It's time for the second installment of Property Management Mistakes!
Earlier, I covered 6 Common Advertising & Showing Mistakes Property Managers Make. Today we're talking about how easy it is to screw up the process of taking applications and screening tenants. This is one of the most important parts of being a landlord — being able to properly select tenants will determine a huge amount of your success and happiness as a landlord.
So let's get onto the screw-ups!
1. Application Mistake: Not Asking ALL the Questions
It's easy to download a form from the Internet and print it out and give it to a prospect — but how many of those forms were put together by a lawyer (or worse yet, an editor) instead of by a property manager?
Naturally, you need all of those legal aspects taken care of, like proof of identification, permission to run a credit check, co-signer information (if relevant) and so on. But there's more.
You also need to obtain references that are not landlords or family members, a list of their previous (at least two!) landlords, including contact information (and previous addresses), verification of their income and permission to run a criminal background check. Then — and this is just as important — you have to actually follow through and do the legwork that all of that information enables.
In particular, take care to actually call all of their previous landlords and ask them about the applicant's tenancy — including allowing them to fill in the dates of that tenancy. We've found that a surprising number of clever applicants put their friends' phone numbers as their previous landlords, but that not many of them are prepared with details like the exact dates of their friend's move-in and move-out. So we ask open-ended questions to try to expose these situations. We even check public records to confirm the owner of a property and when they bought it.
Needless to say, faking a landlord is an automatic "decline" from us.
2. Application Mistake: Trying to Profit From the Application Process
It's not unusual for a property manager to charge an application fee — it does a lot of good things. It immediately weeds out a lot of people who aren't actually serious about moving in. It pays a portion of the money you have to shell out to do a full background check. And it gives you some tiny bit of information about the applicant's finances.
But application fees have been going up lately, and we've even encountered some PMs who require a relatively significant application fee and then ask the applicant to bring proof of their FICO score. That tells us that they're not doing a full credit check (or even any credit check at all — see below), which means their expenses for the application aren't all that high.
Their application fees are being treated like an income stream — and that's not acting in the best fiduciary interest of your clients because you can be guaranteed that those high fees are keeping valuable applicants from moving into their properties.
3. Screening Mistake: Not Looking in Depth at an Applicant's Credit Report
The credit companies do us this great service of condensing a person's entire credit history into a single number, and that number can tell you a lot — but it certainly can't tell you everything you need to know about a person.
This is especially true of tenants. A score can't tell you, for example, if their credit score is low because they regularly miss ordinary bill payments or if it's low because they have one huge debt that they ignore because they know they'll never be able to pay it off. The people in that second category can make great tenants provided they have a solid record of paying their normal monthly bills.
In contrast we've also seen applicants with acceptable credit scores who have nothing but collection accounts on their credit report — with the exception of student loans in deferment with a "perfect" payment history. Don't know about you, but that's not a tenant we want to manage.
If you're one of the above crowd who would go so far as to trust an applicant to bring in evidence of their own FICO score, allow me to introduce you to a cute little thing called Photoshop. Yes, it's out there, and yes, people will and do use it to fake up all kinds of documents. Never trust a tenant's paperwork — it exists to be verified, not to be used as-is.
4. Screening Mistake: Not Understanding Income
The industry standard seems to be that an applicant must have monthly income equal to three times the rent.
We say phoeey to that! That was lifted from the mortgage industry, and those guys knew so much, they caused the recent real estate meltdown.
There's only one income number that matters: what the prospect has available to make their rent payment. This means looking at their take home income after payroll taxes and any other deductions, like child support or garnishments. Then subtract from that their car payments, student loans, credit card payments, etc.
Think you're done? What about utilities? You should be able to estimate those, but what about food, clothing, medical, etc.?
The point we're trying to make is that there is no perfect, guaranteed system, but you should put more thought into it than the "3 x rent" rule.
By the way, don't forget to be on the lookout for fraud here, too. We once had a prospect who claimed to be an administrative assistant give us pay stubs and a W-2 showing over $80k in income. That might be possible at a Fortune 500 company, but not the little mom & pop shop our research turned up!
5. Screening Mistake: Not Asking for Bank Statements
Every week we have a prospect tell us they've never been asked for a bank statement to rent a property, and we shake our heads wondering what the rest of the PM's out there are doing (actually, not doing!).
How important do you think it would be to know if a prospect lives paycheck-to-paycheck or has a pattern of saving money for a rainy day? Granted, some properties are located in areas where it seems 99% of inhabitants live paycheck-to-paycheck. Many in those areas don't even have a bank account, but wouldn't you want to know that? A prospect without a bank account often turns into a tenant who causes headaches with rent payments.
Bank statements also paint a pretty good picture of someone's spending habits. They can show what day rent was paid, paydays, how often someone eats out for lunch and dinner — pretty much where their priorities are.
6. Screening Mistake: Thinking That a Bullish Market Means Good Applicants
It's a common enough mistake — if the rental market is doing well, it means that more people are moving into rentals, which means that more good people are moving into markets. When the market is on the uptick for as long as it has been lately, you start to get a little complacent because there are so many qualified candidates — but think about it from the shoes of a crappy tenant.
With so many good candidates squeezing them out of the market, renters with bad histories get desperate. If you think that someone using Photoshop to mock up a FICO score or using a friend as a landlord are unlikely, we've got some stories for you.
We've had applicants mock up entire employment histories, complete with excuses as to why each of a half-dozen businesses isn't available to be called for verification. The truth is that as the market gets better, the worst applicants get better, too — better at lying, deception and fraud.
We're still nowhere near done talking about the many mistakes that a property manager can make — keep looking under the "Landlording and Rental Property Investing" tag for more tales from the dark side of landlord-dom.
What are the biggest property management mistakes you've seen when it comes to the application and screening process? What would you add to my list?
This article originally appeared on BiggerPockets.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.