If you are a rental property owner and are performing your own tenant screening, you are flying a little close to the sun. Most owners are under the impression that pulling a credit report and handing over the keys is all there is to screening tenants for rental properties. But that is not the case. Pulling a credit report and handing over the keys is hope with paperwork.
The Rental Property Owner's Guide to Tenant Screening hopes to aid the rental property owner with the process of Tenant Screening. Many rental property owners who self-manage tend to pull the applicant's credit report and give the keys to the applicant based on the report. Self-managing involves hope and paperwork.
Whether you are a seasoned property owner or just starting to build a portfolio of rental houses and duplexes, our Tenant Screening For Rental Property Owners guide is designed to offer a comprehensive review of Tenant Screening. Specifically we will outline a rational Tenant Screening process that is designed to save you money by finding you better Tenants before they move into your rental property. By the end of this post you will understand the often inexplicable process that you as a rental property owner go through in Tenant Screening. Ultimately we hope to point out the errors of self-managing and explain why renting out houses, as compared to other types of real estate investment, demands a structured Tenant Screening process as part of its inherently greater risk.
In This Guide
- Credit Scores Are a Starting Point, Not a Finish Line
- The Number That Actually Predicts Tenant Behavior
- Income Verification Gets Complicated in This Market
- Arizona Law Shapes How Deposits Work, and That's Actually a Good Thing
- HOA Properties Add a Second Layer You Can't Ignore
- Applying Your Criteria Consistently Isn't Optional
- Informal (Unapproved) Pets Are The Big Money Loser
- What a Bad Placement Actually Costs
- We Get Paid After You Get Paid - Leasing Fee and Tenant Admin Fee - Guarantees!
Credit Scores Are a Starting Point, Not a Finish Line
A 620-score applicant can be a better renter than a 750-score applicant. We manage 83 properties throughout Mesa and Maricopa County and have found time and time again that a strong number does not make for a good tenant. That number can tell you about a past behavior with debt but it does nothing to explain a potential tenant's payment history with regard to rent.
A credit score reveals a person's history of paying back debt, but it tells very little about how someone will pay rent on time or treat a property. Therefore, in our view, screening for renting out a house involves much more than just verifying a strong credit score. For example, if a prospective tenant has a great credit score of 750 but no rental history whatsoever and is new to a job that he or she started two months ago, then that person is a much riskier applicant than a person with a mediocre credit score of 620 and verified income of 3 times the monthly rent, five years of excellent rental history and great prior landlord references.
Each day that a property sits vacant is costing you money. Holding out for the perfect applicant can end up being very costly in the long run. We have seen many situations where an owner has held out for the perfect tenant only to have that tenant end up being a huge problem. The cost of holding out for the "perfect" tenant far outweighs the cost of getting a good tenant in the door quickly.
The Number That Actually Predicts Tenant Behavior
But most importantly, we want you to know that the prior landlord reference is probably the best predictor of future behavior of any single screening tool. The prior landlord reference will tell you whether or not the tenant paid rent on time and whether or not the tenant took good care of the prior rental property. A strong rental history is what we're looking for and it's probably more important to us than any other single criteria in the rental application process.
In verifying employment for an applicant's screening report, for example, don't take a verbal confirmation of employment from an applicant. Verify in writing the amount of income the applicant is making. This will help protect against tenants who misrepresent themselves prior to renting. The owner we mentioned previously was out $4,200 in lost rent and damages for a unit he rented to a tenant that he verified was employed verbally as opposed to documented.
Verify a Tenant's Rental History of Paying Rent On Time Before Renting Out a Home to Anyone. Let's assume you are owner/investor renting out a home in Mesa, Arizona. If you screened an applicant based on the above criteria you would have been much better off renting the home to this tenant rather than to the above described tenant with the excellent credit score. The tenant with the excellent credit score caused so much damage to the home that the owner ended up losing $4,200 in lost rent and additional repairs. That was a costly mistake on the part of the owner who screened based on criteria that in the end turned out to be of little value to the owner.
Income Verification Gets Complicated in This Market
Rental demand is high, not only from relocating within state residents, but also from remote workers from all over the country, so be prepared to verify the employment of out of state applicants. This may be easier for some than others, i.e. employer provided W-2's vs. 1099's, contractors, etc. Income verification should always be a priority, and owners should always stick to their own criteria that have been set forth for evaluating the credit worthiness of applicants. In the end, finding the right tenant to fill a vacancy will protect the owner's investment in the long run.
So our verification requirements are: 3x monthly rent in verifiable income. So if rent is $1000/month then $3000/year in verifiable income. We require paystubs, bank statements and offer letters that we confirm with employer. We go over documentation requirements with applicants upfront before we fill out an application and then our leasing agent walks them through what documentation is required after that to make sure everything is straight and to avoid any delays.
Another challenge that we see in screening in the West Valley is that of Renters by Circumstance. Many people are currently waiting for new construction to come online in Buckeye and Goodyear and are currently renting. Their thin rental history does not reflect their true financial ability as a tenant and as such we weigh their income and credit score more heavily in our decision making. Every application is evaluated on a case by case basis.
Arizona Law Shapes How Deposits Work, and That's Actually a Good Thing
In Arizona, the maximum Security Deposit allowed for an unfurnished rental property is 1.5 times the monthly rent. For Example, if the monthly rent is $750, then the maximum Security Deposit would be $1,125. For this reason, our company takes a guideline of 1x to 1.5x the monthly rent for the Security Deposit, based off of an applicant's credit report, income verification and rental history.
The deposit for a tenant with a poor rental history can be higher than a tenant with good rental history because the owner is taking on more risk for tenants with poor rental history.
Pet Deposits/ Fees- For Unfurnished rental properties we charge a $250.00 non-refundable pet deposit per pet, plus a monthly $25.00 per month pet rent per pet, with a two pet max. The owner will also have up to $1,000.00 in damage protection per pet for the entire lease term above and beyond the security deposit.
HOA Properties Add a Second Layer You Can't Ignore
While in non-HOA rental properties the landlord can rent out as he sees fit, in many condos and rental home communities in Arizona, the HOA's governing documents may supersede the rental terms, even of the best rental property. For example, one of our rental properties in a West Valley, Arizona City such as Buckeye or Goodyear, has a 30 pound per pet maximum for animals such as dogs. We had an owner who rented to a family with a rather large breed dog, even after the owner read the HOA's governing documents, the owner failed to notify the pet owner that, in fact, the pet exceeded the weight limit. So, the pet was considered in violation of the HOA's rules and the owner was assessed a fine of $500 for each incident, until a lease amendment was signed by both parties.
In addition to normal rental criteria from governing documents for HOA-governed properties (managing many condo and townhome properties in this area) there are special rules that apply such as pet weight restrictions, tenant approval requirements, and additional rules governing parking. For example, the HOA in an owner's condo in Scottsdale recently penalized the owner $500 for violating a rule which limited dogs by weight. In order to approve a rental for a pet owning applicant for a HOA governed property the leasing agent must first review the governing documents to understand all applicable rules. Once an approval process for a pet has been established for a property managed by us, then normal rental criteria are also applied such as income verification, rental history verification, employment verification, credit report evaluation, etc. Since lease amendments are typically required for approval of pets, failure to include any portion of governing documents could lead to Rental Placement problems.
“The owner we mentioned previously was out $4,200 in lost rent and damages for a unit he rented to a tenant that”
Applying Your Criteria Consistently Isn't Optional
A careful reading of Arizona Fair Housing laws indicates that all criteria used for selecting a tenant must be used uniformly on all applicants. Thus, if you require verification of income at 3x monthly rent for one applicant, you must require verification of income at 3x monthly rent for all applicants. Screening against rental history and/or credit reports must also be applied uniformly to all applicants. Furthermore, income from any source must not be used to discriminate against any protected class of people including Section 8/HUD tenants.
Income source cannot be used as a basis to disqualify an applicant in Arizona. And in keeping with our commitment to owners with tenants on Section 8/HUD, we work with tenants on assistance in our rental properties as well. Arizona law does not allow discrimination based on source of income, as long as the owner is applying his or her rental criteria uniformly to all applicants. A Fair Housing complaint or HUD investigation could cost $16,000 to $25,000 or more in attorney's fees, even if owner wins in the end. To avoid such risks, we apply the owners' same criteria to all applicants for all rental properties and keep consistent documentation on every applicant throughout the screening process.
We keep track of every applicant, every decision and every document with screening for all rentals managed in AppFolio.
Informal (Unapproved) Pets Are The Big Money Loser
The biggest loss of money for owners in pet friendly apartments is that of informal approval of pets by owners.
One of our Gilbert property owners recently discovered that his tenant had moved in with two pets rather than one as disclosed on the rental application. Since there was no inspection of the pets at the time of move-in and no written addendum to the rental agreement signed by both owner and tenant for the second pet, the owner was unable to charge the tenant for the additional deposit or for the extra monthly pet rent for the balance of the lease term. All of this could have been avoided had there been a properly documented pet inspection and written addendum to the rental agreement for the second pet prior to the tenant's move-in date.
So often we get "oh that is fine"'ed because an owner does not want to lose an "ok applicant." So we treat pets informally because it seems reasonable in the moment, but ultimately will cost an owner $1,000 of Pet Damage Guarantee money that was intended to fix problems for approved pets. Remember the documentation must be formal too to invoke the guarantee.
What a Bad Placement Actually Costs
Maricopa County eviction filings move through the Justice Court system, and while the process here is generally faster than many states, a bad placement still typically means 30 to 60 or more days of lost rent, plus legal fees, plus turnover costs before a new tenant is in place. We've seen vacancy costs run anywhere from $1,500 to $3,500 or more depending on the unit and season, and that's before you account for any damage.
As stated above our leasing guarantee is based on a 10 month benchmark. If we don't find a suitable tenant and they aren't able to fulfill a 10 month lease term then we will find another suitable tenant for you at no additional charge.
With vacancy rates currently at 5.0% across all our managed properties we are very happy with where we are at. All our tenants that we have placed to date are performing well, and are remaining in their leases for the full term. If we didn't have a good screening process in place we might not be in this position.
We Get Paid After You Get Paid - Leasing Fee and Tenant Admin Fee - Guarantees!
The leasing fee is 1/2 of one month's rent. So for example, on an $1,800 rental, the leasing fee would be $900. We also there is a one time tenant admin fee of $195 for the onboarding of tenant documents.
We list apartments on dozens of real estate websites, all of the major social media sites, and the MLS, etc. We coordinate viewings through ShowMojo, which allow interested renters to schedule viewings at their leisure. The system is designed to try to fill a unit as quickly as possible with the best possible renter, as opposed to just letting the unit sit vacant while we wait for the perfect applicant to come along.
Paul and his team at ProEx do a great job for us with no hiccups. TK – Owner.
That is the standard that we strive for in each placement of tenants in all of our rental properties.
FAQ
What does the tenant screening process at ProEx Realty Management include?
We run a background check, a credit evaluation, income verification, prior landlord(s) reference(s), a review of a potential tenant's rental history, evictions, etc. Depending on the specifics of an HOA-governed property we could also incorporate in our screening process requirements of the HOA in approving a potential tenant(s).
How does Arizona law limit security deposit amounts?
Under the Arizona Residential Landlord and Tenant Act, security deposits for unfurnished units are capped at 1.5x monthly rent. We set deposits at either 1x or 1.5x depending on the applicant's credit, income, and rental history so the deposit reflects the actual risk profile.
Can you screen Section 8 or HUD tenants the same way as other applicants?
No, income source cannot be used as a criterion for disqualifying Section 8 or HUD tenants and applicants. Arizona law requires that criteria for screening applicants be applied consistently to all applicants.
I already paid for a bad tenant at my other rental — How does ProEx handle a tenant that doesn't work out?
If a tenant that we have placed in a property does not work out for at least 10 months of the lease term, then we will go find another tenant for you at no cost or additional charge. You can learn more about our leasing guarantee and other owner protections we offer.
Does ProEx manage properties with HOAs?
Properties in HOAs - We have many clients with condo, townhome and single family homes in HOA controlled communities throughout the area. We work with all the different HOAs and their rules. The HOA screening criteria can include such things as pet weight restrictions and even approval by the tenant of other tenants in the community. We work with all of these different requirements and screen applicants based on the landlord's rental criteria as well as the HOA's criteria.
What pet fees and protections apply to approved pets?
We charge a $250 non-refundable, one-time pet fee and then only $25/month in additional rent for approved pets. To give peace of mind to our owners for damages by approved pets, we also offer up to $1,000 in additional damage protection for each approved animal, which will be paid in addition to the security deposit, should it be exhausted by damage caused by a pet.
If you feel that you are just guessing when screening tenants, we would like to speak with you.