Tenant Screenings as a Risk Management Tool
Tenant screening is a housing provider’s best practice for risk reduction of financial loss caused by tenant default. Failure to adequately screen applicants creates potential liabilities for the housing provider’s business. With the complexities in today’s rental housing regulations and requirements, avoiding unnecessary business risk is a prudent, business necessity.
As discussed in many articles, managing investment property carries risks. Appropriate measures must be taken in business operations in order to reduce exposure to known business risks. Non-payment of rent, nuisance, disturbances, property damage, and direct threats to the safety and welfare of others are examples of high-risk tenant behaviors that have a negative impact on business. Tenant screening is the most important tool for risk assessment of an applicant before he becomes a high-risk tenant.
The tenant screening process provides a consistent, verifiable means to collect relevant information about an applicant to make an informed tenant selection decision A formalized process legally compliant and developed to good business standards helps the housing provider comply with fair housing equal opportunity for all prospective renters to qualify to tenant selection standards. By evaluating the same decisioning factors, such as consumer credit reports, and background checks, required of every applicant, the housing provider establishes a universal screening process that prevents potential bias among applicants. Having a standardized application process and screening policy and practice helps to ensure a non-discriminatory tenant selection decision.
Housing providers depend upon a stable, timely income stream to cover operating expenses and a return on their investment. Without adequate screening for an applicant’s financial ability to pay stated rents, the housing provider may be harmed by his own inability to meet his financial obligations. It could be particularly harmful for the independent housing provider who self-manages his properties and must depend upon a regular, full cash flow to continue operations. Appropriate screenings for the applicant to determine the applicant’s financial ability and his payment history of financial obligations provide a means to evaluate financial risk of the applicant to the rental business. Gaining an understanding of the applicant’s financial situation at the time of application may allow the provider to project future ability of the applicant to meet his obligations during tenancy.
Installing a qualified tenant can help reduce tenant turnover. Tenant turnover is expensive, time consuming, and resource intensive as it recreates the process of screening and selection. There is no reason to let a qualified, known tenant depart in order to chance a new unknown tenant to fill the vacancy.
Why should housing providers conduct tenant screenings? Housing providers have a legal duty of care to take reasonable measures necessary to protect the safety and security of their tenants and their property from unacceptable levels of risk.The housing provider’s duty of care to protect tenants from foreseeable harm extends to protect tenants from third party criminal acts and, correspondingly, to protect the neighborhood from criminal acts of his tenants.
There is good reason to conduct relevant screenings to determine the risk as presented by the applicant for consideration of tenancy. Tenant screenings can help identify risky behaviors of applicants such as illegal activities, threats or nuisance acts toward other tenants or neighbors or property damage during previous tenancies. A housing provider can be held responsible for negligence if his screening practices are inadequate and fail to detect a threat to others.
The tenant screening process is a matter of establishing a level of trust between housing provider and potential tenant through a process of verification and confirmation of relevant facts. By conducting tenant screenings, a housing provider verifies the truthfulness and completeness of applicant supplied information. To the best ability, the housing provider seeks assurance that the potential tenant could be counted on to become a responsible and compliant tenant who will not pose a known danger to other tenants, neighbors, or cause destruction of property.
The tenant screening process is composed of various verifications and consumer reports that identify, confirm, and report information relevant to qualifying the applicant to the housing provider’s rental criteria. Information collected from the application form, applicant interviews, housing provider’s verifications, and consumer reports obtained with permissible purpose and with authorization by the applicant are collectively evaluated and analyzed to give a financial overview and background check of an applicant.
Generally, a housing provider’s tenant screening process includes identity verification, verification of employment and income, a consumer credit report, a background check, a review of the applicant’s rental history, and a public records search. The housing provider will need to research applicable regulations and requirements for the jurisdiction of the rental property to determine permissible screenings by state statutes and municipal ordinances.
- Identity verification – An important first screening is to conduct identity verification of the applicant to protect the housing provider against harm from tenant identity theft and fraudulent acts in renting.
- Verification of employment and income – While source of income is a protected class in many localities, the applicant’s ability to meet rent and other living costs must be verified through appropriate documentation of income such as earnings statements. A housing provider must research applicable statutes and ordinances for the jurisdiction of his rental property to determine the requirements for income qualification. There could be low barrier screening requirements in place that must be followed. As an example, a traditional qualification criterion has been verification of monthly income that is three times the monthly rent. In some jurisdictions, the housing provider may be restricted to a qualification standard that is less than three times the monthly rent.
- Background check. By requesting a tenant background screening for criminal history, the housing provider is protecting himself, his business, his tenants, and neighbors from harm from known risks of criminal acts. The provider must be familiar with jurisdictional requirements for individualized assessment of an applicant’s criminal history. The criteria for use of criminal history in making housing decisions must be developed with respect to what crimes pose a risk, why such crimes pose a risk, and what constitutes a reasonable time period when the applicant no longer poses an unacceptable risk. As required, an individualized assessment may be conducted to provide an opportunity for the applicant to submit supplemental evidence to explain, justify or negate the relevance of potentially negative information. Some of the factors that could be considered in the individualized assessment process include:
- the nature and severity of the criminal offense
- how recently the offense occurred
- the nature of the sentence
- the number of criminal convictions
- the length of time passed since the most recent conviction
- the age of the individual at the time the criminal offense occurred
- the evidence of rehabilitation
- the individual’s rental history before and after the criminal conviction
- Review and analyze previous rental history. A housing provider can conduct an interview with the applicant’s previous housing provider to determine whether the applicant kept lease terms and conditions, paid rent timely, and took good care of the rental unit.
- Public records search. A tenant screening of public records may disclose records of bankruptcy, liens, judgments, or evictions of the applicant of which some could be a concern for qualifying the applicant. A provider should have policy that addresses how such issues as disclosed will be handled.
- Review credit history. A housing provider should conduct a review of the applicant’s credit history, including total debt obligations, payment history, missed and late payments, and accounts in collection. The applicant’s ability to meet debt obligations is a decisioning factor in offering tenancy. A housing provider wants to be sure that the applicant has the ability and demonstrates the willingness to pay a rent obligation.
The housing provider should be alert to issues that could indicate a potential problem. These red flag issues should be discussed with the applicant and appropriate measures taken as required for investigation and resolution.
While a well-developed tenant screening process, compliant to legal requirements, can take some time to conduct, there should be no doubt about the effectiveness of the process. To aid in the efficiency of the process, a housing provider should employ relevant technologies specific to his business operation to help streamline and simplify his screening practices. Having a formal screening policy and practices supported by the appropriate technologies will make screening operations more productive at lesser cost.
Cutting costs by cutting corners is a liability for the provider. Installing a tenant without the appropriate screenings and qualification to standards is risky business. Once installed, a tenant has legal rights that cannot be violated. A housing provider must follow legal requirements for notice and remedy for a tenant who has defaulted on his lease. The provider must use the court system to initiate legal proceeding to evict the tenant and re-gain possession of the rental unit. Legal costs and time spent on just this one tenant alone can be quite costly to business operations. Once the legal process has been completed, the housing provider must spend more money and time to prepare the unit for a new tenant. The rental process will start all over again with requisite costs of time, money, and resources.
Tenant screening done right, gives the housing provider confidence in a tenant selection decision. Quality tenants in a quality landlord-tenant relationship can readily turn into quality renewal tenants, providing cost savings by avoiding tenant turnover.