Vacancy rates are staggeringly low right now. At the end of 2013, the national apartment vacancy rate was 4.1 percent—the lowest vacancy rate since 2001. In Bend, Oregon, where I live (and own a rental property), the vacancy rate is reportedly .5 percent. That’s crazy.
But it also explains why last week, on the day we had our first tenant move out, we got a call from someone interested in the rental, without having lifted a finger to market it. Because we’re doing a small renovation on the unit I naively thought I had some time before I needed to put together our tenant screening process.
But that turned out to be wrong, so we’re doing it on the fly.
Now, clearly a local property management company could handle finding and screening tenants for us, as well as all the move-in stuff like collecting deposits and doing a move-in inspection. Come to think of it, a property management company could also help us with the renovation. But we’re not there yet. We’re trying to self-manage for a bit given we both work part-time and I know a bit about the legal side of the residential rental business from having practiced landlord-tenant law.
It’s important to develop a tenant screening process that you can apply fairly and consistently. Here’s how we’re developing a screening process for this one applicant:
1. Pre-Screen Before Showing
Ideally, before showing the property you can “pre-screen” applicants by telling them the rental price, number of bedrooms, if the property is non-smoking, and if pets are allowed. You can do this on the phone with the interested party, or put it on a sign at the rental if you get to the point of marketing the unit. Pre-screening filters out some applicants before you spend unnecessary time showing the property to someone who ultimately won’t take it.
That said, our pre-screening was a little weak. We did tell the applicant that rent would be increasing because of the renovation, and she already knew how many bedrooms it has because her friend lives in one of the other units. Pets and our non-smoking policy weren’t mentioned.
2. Be a Fair Housing Act Guru
Be paranoid about federal, state, and local fair housing laws. Seriously.
My husband met with the applicant last week to show her the rental unit, and before he went, I made sure he knew some of the details of the federal Fair Housing Act. Under the Act, you can’t discriminate on the basis of:
Depending on the state you live in, other groups might also be protected. For example, in Oregon where I live, you also can’t discriminate based on:
- marital status,
- source of income,
- sexual orientation including gender identity, and
- domestic violence victims
This is what I told him: “don’t ask her about if she has kids or if she’s married or where she’s from.”
I think sometimes the Act is unintentionally violated by naturally inquisitive, chatty people. My husband is neither inquisitive, nor chatty, which in this case is good. Also, as a rule, we don’t talk religion (or politics) with people we don’t know, and we don’t care about anyone’s sexual orientation, including our renters. Anyway, I made sure to mention to him the other protected classes, and he went on his merry way.
3. Have a Good Applicant Form
Find a good application and give it to the applicant.
When we bought the rental units I bought these books–mostly for my husband since he’s doing most of the landlording:
- Every Landlord’s Guide to Finding Great Tenants (NOLO)
- Every Landlord’s Legal Guide (NOLO)
- Property Management for Dummies
All of these books include forms, which made my tenant screening process on the fly much easier. I knew that I wanted a section for landlord references (with phone numbers) and employment history in the application, so I picked the first one that met my criteria and emailed them to the applicant (as PDFs), along with forms giving me permission to check credit and criminal histories.
The application also has a short section to describe basic lease terms, including rent, length of lease, and whether smoking and pets are allowed, just in case the tenant didn’t get them yet for some reason.
4. Check Credit Reports
- Sign up for credit reports with a reporting agency. You must, must, must check your applicant’s credit report, and this step is planning ahead for that because before you can look at a credit report, you have to figure out how to get it. I signed up on Experian.com. With just a name and email address I can invite applicants to sign up and share their credit report with me. They pay Experian directly, without going through me. This is good for a couple of reasons. First, I don’t have to deal with getting money from the applicant since the applicant pays Experian and I’m out of that loop. Second, I know that the report I’m getting is the real thing, directly from the reporting company.TIP: A basic rule of landlording is to never accept a hard copy credit report from an applicant, as they can be tampered with.
- What is an acceptable credit score? When you got the application back, you got the information you need to run a credit check. Many landlords choose to set a minimum credit score of 700; others seem to go as low as 620-650. Just be aware that the lower you go, credit experts predict that the likelihood of late payments or default increases. Decide what minimum you are comfortable with and keep a record of it so you can apply it consistently in future screenings.
5. Check References
- Check prior landlord references. This one is a biggie.
If you give your tenants a decent application, it should include a section on landlord references. Call them. Go back at least two prior landlords. Landlords who want bad tenants to leave their rental property have been known to give good references to get rid of them. If you go back two landlords, that’s less of an issue. Ask if the applicant paid rent on time, damaged the rental unit, had any issues with neighbors or with you, left the unit in a good condition, had any pets (and if so, were there any issues), respected “house rules,” and the reason for leaving.
- Check employer references. This one’s also important
Make sure your prospective tenants are working where they say they are. As with landlord references, this contact information should be on the application.
6. Check Rent to Income Ratio
Many landlords go with a 1 to 3 rent-to-income ratio. That is, rent should be no more than one third of income. This is up to you as the landlord, but be aware that the prevailing wisdom is that tenants shouldn’t be paying more than 25% to 35% of their income on rent.
7. Prepare a Rejection
It would be very easy for us to enter into a lease with the applicant. However, in this case I just got the applications for her and her roommate today, I haven’t checked credit reports or called past landlords or verified her employment. So, the jury is out on whether we’ll be moving forward.
Regardless, I’ll make sure I keep the applicants’ applications, and document in the file the reasons for the decision we ultimately make. That way if there are any fair housing or other questions down the road, we’ll have a record that the decisions we made were based on non-discriminatory standards that we’ll be applying fairly and consistently to all future applicants.
Author of the Landlord Chronicles blog, Tracey March provides stories and “lessons learned” from her experience as a self-managed rental property owner. Answering the question if you would benefit from partnering with a property management company.
NOTE: In this case we had one applicant who contacted us, so we didn’t have to deal with advertising our rental unit or with choosing amongst multiple qualified applicants. Those facts simplified our screening process immensely.
- Consider checking social media profiles to make sure what your applicants say on their applications is consistent with what they’re saying online. But be careful—and read more about the potential downsides of using social media as part of your tenant screening process here.
- I’ve read that if you get a chance to peek inside the windows of your prospective tenants’ car, you’ll get an idea of how organized or tidy they are. But I’m not sure what I think about that, since my car is usually a mess!