainly check that the appearance of the applicant is reasonably similar to the photo on the license and that each item of physical information shown on the license seems reasonable compared to the person in front of the landlord. The signature on the license should be similar in appearance to the handwriting and signature of the applicant on the application form. The landlord’s policy of verification of identity including the use of state issued driver’s license information must be his standard practice applied to all applicants in a non-discriminatory manner according to fair housing laws.

Fraud Prevention Practices

To help protect his business from tenant fraud, a landlord should, at a minimum:

  • Have full understanding of landlord-tenant statues, local ordinances, and fair housing protections.
  • Be prepared to pre-screen potential applicants when they respond to an advertised vacancy; make notes of information discussed and save for later reference as needed.
  • Meet the prospect in person and require proof of identity before showing a property.
  • Provide written copy of rental policies, rules, and regulations and advise prospects of rental qualification standards and tenant screening policies during the initial contact.
  • Require applicants to appear in person to complete and submit application – only the landlord’s rental application form should be accepted.
  • Accept only fully completed signed applications; missing or illegible information will be cause for rejection of application.
  • Compare the applicant’s signature on the application with another document that required a signature, as example, the signature on the driver’s license.
  • Require a personal interview with applicant.
  • Require all proposed adult occupants of the rental property to be tenant screened and qualified to standards.
  • Require all adults occupying rental property to be named on the lease agreement and made joint and severally responsible for the lease.
  • Require applicants to furnish two forms of personal identification, with one document containing a photo identification signature at time of application.
  • Require applicant to furnish copies of proof of employment, income, utility bill, and telephone bill.
  • Require applicant to furnish copy of driver’s license and vehicle registration.
  • Advise applicant that supporting documentation must match the information on the rental application including name and address.
  • Verify the applicant’s employment or source of funds.
  • Verify the applicant’s past rental history with previous landlords.
  • Conduct full tenant screenings as applicable by statutes and law.

Landlords who know the laws and control their business may be less likely to suffer financial loss from tenant fraud.

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