Risk Management Practices in Tenant Screening
Due diligence in evaluating the business risk of a rental applicant requires the use of tenant screening as a core practice in business risk management policy.
Tenant screening assesses the applicant’s potential future risk of material default of lease terms and conditions that would result in financial loss to the landlord if the applicant were to be offered tenancy.
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 a landlord cannot afford to take on. Such behaviors are costly, time consuming, and bad business. If risk cannot be avoided, there must be a risk reduction policy that helps minimize business risk. Legal and sound business rental qualification standards, aka, your tenant screening policies, help reduce known likely risks and avoid potential risks not even yet considered. With that in place, strong lease agreement terms and active enforcement of rental policies will help protect the landlord’s business against bad tenant outcomes.
A landlord has a duty of care responsibility to his tenants to protect them from known risks to persons and property. Tenant screenings analyze certain aspects of financial, criminal, and public records of the applicant being considered. While information provided by these screenings is used for primary risk analysis, there are additional tenant screenings that a landlord conducts to support and complement contracted tenant screening services.
The due diligence of duty of care in screening applicants extends to the landlord performing his duties 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 must be kept secure, confidential, and used only for permissible business purposes. Landlord verifications of employment and income, and reference checking are important practices in tenant screening risk-based assessments. The following information has been excerpted from various articles in our Tenant Screening Guides.
Verifications of Employment and Income
An applicant must prove he can meet rent terms and conditions by submitting documentation of current employment and proof of income at time of application.
Verifying an adequate source of income that the applicant will use to pay rent is important to determine whether the applicant has the financial ability from a sufficient, stable income source to pay timely rent. It is a good practice to verify the applicant’s employment and income early in the tenant screening process. If the applicant cannot qualify under the landlord’s financial criteria, there is no need to proceed with other screening reports.
Verification of an applicant’s financial ability to pay rent is a part of the landlord’s responsibility of duty of care to protect his property and his tenants. Some potential tenants overestimate their ability and means to pay rent in a timely manner. A landlord cannot afford to accept at face value the income amount the applicant enters on the application form. Verification begins with independent confirmation of the applicant’s employment and income.
In general, a landlord can request whatever financial information is required to confirm the applicant’s ability to pay under the landlord’s legal, business supported rental criteria, provided the same requirements are demanded of all applicants. For rental housing, the most common income qualification standard is a 3:1 ratio of gross monthly income to monthly rent. However, depending on various issues regarding applicant income sources, income tax matters, and unusual debt, it is sometimes necessary to consider an applicant’s details of other financial matters rather than only gross income.
There are many sources of income that may be used for rent payments. Wage earnings are the most common type of source of income and can be easily verified by a landlord. Non-employment income must be considered on a case-by-case basis with a verifiable document, appropriate to the source of income, such as an official statement of receipted funds and statement balances.
Landlord References
Reference checking with previous landlords is an essential tenant screening. There is no better source of direct information regarding an applicant’s relationship with a previous landlord and neighboring tenants.
A landlord wants a stable, responsible tenant who is ready and willing to pay rent as agreed, maintain the rental premises to acceptable standards, and conduct himself as a good neighbor. Who could be a better source to confirm the applicant met these standards than his former landlord?
If past behaviors give indications of expected future behaviors, then past rental behaviors are key to risk assessment of a future tenancy. Former landlords can provide the type of information needed to assess potential risk. While the applicant’s interview and his application information may preliminarily qualify him to rental standards, details of a previous tenancy as provided by the landlord may tell a different story.
Reference checking is a simple step but some landlords skip over this critical screening, thinking it unnecessary if the credit report is satisfactory. Calling landlord references to determine whether the applicant satisfactorily fulfilled his lease obligations is a business safeguard. Failing to conduct all due diligence on applicants has the potential for claims of liability and negligence.
Current Landlord
An applicant may request that the current landlord not be contacted. The applicant may not have given notice or may not want the current landlord to know he is looking. There is also the possibility that the applicant thinks the current landlord will give unfavorable information, which may or may not be justified. While the request is understandable, the landlord should adhere to his stated tenant screening policies.
If one exception is made, other exceptions might follow or an applicant might think that the landlord is discriminating against him. However, the timing of the decision to contact the current landlord could depend upon whether the applicant meets other qualification criteria. If the applicant fails to meet minimum criteria there is no need to continue the process. If the applicant meets criteria, the current landlord should be contacted. Any information obtained from the landlord interview would be analyzed with information obtained from other screening reports for final evaluation.
No Previous Rental History
An applicant applying for his first rental does not have a rental history to check, but that does not mean the applicant is automatically disqualified from renting or potentially less qualified than a tenant with years of rental history. A landlord must look to other references to qualify the applicant. Commonly these other types of references are work references and personal references.
Former Landlords
If the applicant has been a renter for several years, calling former landlords may provide more honest answers to questions about rental behaviors. The tenant moved on but his records and his reputation likely remained with the landlord.
While some former landlords could be hesitant to provide detailed tenant information due to privacy concerns, a landlord should be able to confirm dates of tenancy, rental amount, and the security deposit amount.
Information obtained through landlord references should be assessed against information obtained through other types of tenant screenings. A landlord must keep an open mind regarding any mention of personality conflicts, subjective feelings, or personal preferences as expressed by a former landlord. A positive reference by a former landlord does not necessarily mean a trouble-free tenancy. A decision to offer tenancy must be based on all objective data collected by the landlord’s tenant screening process.
Checking references with previous landlords is an essential risk assessment tool and perhaps the strongest predictor of an applicant’s future rental behaviors. A landlord must however evaluate an applicant’s qualifications using a variety of tenant screenings, not just one type of assessment. By using multiple types of screenings, if the tenant has been a problem tenant in the past there will likely be red flags that show up in other screenings.
Personal References Screening
Contacting applicant supplied personal references is often an under-utilized screening tool. Many landlords express the opinion that personal references provide little value in the tenant screening process and are therefore a waste of landlord time. Persons contacted as personal references may be reluctant to offer information or information shared during the screening may be biased in favor of the applicant or not relevant to a housing decision.
Most applicants are not likely to provide the name of someone who would give a bad reference. The fact that information obtained from personal references can be difficult to quantify and assess in objective terms also leads some landlords to use this source of information infrequently.
The value of personal references as a screening tool incorporated into the full screening process should not be readily dismissed. By contacting personal references the information supplied by the applicant can be cross-checked with the reference’s responses. This allows the landlord to help determine the truthfulness of the applicant’s statements as well as to identify red flag issues that may indicate potential problems.
While some landlords may consider personal references to be self-serving for the applicant, personal references should not be overlooked as a good source of information. In some circumstances, e.g., when first time renters and students are entering the rental market, and former homeowners are returning to the rental market, the information provided by personal references can make a difference in decisioning if insufficient data is returned from other screening sources.
Personal references serve a different purpose than landlord references. A personal reference should be an individual that has never rented to the applicant. Personal references are character references offered by family, friends, business associates, community leaders, or others who can personally vouch for the applicant. A reference from an individual who has had a long-term relationship with the applicant can provide meaningful knowledge of an applicant’s character. A reference from a parent may provide different information which is more protective of the applicant’s character.
The contact information of personal references may prove to be of help at a future date if the applicant becomes a tenant, but cannot be reached for legal service or in case of an emergency. Personal references listed by the applicant may be of help in the landlord contacting the tenant as necessary.
Documentation
Written documentation of verification of employment and income and reference screenings should be kept in the applicant file to substantiate the housing decision and defend against applicant claims of discrimination.