Welcome back to part two our our three part “Fundamentals to Property Management” series. This article is all about screening and picking qualified tenants. Qualified tenant placement is the most important aspect of property management. Picking the highest qualified tenant can feel overwhelming and stressful, but it is a task that will help ensure your investment can generate the highest returns possible. With many years of tenant placement under our belts and our fair share of mistakes made, we are here today to share with you our formula for qualified tenant placement. We do this in hopes that you don’t make the same mistakes we did.
Here at Provision we like to compare tenant screening to purchasing a painting. You want to be able to see the whole picture before deciding to move forward with your judgment, whether it be purchasing art or placing a tenant. So, for starters we like to compile a tenant’s Credit history, proof of Income, do a Background check, and an overview of their Assets. Or as one of our partners put it so eloquently, their CIBA. So we are going to break each of those down for you individually.
However real quick I’d like to go over a few very important steps that will naturally happen before you start to go over someone’s financials. When you first sign on a new management from an owner that owner may have certain requirements for tenants renting out their property. If that is the case, you will need to adhere to those requirements or risk losing your client.
For us the owner’s needs are always our number one priority. However, we have always advocated to the owner that we are hired because finding qualified tenants is one of our specialties. And we believe that having income or credit score requirements are a great idea to help weed out low quality tenants, but those requirements need to be flexible. For example we have placed tenants with lower than normal credit scores, but it’s because we were able to look at the full picture we were able to make an educated decision about that tenant, but more on that in a minute.
Secondly, and especially if you have read part one to this series “Tips to Listing Your Property“, you will find that almost immediately after listing your property applicants are calling your phone or sending you emails. This is a great chance to do some surface level screening. You want to make sure that before you move forward with the screening process the applicant’s interest and your’s align. It’s important to ask when they are looking to move, how many people would be moving in, current number of pets, and their reason for moving. With these questions in hand you will be able to screen people from the get go.
Now back to our CIBA process and how to effectively leverage someone’s financial and personal history to ensure you are placing the best tenant possible.
1) Credit
The first thing you see when you run someone’s credit score is their score. We highly advise that you look at that score last. The history of someone’s score is worth so much more than the number. We look at how many lines of credit does the applicant have open, how much outstanding debit do they have, and what is their payment history. Also what the credit score won’t tell you, but the history will, is if the person has recently experienced some kind of financial hiccup.
Take for example the tenant from earlier that we placed that had a credit score below what are tenants normally had. This tenant had a medical emergency, and because of this they had to declare bankruptcy and were foreclosed on their house. Their credit score was shot, but that’s where we found a diamond in the rough. So the story goes like this. Because of their poor credit score they needed to rent. These tenants knew that it was only a matter of time before the bank foreclosed on them, so they stopped making mortgage payments and instead were saving. With this cash in hand, they were able to provide the security deposit, last month’s rent, and first month’s rent at lease signing. So we were comfortable with our position given that they were willing to put more money down. Both individuals were employed so we weren’t concerned about their ability to make future payments. On top of all that, since they were previous homeowners they have been great tenants. The point of this story is that if we had denied them the lease because their credit score was low we would have missed out on great tenants. However, in full disclosure we do have one minimum requirement. We won’t sign a lease with anyone if their debt to income ratio is at or above 50%
2) Income
Now that you have gone over a potential tenant’s credit report, and you like what you see. The absolute next thing you need to confirm is their income. So you need a proof of income, two recent pay stubs do the trick for us. We have gotten plenty of application were people claim they make a sizable amount of money. However, when we ask to see pay stubs or bank statements they may fail to bring any evidence. And for us, if anyone is proven to have falsified or lied during the application process we automatically deny their application. For us, tenants need to have integrity, or else how can you trust them to pay.
It is also wise for you to know where the income is coming from. You should be wary if someone’s income is commision based, or they rely heavily on tips. You should also be wary if the person is self employed and/or in a new market were they aren’t fully established. When it comes to judging someone’s source of income you want to be judging the likely hood that the income will cont. A W-2 employee is a more favorable tenant than someone who is 1099.
3) Background Check
Going over someone’s background can be tricky. We know no one is perfect and we won’t automatically exclude someone for a mishap that happened years ago, but we look for patterns to determine if the prospective tenant has changed. However there are a few lines in the sand we will not cross. Firstly we will never put ourselves or our vendors in harm’s way, this means we will not sign a lease with someone who has gang related charges. We also do not place tenants with any kind of aggravated assault charges, or anyone with charges of domestic and/or sexual abuse.
People with other serious crimes like drug manufacturing/distribution, organized crime, and theft charges are also placed at the bottom of the stack. Basically someone with a history of serious violence or drug charges would be denied. Of course we would never sign a lease with someone who is a murderer, rapist, or sex offender. However low offense charges like a drug possession charge should still be an eye opener but we understand people have the ability to change and better themselves. Take into account how long ago those charges were and never be afraid to ask the person to explain to you the situation surrounding the charge. After all if they aren’t willing to talk about it then you shouldn’t be willing to sign a lease with them. Remember the goal here is to see the full picture in as much detail as possible.
4) Assets
Assets, the final step along the way of signing a lease with someone. By this point you should have done some light screening, like making sure their timeline to move in aligns with yours, that they aren’t too many people moving in, and if they meet your pet criteria. Then if they pass your preliminary screening questions you should have taken an application and reviewed their credit, income, and background. If everything looks good and you are tight on time you might just go ahead and sign the lease. And honestly we would say you have done a great deal to make a well informed decision.
However if you want to go the extra mile you could go over someone’s assets before you decide to sign a lease with them. Things to look for when reviewing someone’s assets are how liquid are the assets. This is good to know if the person has a low income and you were worried that they wouldn’t make their payments. Also knowing the value of their assets is good knowledge. If they have enough assets to cover a few months rent then you can be reassured that you won’t have to evict them shortly after signing the lease.
With these tips and hints in hand you should feel confident that you are ready to go out and find the most highly qualified tenant possible. Of course we want to remind you that every turnover presents unique challenges, which make for unique opportunities. Always try to leverage these opportunities to your and the owners advantage. And remember, you wouldn’t buy a painting without looking at the whole piece, so why would you place a tenant without examining their full picture.
If you liked what you read, or have any questions and want to go into more detail please go connect with us on Facebook. Stay tuned for our next post about how we manage and grow our Tenant-Landlord relationships.
