Tools of the Trade – Tenant Background Checks
This article is Part 3 in a multi-part series revolving around the Tools of the Trade that any landlord needs to be aware of and probably use. In this series, I will cover the following topics and probably throw in a few others along the way:
Now you may be wondering why it is taking so long to discuss lease agreements and other forms. Remember back in the post on the Telephone that I discussed the problems with getting to ahead of myself and my phone started ringing off of the hook with sales calls? Well imagine yourself in a situation where you are actively advertising your rental and have a prospective tenant. How are you going to perform a tenant background check? Do you know where to go, who to turn to? Did you realize that some companies require an inspection prior to allowing you to pay them money to run a tenant background check? You do not want to be stuck in a situation where a person is trying to give you money that you shouldn’t take until you have done your due diligence.
What is a tenant background check
A tenant background check is an investigation into the prospective tenants employment, credit, eviction, and criminal history. A tenant background check will help to flesh out any skeletons that the tenant might be trying to keep in their closet.
Where to begin
To help you stay legal and provide as much proof against any possible discrimination lawsuits, you need to start establishing the criteria that you will use to determine the prospective tenants eligibility. This criteria allows you to show consistency with your investigation and reduces the possibilities of someone winning a discrimination lawsuit against you. Remember, you are renting to real people that have probably had real problems in their lives. Are you willing to rent to a person that has had a foreclosure? How about someone that has gone through bankruptcy?
Establishing this criteria can be very difficult in the beginning and in all honesty, it does not mean that you won’t get a looser that simply looks good on paper. Some of my best tenants have been those with a chapter 7 bankruptcy, mediocre credit and live paycheck to paycheck. I have also had a loony that also had a chapter 13 bankruptcy, made good money as a real estate agent, but because I wouldn’t let her boyfriend move in without being added to the lease, she started fabricating stories until I finally let her out of the lease.
I don’t even bother with a credit score as there are too many factors with a persons life that will make a persons credit score plummet. Remember the great tenant that had gone through a chapter 7 bankruptcy? Do you think they had great credit? That tenant was slowly trying to rebuild credit after a divorce and massive medical bills forced the bankruptcy. Life happened.
Credit history is an area that I probably put some of the most focus on. With the current average credit card debt being over $7,000, it is very likely that your prospect will have some. You will want to look at the frequency of delinquent payments, the last occurrence of a delinquent payment, how many debts, and the total outstanding debt.
If the prospect has a couple of credit cards, all with low balances, but a history of delinquent payments, this is a HUGE red flag for me. Sure, they probably have the money to pay rent but will they?
If the prospect has a couple of credit cards, all with high balances and no history of delinquent payments, this shows that they are capable of paying their debts; I would ask the prospect for details as to WHY the balances are so high. There could be a valid excuse, or they could point you to the 80 inch LCD TV with crazy surround sound system.
Has your prospect ever been evicted? Are you seriously going to bother with them? Move along!
Just like with Credit History, I think that you need to take everything into consideration. If the prospect was convicted of of a felony for smoking marijuana in 1974 whereas now that would be perfectly legal in California, I would probably ignore it. However, if the same prospect was convicted of a misdemeanor for child endangerment, I would probably look for a different prospective tenant.
See, you do not have to say NO to all criminal acts and by the same token, you do not have to say YES at all! You simply need to document, for your own records, the reasons why you denied the person and be consistent with that for all of your prospective tenants.
Just as with Evictions, if the prospect isn’t employed or has a source of income such as a retirement fund, move along!
Tenant Screening / Background Check services
TVS offers a very competitive rate of $33.90 for a Credit/Criminal/Eviction check. TVS does not require any sign-up fees, membership fees, or annual fees to utilize this service making it perfect for the Do-It-Yourself landlord! Although I have not yet used this company, I will be using them the next time I have a vacancy.
Rental protection Agency offers a slightly lower rate of $29.95 and also does not require any sign-up fees, membership fees, or annual fees to utilize this service.
TransUnion – SmartMove is a highly trusted service, brought to you by one of the three major credit bureau. Although at $25.00 this may seem like the best service due to the price, the problem is that it requires additional effort on the prospective tenants part. The prospect is required to log into the SmartMove site and authorize the credit check. You are now placing more control into the prospect hands than necessary; you will lose time and money if the prospective tenant isn’t as proactive as you are.Questions? Comments? Contact DIY Property Manager!