What’s Missing in a Tenant Screening Report and Alternative Sources
Most landlords have seen a tenant screening report or two but even if you have, read on. There is more to learn and a better way to screen tenants.
If you are new to real estate investing or specifically property management then I am about to give you some information that could save you years of grief and turmoil. Conversely, if you are a seasoned investor I’m about to make you question the entire way that you screen your tenants. Here we go!
Everyone who’s been in the property management business knows that tenant screening is one of your most precious assets when it comes to managing rental property. Tenant screening will help you weed out the people who have no intentions of making their rent payments. They help weed out people that have the potential to be dangerous to your property or even you personally, thanks to criminal background checks. All this information is very important to a landlord. Because after all, you are trusting a complete stranger with your investment property. Tenant screening, if done properly, will keep you out of costly court battles and save you hours upon hours of headaches. So it is safe to say, tenant screening is one of your most valuable weapons in your arsenal.
What do you typically see in a screening tenant report?
Most landlords order a traditional credit report along with a criminal history and possibly an eviction history. While a criminal history and an eviction history are obvious as to why that information is important, let’s look at a credit report. What information do you truly gain with a credit report? Credit reports don’t typically tell you how a tenant pays their rent. Do they pay on time or are they routinely late. Even with Experian’s rent bureau program, the information about rent payment history is sparse at best.
Typically, a credit report provides information on how an applicant pays bills that are not the basic needs of life bills. Instead, the credit report shows the history of credit card payments. Theses bills do not carry the same weight as rent. For stable established households, these non-living bills (bills that must be paid for basic needs of life) are just as important as rent. However, in a lower income household, having a place to lay your head is much more valuable than your credit card. Payments for things like credit cards, take a back seat to rent in these households. As a landlord looking to select the right tenant who is more likely to successfully pay rent, it makes me wonder why do we put so much emphasis on a credit report. In many ways, it is really comparing apples to oranges.
What are the limitations with a credit card report?
Someone who does not pay their credit card could still be very successful with making their rent payments. They know at the end of the day, they need a place to stay more than they need a credit card if things get difficult. When we check a credit report, we really are trying to find out what a tenant’s intentions are. However, we are looking at something that has nothing to do with the tenant’s intentions on paying rent.
I thought long and hard about this dilemma years ago and wondered if there was a better way. After some digging and testing out several different theories, I discovered something more helpful. It has proved to be a much better indicator of a tenant’s ability and willingness to make rental payments to you, the landlord. This indicator shows several things, how much the tenant makes, how they pay their mandatory bills such as utility bills, cell phone bills, insurance payments, as well as rent. Best of all, this “alternative method of screening” is fraud-proof and extremely reliable.
What is the better the better way to handle tenant screening?
I have found in my studies that the best way to screen tenants is not by credit reports but by bank information. Let me show you why. Bank information, first of all, is fraud-proof and cannot be manipulated. A credit repair person can change a credit report to look more favorable than the applicant actually is. The records that a bank keeps are accurate and cannot be changed by any outside source. Second, bank information can verify payments that a tenant makes as well as income that a tenant receives.
If you look at enough information from a bank you can see all kinds of other financial habits. For example, by looking at how many non-sufficient funds (NSF) a tenant carries and how often their account goes negative you can see how responsible a tenant is. After all, if a tenant can’t keep their bank account in good order there is a higher chance that they won’t be able to make sure they pay you in a timely manner. In fact, if they can’t manage their bank account what makes you think they can manage to keep your property in order?
I tested this theory out several years ago. After three years of study, I found that by screening tenants using bank data, I have been able to reduce my evictions to zero. Previously, I averaged at least 2 a year. In fact, I have even reduced the number of slow-paying tenants that I have down to 1 where previously I had at least 15 out of 100 in any given month.
What about privacy and security?
You may be thinking that this information is a little too sensitive to have in your office. After all, the last thing you need is a prospective tenant claiming that you must have done something with their banking information and their account has been compromised. Well, the short answer to this is to have a process that allows you to see the bank data. The data must be destroyed immediately after you have made a decision. Another option is to consider using an alternative credit service such as LeaseDefend.com. Services such as LeaseDefend, summarize bank data online. It allows you to see only the information that helps you make a decision.
Whatever way you go, whether you use a service or collect actual bank records, screening by information that is actually relevant to paying rent is much more valuable. Looking at information that shows payment history on something unrelated to your same type of product (which is the rent), is of almost no value. In the property management business, landlords have often accepted the status quo as the best way to do things. They have not taken into account new technologies and more meaningful information that is available to us now.
If you are tired of dealing with tenants that look good on paper, through a screening report, but work out poorly then consider this alternative. LeaseDefend is a way to get better and more insightful information on your applicants. It’s about time we started using the technology that is available to our advantage. Please share your thoughts good or bad on this new process and how it could help (or hinder) our industry.
Art Veal is a 20-year real estate investor and founder of alternative tenant screening service LeaseDefend.com. Art has invested in multiple types of real estate investment including residential, commercial, and private notes.