How risk mitigation can keep your investment turning a profit
As a landlord, you likely perform some type of tenant screening to help identify tenants that protect your investment. But, do you really utilize the best tenant screening processes? How can you be sure? Statistical information shows that despite actively screening tenants, landlords often don’t do enough to mitigate risk. To a landlord, risk is real and always looming. In our current economic climate, you know that no matter how careful you are there is always risk and something may happen and any tenant can default on a lease and not pay rent.
Some investors managed to generate profits even while the market has struggled to recover. How? By sticking to some simple tenant screening best practices.
A recent My REI Advisor webcast discussion with industry experts titled “Tenant Screening Best Practices” illustrated how fraud and lax tenant screening can negatively impact a landlord’s time, resources, and finances*. However, the discussion also highlighted tips and strategies landlords can use to avoid these pitfalls.
What application fraud tricks commonly used by tenants should landlords be aware of?
According to one of the Webcast experts, Bagrat Bayburtian, Vice President of Product Solutions for CoreLogic, a pioneer in rental and alternative credit screening, applicants who have something to hide are very good at using tricks and fraud to hide or misrepresent information that may clue you in on their previous bad behavior. For example, eviction records are only associated with a name and an address, and in some cases, it can be difficult to match common names with default legal action without a social security number or date of birth associated with that default action. To complicate matters, background checks for criminal records are not linked to an address, only a name and a date of birth.
People skilled at fraud commonly use maiden names or exclude dates or digits in their date of birth or addresses and become adept at misstating information to try and pass a tenant check.
What items should be included in a tenant screen?
While background checks search records, it has progressively become more important to run checks to detect fraud as well, which include cases of identity theft. More advanced background and tenant check software is able to detect fraudulent activity and raise potential red flags allowing landlords to be more diligent in their screening. Searches utilizing various combinations of the applicant’s information can identify inconsistencies in applications, credit reports, and public records.
A thorough application will include name, address, social security number, date of birth, two prior addresses, employment history, and current contact information for both the applicant’s landlord and employer. This information should be collected for each adult is applying to live in the residence. The application should also include an authorization form that consents to process the background check and verify the employment income. Appropriate language in the application may allow rescreening after occupancy of the property if problems should arise.
What does a tenant’s numerical credit score actually represent?
Bagrat Bayburtian also explains in the Webcast why conventional credit scores don’t predict a person’s ability to pay rent. Algorithms are specifically designed to detect the probability of a person’s inability to pay rent, and there’s quite a bit of behavioral science involved. Credit, subprime scores, past leases, evictions and other public records are included in the calculation of this score.
How do different seasons affect how stringent your screening is?
Prudence in screening tenants should not change with the seasons. Despite the fact that it may be more difficult to find a quality tenant in December than it is in May or June, landlords need to realize that quality screening should be a year-round commitment, or you may face the consequences in the form of a default or eviction situation. Consistent screening also provides the opportunity for fairness and equal opportunity.
Understand the importance of using a professional property manager.
According to Bryan Kinsey, Account Executive with Aon Rent Protect, with the increasing tenant population, working with experienced professionals is becoming more important for investors. Property managers are a confidence builder for landlords because their experience and knowledge provide access to services and know-how for facilitating a successful rental income. Aside from proper tenant screening services, the right property manager has a wealth of information and a network of service providers, everything from electricians to insurance agents to plumbers to attorneys. Working with clients to identify the best products and services, a professional property manager can help ensure you are using the best possible professionals at the best possible price for your rental property.
How to find the best property manager for your needs.
It’s important to find the best property manager for you and your investment, as each will have a specific expertise, explicit set of resources and various level of familiarity with different types of rental properties. Real estate advocacy group All Property Management (www.allpropertymanagement.com) matches properties and landlords with property managers who have the most experience in handling the unique challenges that each property presents. Money you use to pay a property management fee will save you in the long run, as your property manager will provide value in terms of saved time as well as the various industry connections that come with their extensive experience.
In conjunction with proper screening and utilizing a skilled property manager, consider rent default insurance and take comfort in knowing you’re protected against rent default. Even with risk mitigation steps, there’s always a chance that the unknown will happen and a tenant will stop paying rent, costing the property owner and property manager in lost rent and legal fees for eviction. Aon Rent Protect, only recently available in the United States, is a safety net if the worst should happen. The insurance reimburses landlords for unpaid rent in the event of a covered default, as well as up to $1,000 reimbursement of certain legal costs if eviction becomes necessary.
Measuring tenant risk differs from measuring financial risk. While tenant screening is vital to both small and large landlords, so is protecting your cash flow. Aon Rent Protect is an important tool in helping you achieve this safety net. In conjunction with risk scoring and utilizing the services of a professional property manager, as a landlord you can not only protect your financial investment, you can utilize these tools to grow a more profitable business.
* The My REI Advisor webcast, titled “Tenant Screening Best Practices” can be accessed at this link.