So I’m fortunate enough to be in a market with extremely high tenant demand for rent credit program homes. A craigslist ad can pull 30 calls in day.
Our units have sold extremely fast, but we recently had more evictions than I’m happy with. Currently our resident selection is pretty loose, and I think it’s appropriate to tighten it. Our current selection criteria is:
-Earn 3x the total house and lot rent payment
-Have no recent evictions or felonies
-Pay first month’s rent and a deposit of one month’s rent
So I’m considering a few changes or additions:
-Require first month’s rent and a deposit of two month’s rent (this is probably the best option)
-Not accepting applicants who had short occupancy duration at their last two homes
-It’s labor intensive, but Leigh Robinson in his book Landlording suggests as a final step before acceptance an applicant physically visiting the applicant’s current place of residency.
Does anyone have any suggestions or recommendations on the most effective way to become more selective? I’d rather not get involved in pulling credit due to the red tape around it.
I would absolutely not waste your time visiting the tenant’s place of business. For one, that is not scalable and it is also a little amateurish. In any event, I would do this instead:
No evictions or felonies EVER
Credit: Look on there for delinquencies for credit cards, furnishings, cell phone, etc. You can ignore medical and student loans typically. Also, we don’t accept anyone with back child support. Personal preference is driving this along with the fact that they can go to jail for it whenever the court decides to get around to it.
You might also scrutinize the following:
Length of employment: If you have that much demand, then it might be worth only taking applicants who have at least 2 years at their current employer.
Credit Score: Again, with enough demand, you can set a credit score mark as well.
Only accept cash purchases of your home. Tell any new applicants that you don’t rent/RTO anymore and the only way they can get in is to buy the home for cash. With 30 calls per day, I bet you can get this done.
You can not properly screen without doing a credit check. The score is important but more importantly you are taking a close look at the history of there credit score. Their debt ratio plays a major factor in their money management skills.
Residency history is also important. You want stable not transient individuals.
I would be taking a serious look at selling the home outright by requiring potential applicants to obtain bank financing.
If they have good credit, long term employment and stable residency they should qualify for the amounts to purchase. Bottom line is if they can not save up the small amount to qualify for a bank loan they are going to be a greater risk.
If you are going to do rent credit you must pull a credit report and learn how to read them, Every landlord does credit searches, except for some park owners, as a routing screening practice for all tenants.
Credit checks are fast and easy once you sign up with a company.
I do not currently pull a credit report, but am considering doing so in the future because it will help better screen and tell me if there are options for financing the home rather than rent credit if I choose to go that route. Perhaps Greg can share which credit service he uses and the cost.
I’ve just been at his a little over a year and am continually refining my process but what I have found so far is the following:
Big down payments make a difference. Having tenants pony up some serious up front dough aligns both of your interests. On a home I have $6-$10K invested in I usually get $2000-$2500 down which equates to 25%-40% approx.
They must have good landlord references, and it can’t be mom and dad. You have to call and verify. If they start saying that they had problems with the landlord it’s a red flag and will usually disqualify them. I have found most landlords to be friendly and willing to tell their experience with the tenant.
Verify their income. I make them text me a picture of their most recent pay stub and the prior year W-2 or last pay stub for that year. That will verify that they are indeed employed and what the earnings actually are. People will lie to you so verify.
Run an evictions and criminal background report. If there is a criminal issue from a couple of decades ago and it wasn’t violent then I may give them a pass. But if they recently got out of prison for drug dealing, then no way.
Job Stability. I do look for someone that can hold a job and not bounce around a lot. I can’t tell you how many say they don’t have a job but they will get one at Amazon next week.
I don’t use my real name on this forum as I work as a GM for a large mobile home retailer which has it’s own financing division. They have the best performing loans in the business which in part has to do with them being an “equity based” lender which means the worse the credit is, they higher the down payment is going to be. This makes it tougher for the buyer to walk away and if they do, it increases the recovery rate for the asset.
Don’t think in terms of first months rent and deposit. Think in terms of 20%, 30%, and 40% down. Also if they have the capability of paying all cash for a house, then those will be the best payers. Those are the only ones I will make an exception on regarding the landlord references and many times will get a parent to sign a lease since that is where the money is usually coming from anyway.
I am in Canada and do not have the same credit check companies as in the US. My cost is $25 for each check and the applicant pays. Most credit check companies are in approximately the same price range.
I do not sell homes through rent credit but, unlike simply screening for regular tenants, I do believe a credit check is mandatory if you are selling a home you are in any way financing. Rent credit or holding a mortgage you need to operate the same as a bank would. Income verification, credit, down payment etc. Like any business you need to be professional and minimise your risks. How successful the partnership you have with a tenant in a rent credit program depends mostly on you, as the community owner, to choose the right applicant.
I believe much of this industry has been lax in having any level of qualification standards in the belief that all tenants have low/no income and poor credit. This is simply not the case as there is a range of applicants and by thorough screening only the best should be chosen.
@ErnestPecunio, I totally agree with:
“2. They must have good landlord references…If they start saying that they had problems with the landlord it’s a red flag and will usually disqualify them.”
“3. Verify their income…People will lie to you so verify.”
How can you take a down payment on a home? Dodd-Frank says you can’t take payments unless meeting Dodd-Frank criteria.
Banks generally won’t lend on used mobile homes in my area thanks to Dodd-Frank SAFE Act so that is not a good screening tool for us. Few of our tenants wouldn’t qualify for bank loan. Used trailers are poor collateral.
Be careful of using no convictions or arrests ever. That can get you in trouble with discrimination under the fair housing act. See HUD recent post. Besides, a person who did something stupid 20 years ago when they were young may be a good tenant now.
We don’t take down payments. We take security deposits on our rent credit. If that deposit happens to be $1,500 on a home they are renting for $595, then so be it. It might be the thing that separates that applicant from the other applicants for that home. When the resident is ready to purchase, I usually offer to reduce their security deposit down to the amount of the lot rent so they can use the overage towards the home. In any event, down payment isn’t in our company’s vocabulary and I wasn’t the one who suggested it.
The credit/criminal/background is supposed to be used as a tool to form a total picture. This tool, along with the manager’s recommendation is what we generally use to form a decision about the potential resident. When an applicant is denied, there isn’t a reason given. Our managers don’t have access to the reports and they are only told that the application wasn’t accepted.
I was under the impression that the Fair Credit Reporting Act required anyone using a consumer credit report to make an adverse decision to report the reason for that decision.
You are correct. It’s something we should be probably do, but currently don’t. I’ll be looking into what I need to do now that you’ve brought that to my attention.
Landlords do not report because a adverse report is not the reason for rejection. Landlords never provide a reason.
The fact is that there are a multitude of reasons to reject a applicant and not informing the applicant of the reason avoids pointing at the credit report as the reason. Rejecting a applicant is a collection of adverse screening results.
If the credit report is the only reason a landlord is rejecting a applicant they need a more thorough criteria for rejection. Doubtful a landlord would ever be challenged but to be safe have multiple reasons in your pocket.
All good observations, but I’d like to add two of my own:
You can no longer deny a tenant based on just having a felony. The U.S. government has ruled that you have to base your decision on the type of crime, time since it occurred, etc. It’s a total mess. You can get sued simply by saying that anyone who committed a felony is denied. Here are some articles on it:
The sad truth is that, regardless of what you do, you will have a certain percentage of tenants blow out. Even the American middle class has only around $400 in total savings, and the slightest bump in the road will derail most anyone who lives in your park. Losing a job, breaking a leg, a car engine blowing – all of these will turn the good paying tenant into an eviction. So play the percentages. Every home has a logical perfect resident. You just have to churn through some to find that lifetime resident. If you have 10 homes to get out the door, you’ll have 5 that stick and 5 that blow out. You then re-fill those 5 and 3 will stick and 2 will blow out. Then you fill those 2 homes and 1 will stick and 1 will blow out, and then you fill that final home. Large deposits may not help to find that perfect tenant, but it will definitely ease the pain of the run-off, as it helps to put the home back into service. The larger the deposit the better – as long as it’s reasonable and allowable by law – and that’s the best way to both find a solid tenant as well as buffer the pain of the churn. BUT DON’T BE UNHAPPY WITH YOURSELF ABOUT TENANTS NOT ALL STICKING. It’s not your fault, it’s just a byproduct of living in America in 2016 and the plight of the average American household. You can never eliminate this, no matter how hard you try.
The reality is that nothing has essentially changed in regards to criminal records screening except for the fear factor. Landlords still retain the right to do criminal back ground checks as a part of their tenant screening process and may still legally reject based on criminal records…
What is being attempted is to insure the rejection is not racially motivated.
Landlords should insure that their screening practice does not state that all criminal records shall be grounds for eviction. The policy should read that “criminal convictions shall be assessed on a individual bases”.
Applicants should still never be informed as to why they are rejected and Landlords should still be able to evict any one they choose for what ever they choose as long as they protect themselves by having a comprehensive screening process.
Those landlords that fear the ramifications of rejecting applicants should assess whether they are qualified to be performing applicant screening.
This is the problem with the latest HUD guidance. It’s not just racially based, it’s expanding discrimination out further to include criminal history - a criteria that has never been protected before. Having a criminal history is supposed to be the cost of making bad decisions, but as a nation we’re getting further away from keeping people accountable for their actions and having to deal with the fallout from those actions. Where does this nonsense end? If the government doesn’t want criminal history to be a factor then they should adjust how criminal history is recorded on their record so that discrimination cannot be a factor. If it shouldn’t be a problem for housing, why isn’t it also being adjusted for employment? Another conversation, just annoying.
With the new guidance you cannot just reject someone (completely irrespective of race) because they were arrested, or convicted anymore - you have to show it has a specific and adverse impact on your community as a reasonable justification to deny their application. You don’t tell the applicant this, but you need it handy if they file an FHA violation against you and there is an investigation.
Many community owners make blanket generalizations that someone who has been convicted of a crime likely has an inherent disposition to have bad behavior which could cause problems in the future. It’s an easy way to ensure your tenant pool does not have riff raff. You cannot do this anymore in the US, or otherwise put yourself at risk for violating FHA regulations.
Just to be clear, there is a difference between someone who is rejected after applying for credit, versus someone who is rejected after applying for residency. AFAIK, a credit rejection DOES require a denial letter which includes the reason for denial. But this only applies if you are offering credit (e.g. for financing sales).
So park owners offering financing opens up new areas of concern if we believe we should turn them down and then provide reasons–ouch–liability. I wonder how long a time period we are on the hook if that party believes we discriminated–one–two years later or forever?? We definitely need some common sense from our over reaching government before we all decide why are we working our butts off to work for the government bureaucracy. I know of companies that have made lawn mower being sued 20 years later for some homeowner that maybe used the mower incorrectly and got hurt.
HUD guidelines have not changed. Criminals are not a protected class. Landlords could always choose to accept a applicant with a criminal record that they did not believe would pose a threat.
Being a landlord has always come with a serious responsibility to choose or reject applicants based on the landlords own criteria. I do not believe there is any more risk of negative ramifications today in being a landlord than there was 20 years ago. Responsible landlords do not need to change their criteria or fear charges if they are smart enough too know how to protect them selves through the process. Nothing has changed, the applicant you rejected in the past you will still be able to reject today, assuming it was not based on race.
I promise I am not making this up - this is from the attorneys at HUD…
“A housing provider must, however, be able to prove through reliable evidence that its policy or practice of making housing decisions based on criminal history actually assists in protecting resident safety and/or property. Bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record are not sufficient to satisfy this burden.”
Jhutson, from a quick review of what you sent it appears white people do not have as much jail time (% of population) compared with blacks and Mexicans. So with that said I probably I reached a non PC correct conclusion. The bottom line after teaching schools in Florida and Michigan the family structure is ---------------- and after spending over 40 billions dollars on LBJ’s social programs the results is ------------------------- Sometimes money does not solve problems and times it looks like parts of our government are just trying to agitate one group against another be it ethic groups, gender, economic class etc. As park owners we are put into situation that 30 years ago we never even talked about–our first park did not need guidelines or rules–times are a changing.
Times are always changing but as landlords we simply need to be smarter in regards to who we do not rent to.
You know what they say, “if you can’t stand the heat get out of the kitchen”.
I think landlords that fear rejecting applicants will at some point down the road be selling due to the stress of dealing with low quality, maybe criminal, tenants. They will be the new turn around communities that those with stiffer back bones will be able to pick up at a steep discount.