Property Management Secrets: Forget Credit Checks, The Holy Trinity of An Effective Tenant Application

Over the last fifteen years as a real estate investor in New Orleans, Louisiana I have yearned to find a good property management company. I still haven’t found one. While I am very good at managing property, I would love to outsource the day to day minutia so I can focus on expanding my business. Wouldn’t you?

So check out this angle, and read on for the Holy Trinity of an Effective Tenant Application. 

Alas, what I have discovered is the property management companies I have hired over the years, which include Superior Property Management and Latter and Blum Realtors, all have similar policies that work to the detriment of keeping apartments rented and maintained.

Huge Property Management Misconception:

One major shortcoming in the policies of almost all property management companies is factoring in credit reports as a primary component in screening tenants. The hair on the back of your neck may be standing up right about now, but bear with me for a minute.

When I got started in the business of renting residential apartments, I automatically assumed that running credit was a must when taking a rental application. However, over the years my real life experiences unequivocally attest that there is absolutely no correlation between high credit scores and great tenants.

Hands down some of my worst tenants have had impeccable credit. The truth is unless their previous landlords are reporting regularly to credit bureaus regularly like a bank or phone company, a credit report doesn’t give insight into the timeliness of rent payments. In fact, it is reasonable that a typical American will use their last dollar to protect their credit rather than pay rent on time – and let’s face it, a lot of folks are tight on cash these days.

And here are the two major consequences that arise when credit reports are put on a pedestal:

1. Vacancies, not weeks but months. There are a lot of dream tenants that you will turn down. I’m talking about responsible, hard working people who pay their rent on time, but just don’t have very good credit.

2. An exhausting application process. How do you feel about additional paperwork? You hate it, don’t you? With all the leases and property files I need to maintain, the last thing I need is to run credit reports, and then review them. And guess what, they’re not free. Dynamic people who are great tenants have options, and all things being equal they will take another apartment in the spot that doesn’t require a two day turn around for a report that they have to pay for. Think about it, if a renter looks at 20 apartments, which many do, and he or she had to pay $20 for every application, that adds up to $400 just in application fees, with no guarantees. I wouldn’t do it either.

If I haven’t convinced you yet, here is some more evidence. I have a client named Tom with twenty-five apartments in Uptown New Orleans. When I met Tom he had been in the business roughly thirty years and we really hit it off primarily due to the fact that we run our businesses almost identically, including that we don’t concern ourselves with credit checks. I have been doing his leasing for him for a while now, and we both run just shy of 100% occupancy throughout the year. We do however take screening potential tenants very seriously and agree that there is a “holy trinity” of applicant must haves…

1. Verifiable and Recent Landlord Reference:

By far the most important information that can be taken on a potential tenant is the reference of a previous landlord. After all, that is the relationship that is being entered into, and I really don’t care if my tenants pay their credit card bills, or fell on hard times a year ago and ruined their credit. If they make good on the rental payments, on time, every month, that is what I care about. There are occasions when somebody has not rented recently, in which case I don’t turn them away immediately, but I look very closely at other references, such as employment. I also use an incredible god given gift that we all have. Intuition. Sometimes just meeting someone makes it clear that are or are not reliable.

2. Can They Afford The Rent Payment?

This is pretty simple. They either have enough money coming in to afford the payment or not. In the instance they do not, there ought not be further consideration unless they have a cosignor or can document savings. I have no problem asking a prospective tenant to produce confidential bank records to show just that.

3. Adequate Security Deposits:

Regardless of how great a tenant may look on paper and in person, anytime I rent an apartment to anybody I know I am taking a risk. A bad tenant can cause a lot more headache for a landlord, because a tenant can always move, but evicting people and repairing a trashed apartment is something you are stuck with as a property owner. People ask me to negotiate security deposits all the time, and every time I’ve ever done it I’ve regretted it except for once. The security deposit should cover atleast one months rent just in case.

I touched on intuition earlier, I also call it the “personal impression” I get in meeting a prospective renter. When it is definitively at one end of the spectrum, I would bet on it before a credit report in a heartbeat.

A quick note about social security numbers. I do collect them at or before signing a lease. I keep them on file in case I need it down the line. But I do not use it for any screening.

Hopefully you enjoyed this post, and it is always appreciated if you choose to share it on facebook, twitter, or other social media sites via the buttons provided here.

Happy landlording!

Recommended reading:

  • Things to Consider when Interviewing Property Management Companies – Picking a great property manager for your rental properties is one of the most important tasks you’ll undertake, once you’ve actually found a good rental. In searching for a manager, you’ll want to do a thorough interview, and in doing so, you should be able to figure out if they are worth working with. Here are some questions you’ll want to keep in mind when interviewing managers.
  • Property Mangement Companies – What to look for – property-management-companies. We haven’t fully given up selling our house, but we’ve entered into a contract with a property management company. Our old house is for sale and for rent at the same time. The really good news is that we …
This entry was posted in Property Management and tagged , , , , , , . Bookmark the permalink.

5 Responses to Property Management Secrets: Forget Credit Checks, The Holy Trinity of An Effective Tenant Application

  1. Joshua Dorkin says:

    Andrew – Thanks for sharing my article as recommended reading for your visitors. I appreciate the share!

  2. Dennis K says:

    Andrew,
    Great article. I’ve been a landlord for 31 years and only started using credit reports 4 years ago. I’ve been very lucky for 27 years, sometimes, personal intuition is wrong. 3 years ago, a very nice young man applied for a rental. Based on application and personal contact, I would have rented to him. His credit report showed huge debts, he would have been a deadbeat I’m sure.

    • Andy says:

      Hi Dennis,
      Nothing is foolproof, and every relationship entered into has some element of risk for the landlord and the tenant. All we can do is develop the best policies for our businesses based on past experiences and recurring results. I would never shun anybody for using credit checks, it is just more information to base a decision on and that is ok. However, the fact that you did just fine for 27 years without using credit reports just confirms, for me, that the importance of it is outweighed by the hassles and the costs that often result in losing a good tenant. I also have a feeling going forward it is going to be more and more difficult to find Americans with good credit. Thanks for stopping by and reading the article, as well as leaving a comment.

  3. Joseph Liuzza says:

    Andy,

    Real estate investment groups have made me lots of money. I wrote an article about the advantages of joining a group. Take a look: http://ezinearticles.com/?Create-Amazing-Positive-Cash-Flow-With-Real-Estate-Investment-Clubs&id=6707745

    Regards,
    Joseph

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>