Tenant selection in today’s economic environment

I was recently on the phone with a rental property owner who was considering utilizing our leasing and property management services and he asked me an interesting question.  He asked me how the downturn in the economy and the flood of foreclosures and short sales had affected the way that we make decisions about rental application approvals.  I had not given the issue a lot of thought as the housing collapse didn’t exactly happen overnight.  However, as I reflected upon the way that we used to process rental applications a few years ago as compared to the way we do today there is a big difference in our process as well as the information that we deem important.  There are several factors that have contributed to the change in the way that tenants are screened and selected.

The biggest factor that we have seen is that the market is now flooded with people who are converting from property owners to renters.  While a small percentage of these people are making this transition by choice, a huge percentage of them are being forced into rentals as a result of foreclosure, short sale, and the inability to procure financing for a home purchase.  This presents an interesting dilemma when reviewing a rental application as these applicants do not fit the typical renter’s profile that we are accustomed to making decisions about.  This has also forced traditional selling real estate agents into the rental market which causes its own set of hurdles.

We have also noticed that layoffs, cut hours, and job changes are increasingly common these days.  A large majority of the rental applications that we see include current job tenures of less than 1 year.  Total income numbers seem to be trending down for our lower rent properties which make decisions for those units increasingly difficult.

These issues and others have led to a fundamental change in the way that we screen tenants and make decisions regarding who is qualified to rent a property and who is not.  This selection process pertains to what we consider to be “marginal applicants”.  We typically categorize our applicants into one of three possible designations:

1. The absolutely yes category.  These are the easy ones to spot.  Credit scores in the 700s or 800s, high income, stable employment history, no pets, etc.  These are the easy ones that we race to the phone to approve before they start looking for another property.  In my market only about 10% of our applications fall under this category.
2. The absolutely no category.  These are almost as easy to sniff out.  Miserable credit, collections, judgments, no verifiable income, criminal histories, and the like.  These are easy decisions as well.  We just write off our time and effort showing the property and screening them and move on to the next.  In my market about 30% of applicants fall under this category.
3. That means that 60% of rental applicants that we see fall under the marginal applicant category.  These are applicants who have both positive and negative factors which have to be carefully examined and balanced to determine if they will be successful tenants or not.

Our opinion is that making the proper decisions regarding these 60% of the rental applicants is the single most important process determining how valuable a service we are providing to our property owner/investor clients.  Placing the wrong tenant can be a very expensive mistake for a property owner and a very big headache for us as a management firm.  The basic considerations that we make when selecting a tenant in this environment are:

Credit reports – Credit scores are only a small factor in our decision making process these days.  There was a time when we would automatically dismiss an applicant with a credit score under 600.  Those days are long gone.  Credit scores are not what they used to be.  It used to be a source of pride to have clean credit and a lofty credit score.  There was social pressure to avoid bankruptcies, foreclosures, and damage to your credit report.  The economic crisis the country has faced over the past few years has changed this completely.  Property owners are making business decisions to walk away from under water properties or sell short.  The social pressures have given way to acceptability as this process has become commonplace.  Scores are very often devastated by a short sale or foreclosure.  However, many of these people have pristine credit otherwise.  While a short sale/foreclosure can’t be completely overlooked we often discount them a great deal if credit otherwise is very strong, regardless of credit score.  For the career renters things have not changed quite as much.  We still look for average to above average credit although we seem to discount medical collections these days since they are so common.  We also consider non-payment of utility bills or a judgment/eviction from a previous landlord to be automatic disqualifiers in most cases.  Even for these applicants credit score is far less important than the details within each type of account within the credit report.

Income and employment – People are changing jobs, being laid off, and are having hours cut constantly.  While credit scores have become less important in our decision-making process we put a big premium on stable, long-term employment.  It is also increasingly important to verify income.  While we ask for contact names and number for employers it is often difficult to verify income with employers.  Paystubs are by far the easiest way to verify income and if the paystubs do not match the stated income it is an issue.  If the income can’t be verified it should not be counted for qualifying purposes.  While we are typically approving lower total income numbers we are much more stringent as it pertains to qualifying that this income is legit.

References – Personal and landlord references used to be a huge part of our decision making process.  A few years ago you could call a landlord and get direct answers to questions about your applicant.  This has given way to faxed tenant authorization forms and a lot of unreturned calls.  Landlords do not want to deal with the liability stemming from providing the wrong information, especially without tenant authorization.  There has also been an influx of recommendation letters from previous landlords, professional colleagues, and others.  What we’ve seen is that many landlords will provide a reference letter to a tenant that they are trying to get out of their property in a hurry.  What better way to get a deadbeat tenant out of your home than to highly recommend them to another unsuspecting landlord.  References from friends and family are truly useless and are not even considered.  While we still attempt to contact previous landlords we only consider the positive information we receive as supplemental information.  The negative factors do figure strongly into the process though.

Everything else – The other factors involved including criminal checks, pet and smoking details, number of occupants, and others will also contribute to the decision making process but really only serve as possible disqualifiers based upon owner preferences, HOA guidelines, and local laws/ordinances.

It is vitally important to constantly update the way that we as property managers evaluate rental applications and to adjust our practices to mirror the changes going on in the rental market and the economy as a whole.  By doing so, we will make better choices regarding our application approvals and denials and ultimately provide better service to our clients and investors.