Tenant Screening: Everything You Need to Know
March 20, 2019
We’d love to connect with you.
What You Need To Know When Screening Your Tenants
Finding the right tenants and avoiding the bad ones is critical for any landlord who wants to maintain their sanity while growing their rental business. Online tenant screening is therefore an indispensable tool.
Just think about it: Almost every nightmare rental scenario – late payments, trashed properties, pet problems, evictions – relates to the quality and maturity of your tenants. The cost of skipping tenant screening adds up. But all these challenges can be mitigated or entirely avoided if you have the right tenant.
Finding the right tenant, however, can feel like a challenge. When it comes to tenant screening services, there are a lot of different types of reports and levels of detail you can request. Understanding what each report contains and the meaning of the data will give you the ability to take full advantage of your screening process. In this article, we cover the main aspects of how to screen tenants, including credit, criminal, and eviction reports. We’ll also provide tips for more effective passive screening, better rental application questions, and steps to avoid Fair Housing discrimination.
Advantages of Tenant Screening
The full cost of evicting a tenant – including legal fees, lost rental income, etc. – can be anywhere from $3500 to $10,000, which is a steep price to pay for winding up with the wrong renter. Requiring a credit report and criminal history is your best ally in the battle against bad tenants. But avoiding expensive evictions isn’t the only advantage an effective tenant screening process offers.
Avoid Bad Tenants
For starters, not all bad tenants merit eviction. Some tenants will pay late, disrupt neighbors, and treat your property with a general level of carelessness, but they won’t do any of these things to a degree that makes eviction worth the time, effort, or cost. They’ll be a headache, sure, but not as big a headache as a legal battle.
Finding the right renters not just by running background checks but also through better applications and passive screening can help you avoid these headache tenants, and that’s a major plus.
Find Good Tenants
Bad tenants may be bad, but good tenants are actually great. If you’ve been a landlord even for just a couple of years, you already know this. A tenant that pays rent on time every month, doesn’t disturb their neighbors, and rarely has maintenance requests or other needs is as good as any investment.
Effective tenant screening can help you attract these excellent tenants and identify them amongst all other applicants.
Legally Deny Prospective Tenants
Fair Housing violations are bad news. But without a proper screening report, there’s little on which you can justify your denial of an applicant. In fact, if you don’t require any sort of screening, you’re at the mercy of first come, first served.
Conversely, if you set application benchmarks and stick to them, you will be able to easily justify any decision to reject a rental applicant.
Disadvantages of Tenant Screening
We’d like to tell you that tenant screening is all sunshine and rainbows, but doing so might jeopardize our journalistic integrity. True, the benefits of screening tenants far outweigh the disadvantages (and you can tell by this article we’re big believers in the practice), but it’s important you know some drawbacks do exist.
Scare Potential Applicants Away
We strongly recommend that you charge your tenants for their screening reports; however, doing so may scare away some potential applicants. In many markets, this won’t matter; but in some locations where there is an oversupply of housing for a limited number of renters, each fish on the line matters.
That being said, each time you pay for a tenant screening report and ultimately have to reject the applicant, you’ll wish you’d made them pay. If you find yourself in a renter’s market and you feel an application fee is affecting your vacancy rate, begin offering to credit any accepted applicant’s security deposit or first month’s rent by the amount of the screening fee.
If this still scares them off, do you really want them as a tenant?
Negatively Impact the Applicant’s Credit Score
Depending on the service you use and the type of credit report you run on your tenant, their credit score may be negatively impacted. While this is certainly a disadvantage for the tenant and something you should be aware of, it is also easily avoided.
Hard and soft inquiries provide the exact same credit information, but hard pulls lower the subject’s credit score while soft pulls have no effect. Understand the difference between hard credit inquiries and soft credit inquiries, but for the most part, you’ll want to target a service that uses soft inquiries only.
Types of Tenant Screening Available
Product differentiation occurs because different people have different needs. That’s why Rolls Royce can exist in the same world as Jeep Wrangler; you don’t spend 300k for a car to take off-roading. Likewise, when it comes to screening services, one size does not fit all. Some industries require as thorough (and as a result, as expensive) a check as possible; for others, the bare minimum is enough. The key to understanding what you need is understanding what each level of screening provides.
Background checks can vary quite a lot and understanding those differences is key. Primarily, this variance is because of the different laws that govern how courts record criminal activity. For example, all criminal records are filed under the name and date of birth of the offender; however, some counties include their address while others do not. This additional piece of information can be crucial in correctly identifying records – after all, it is quite possible that two people share a name and date of birth.
Different types of criminal reports will attempt to counteract these inconsistencies in different ways. Some (like Innago), use SSN as a means of first verifying identity, uncovering aliases, and tracking past addresses. With this increased data, a more accurate report is produced.
The information contained in a report is also dictated by its source. There are three sources of information: individual county court records, state databases, and national databases.
County Records: County records contain the most accurate and up-to-date information available on the subject. If the offender is correctly identified and they committed a crime in that county within the last seven years, their offense will be included. However, if you search county records in County A but the crime was committed in neighboring County B, you will be left empty-handed. To check every county in the US you would have to quite literally pay for a county level criminal report for every county in the country (an expensive prospect). Depending on county policy, these can also take time to return.
State Records: State records are available instantly (except for in Wyoming, Delaware, South Dakota, and Massachusetts). Some states include county-level coverage in their databases, others do not. If they do, the information is typically comprehensive, but may contain inaccuracies or incomplete data if the county has not yet reported the crime to the state database.
National Records: National records pull from all forty-six electronic state databases (excluding those listed above). These often include both state and county level checks. National records are also often paired with complementary databases, such as the National Sex Offender Search and the Terrorist Watch List. As such, national records can be a quick, comprehensive solution. However, states and counties are not required to participate, and inaccuracies can occur.
Here’s a quick summary of the advantages and disadvantages of each:
|Speed||Typically instant||Typically instant||Can take anywhere from 1 to 14 days*|
|Cost||$13-60 (varies widely based on level of information requested)||$10-25 per state||$16-25 per county checked|
|Main Benefits||Most far-reaching. Can be bundled with other databases (sex offender, terrorist watch list).||Contains both state and county level records (where available).||Most accurate and up-to-date.|
|Main Drawbacks||Not as accurate as county level.||Variance/inconsistencies in information by state.||Limited to a small location, slowest to obtain.|
*This is particularly notable for states like California in which county courts go on furlough for up to two weeks at a time.
For landlords, a national criminal search is usually all you need. Going county by county is almost always a costly indulgence. If you’re in a particularly crime filled area or live at the crossroads of three or four counties, you may want to expand your search, but you’ll likely learn all you need to know from a national database.
Eviction reports are also not standardized and are often filed only under the expelled resident’s name. Again, an SSN verification can go a long way in increasing the accuracy of the data returned. Also of note, while eviction records were previously included in credit reports, that is no longer the case. A July 2017 law made such activity illegal. If you’re looking for eviction records, don’t rely solely on a credit check; you’ll need to request that information as an additional report.
Unlike criminal reports, credit reports are fairly standard. Whether there’s a middleman delivering the data or not, a credit report will nearly always come from one of three sources: Equifax, Experian, or TransUnion. These are the three primary credit reporting agencies (CRAs) in the US. Because of their ubiquity, the information contained in any credit report you receive should always include the following (if any of this data is missing, we suggest looking elsewhere):
Basic Information: Applicant identification including address history and any aliases.
Fraud Indicators: Notifications that appear if there is an SSN mismatch.
Tradeline Summary: History of payments on active credit accounts (e.g., credit cards, auto loans, etc.).
Inquiries: Companies that have viewed the applicants credit history within the last two years.
Credit / Resident Score: A numerical expression of the applicant’s credit worthiness (this can be specialized for renters as a “Resident Score”)
Because this information is relatively standardized between the big three CRAs, learning to effectively interpret and understand an applicant’s credit report does not take a lot of effort. We strongly suggest investing just a bit of time to set your own applicant benchmarks or tenant scoring system.
Constructing Your Rental Application
It’s easy to get caught up in red flag results like eviction records and low credit scores, but overlooking the importance of a rental application in your screening process is a mistake. A good rental application can tell you quite a bit of information about a prospective tenant that you could not uncover otherwise. Further, when coupled with criminal records, credit history, and identity verification, an application can be used to determine whether your applicant is being entirely truthful.
Some key pieces of information to include in your rental application are current and prior residence information, employment history, personal references, and proof of income. Depending on your policies and location, you may want to add additional sections like pet ownership and whether or not they own a vehicle.
But don’t simply receive applicant information, take a look, and move on. Your would-be tenant has provided you quite a bit of information. Act on it! Call current and past employers and landlords. Prepare some questions and take notes. This is one of the best ways you can learn about the quality and character of the renter.
Should an Application Include an SSN or Driver’s License?
It is extremely common for landlords to require their applicants to include a social security number or driver’s license as a means of verification. We strongly advice against this. Laws governing consumer data protection are strict and growing ever stricter. If you do not know how to properly store and dispose of this information, you should not be collecting it.
Rather than taking an SSN to run a credit check, use a service that allows the tenant to submit their identification information directly (it’s probably better for their credit score anyway). And if you’ve heard you need either a driver’s license or social security number to collect in the case of an eviction, this is actually not the case. In the event that you win an eviction judgement, the judge can force disclosure of the SSN for collection purposes – no need to have it on file beforehand.
Should you Charge Tenants for Applying?
As we’ve covered above, charging tenants for applications does run the risk of scaring off some potential candidates, but that risk is negligible. Charging a tenant is an excellent way to offset your costs and root out the serious applicants from those that are not.
One thing to keep in mind: some states, such as California, have rules regarding how much you as a landlord can charge for an application, and whether or not you can profit from that money. Be sure to check your state laws or consult with a local lawyer before you take any action that may put you on the wrong side of the law.
Avoiding Fair Housing Discrimination While Screening Tenants
Speaking of staying on the right side of the law, understanding Federal Fair Housing laws and how to avoid violations is critical when constructing your tenant screening policy. If you’re not familiar, the Federal Fair Housing Act was written into law in 1968. It guarantees the right of all renters to choose housing free from unlawful discrimination. To avoid ambiguity, the FHA further defines seven protected classes: Race, Color, Religion, National Origin, Sex, Familial Status, and Disability. State laws often expand on these classes, adding sexual orientation, gender identity, age, source of income, marital status, and other protected classes.
When constructing your application and tenant screening process, be conscious of any questions or requirements that may cross these fair housing lines. For example, don’t ask if the applicant was born outside the US. Even if you’re not using this as a means of screening, a foreign-born tenant that is passed over for another may interpret your action differently. Don’t put yourself at risk.
As we’ve mentioned before, one of the best ways to avoid ambiguity is to create minimum applicant requirements and stick too them. For example, if an applicant has a credit score below 500, you won’t rent to them. Or if they have more than one prior eviction, they can’t lease your property. If your rules prove too harsh, you may lower them, but lower them across the board. Never, ever make exceptions on a case-by-case basis.
One thing to note: while it may be tempting to refuse applicants that have any sort of criminal history, it may not be legal. You can justify a policy in which you refuse to rent to applicants you believe will endanger others in the community but refusing rental for any arbitrary court sentence (like a traffic ticket) is not allowed.
Finally, landlords often ask us how to manage multiple applicants that satisfy your minimum requirements. There are two methods you can choose: first come-first serve and most qualified applicant. First come-first serve offers obvious discrimination protection. It is an easy policy to point to as justification for an applicant rejection. But it may leave you passing up a better option.
As a landlord, it is your right to rent your property to the most qualified applicant. The danger, of course, is in determining which applicant is most qualified. Is a tenant with a minor court incident and a credit score of 780 better qualified than one with a clean record but a score of only 700? If you don’t feel confident in making a clear evaluation, the rejected tenant may point to some other protected class difference.
As with everything screening related, evaluate your circumstances and determine which policy is best.
Using Passive Screening to Improve Your Applicants
Much of what we’ve spoken about so far can be categorized as Active Screening. This includes any screening activity in which the property owner is, well… active. Think requesting a credit and criminal history report or reaching out to references listed on an application. Passive Screening, conversely, is inactive, and because of this, it can be an excellent way to improve the quality of your tenants without imposing too much on your time.
Passive screening typically starts with marketing. Different marketing sources will produce different applicants. After all, no marketing channel will reach everyone you want. By understanding the types of applicants one advertisement produces versus another, you can better target renters you believe to be a good fit.
For example, if you’re in a small college town that’s highly walkable, posting an ad in the paper may attract more adults or professionals. A yard sign, billboard, or paper advertisement placed in the downtown area with heavy foot traffic may attract more students. Understanding who your marketing effort is most likely to reach and with whom it is most likely to resonate will enable you to improve your renters.
A great way to begin passive screening is to start asking tenants on your application where they heard about the property. File that information away, and when you have a good tenant experience or a bad one, go back and consult the source. You’ll quickly realize which marketing efforts bring you the tenant’s you want and which do not.
And while passive screening begins with marketing, it ends with retention. A good renter is worth her weight in gold, so don’t let her walk away. Good business management includes keeping your best customers around. Recognize the value of a tenant that always pays on time, treats those around him with respect, and keeps your property in great condition. Be ready and willing to offer him a discount to stick around.
Using Social Media to Screen Tenants
When it comes to social media and tenant screening, landlords need to be very cautious. Social media can be an excellent way to peek into the personality, attitudes, and behavior of an applicant. But the information you gather and how you gather it can get you into trouble.
If you choose to use social media as a means of determining which applicants are the best fit for your property, there are a few things you need to know. You’re probably tired of hearing it by now, but the first thing to do is create a policy. If you check Instagram for one applicant, you must check it for all other applicants. And no, Facebook and Instagram are not the same thing, nor are Twitter and LinkedIn. Once you open up the can of worms that is one social media platform, you must use that exact same platform to screen all other tenants.
Additionally, anything posted publicly is fair game. If an applicant includes pictures of themselves violating the law or doing drugs, you can use that information to deny them. But if the information is private or blocked, you cannot require your tenant to share it, so don’t even ask.
Further, understand the limits. The personas people project on social media are not real life. Take everything with a grain of salt. There is also not much of an identity verification process with social media. You won’t be validating an applicant’s Facebook page using their social security number, so recognize that the James Smith you’re seeing punch a hole through the wall of his rental property may not be the James Smith applying to yours.
Make Tenant Screening a Priority for Your Rentals
As a landlord or property manager, tenant screening is your first line of defense. When used effectively, with the right amount of thought and understanding, a tenant screening process can dramatically improve the quality of your renters. Better renters will leave your properties in better condition, your bottom line healthier, and your sanity intact.
Hopefully this article has not only helped you realize the importance of screening your tenants, but also given you the tools and understanding necessary to ensure your screening process is a great success.
For more interesting articles on managing your properties, be sure to subscribe to our blog and Like us on Facebook. And don’t forget to share your thoughts in the comments!