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Ultimate Tenant Screening Guide

The goal of tenant screening is to assess a tenant’s potential risk.

There are three main questions that you’re trying to answer. How likely are they to pay their rent on time each month? How well will they maintain the unit? How long are they likely to stay for?
Most landlords’ focus on making sure tenants can pay rent. The reason they do this is that the other two questions are harder quantify. You’ll have to use your intuition and experience to gauge these risks.

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Ultimate Tenant Screening Guide

  1. 1. Learn how to successfully screen tenants and avoid the bad ones. May 2016 Ultimate Tenant Screening Guide
  2. 2. Learn how to successfully screen tenants and avoid the bad ones. Ultimate Guide to Tenant Screening Version: 1.0 | May 2016 | © Zora Computing Inc.
  3. 3. What You’ll Learn 1. Understanding what your job is 2. What you should learn during the initial conversation 3. Questions you need to ask 4. How to screen tenants and avoid the bad ones 5. What really matters when screening a tenant 6. How to be consistent in your screening process 2 Introduction The goal of tenant screening is to assess a tenant’s potential risk. There are three main questions that you’re trying to answer. How likely are they to pay their rent on time each month? How well will they maintain the unit? How long are they likely to stay for? Most landlords’ focus on making sure tenants can pay rent. The rea- son they do this is that the other two questions are harder quantify. You’ll have to use your intuition and experience to gauge these risks. It’s also important to not take to long in evaluating potential ten- ants. Try and book a showing with them as soon a possible. If they fill out an application, perform your background checks quickly. They’re going to be looking at multiple properties, remember first- come, first-serve. If you aren’t fast enough they’ll sign a lease with someone else. Section 1 Houston We Have Contact!
  4. 4. 3 The Initial Contact Rental inquiries are all inbound conversations. Tenants are always contacting you, not the other way around. What this means is that they’re interested in renting from you. They like your property enough to call a com- plete stranger to learn more. It’s important to remember that what you’re job really is right now is being a salesman. You’re trying to deter- mine whether the person on the other end of the phone is really interested, is qualified to buy, and whether you want to sell to them. Remember you’re getting into bed together for at least a year, this shouldn’t be a snap decision. There are a handful of questions that you should get through whenever a potential renter contacts you. We’ve listed the biggest ones below, with how to inter- pret there responses. This isn’t the end all, be all by any means. Try adding different questions and see what works best for you. It’s your job to sell an applicant on your property. There are plenty of other places where they can live. It’s up to you to convince them that your place is the one they really want.
  5. 5. 4 5 Must Ask Questions to Help Avoid Mistakes 1. Why are you moving? Despite seeming really personal, this can be one of the most important questions to ask. That’s because it can raise a lot of warning signs for how they may act as your tenant. Are they moving because of being evicted? Do they have a bad relationship with their current landlord? Do they keep going on about how unsuitable their current unit is? Be wary of these sorts of answers. What you want to hear is from tenants is answers like, we’re moving because we need more space we’re expecting an- other child, I’m moving to live closer to work, there’s a really good school in your neighborhood that we want our daughter to go to but can’t afford to buy in the school district. 2. When do you plan to move? Have you given notice to your landlord? First off, you definitely don’t want to hear anything like ‘this week’ or ‘by Monday.’ There are several reasons for this. It doesn’t give you enough time to properly review their application. It’s often a sign that they’re planning on abandon- ing their current unit. It’s really just a clear warning sign that something is fishy. Always ask for an explanation but be very, very hesitant when you hear something like this. Likewise, if they’re looking three or four months in advance don’t take their call that seriously. They’re really just look- ing around. Most jurisdictions require you to give your current landlord one to two months’ notice when moving out. That’s why most tenants start searching 4 – 8 weeks before they need to move. Make sure you can have the unit ready for them by their needed move in date.
  6. 6. 5 3. What is your monthly income/what do you do for work? Will you be able to pay first months’ rent and the security deposit upfront? Most property managers’ use 2 – 3 times income-to-rent as a benchmark for what most tenants can afford. Obviously this will vary by city. If you’re unit is in a major metropolitan, expect that ratio to generally be lower than a mid-sized city. That is rent will make up a larger percentage of income. The follow on question is to see whether they will be able to afford paying first months’ rent and the security deposit when they sign the lease. Be very hesitant if they can’t. You can ask for a guarantor if they look like a good tenant in most regards, but you think they might not be able to meet their monthly rent. 4. Can I ask for references from your past landlords and current employer? If the answer is no, you need to move on right away. There are two exceptions to this that require some more digging; young adults that have just moved out of their parents house and recent immigrants. Both of these groups can be great to rent to but try and find a way to protect yourself, either with a co-signer/guarantor or with taking several months of rent upfront (if this is allowed in your jurisdiction). Because you probably won’t get a straight answer out of their current landlord (if they’re bad tenants the landlord wants to get rid of them), try calling their current and last landlord. Make sure to ask if they frequently missed rent on the first of the month, or if they currently owe the landlord any outstanding rent. PS. Never use the number they give you for their landlord always look it up yourself. It’s also important to check how often they move. This will be a good sign of how long they’re likely to stay. Remem- ber tenant turnover is likely going to be your largest expense associated with a unit. On average units sit vacant for a month and a half after a tenant moves out. That’s a lot of income missed out on.
  7. 7. 6 5. We require a background check and credit check. Are you willing to let us perform one? Disqualify anyone who doesn’t agree to this as a potential renter. You need to be consistent in this, just like you need to be consistent in any additional rules that you require tenants to follow. The reason for this is that it exposes you to fair housing rules or human rights issues. Be Consistent. P.S. Never use the employers phone number that they give you. 6. Ask if they’d like to have a viewing? The number one most common mistake that we’ve seen is landlords forgetting to ask an applicant if they’d like to tour the unit. You’ve just gone through all of the trouble of selling them on it now you have to get them there. Don’t forget to ask. 7. Additional Questions Worth Asking: a) What do you do for work? b) What is your maximum budget? If the tenant is paying for utilities this should be included in your affordability cal- culation. Be honest with them on what previous tenants have had to pay. c) How many people will be living here with you? How many children? (Note: More people means more wear and tear on the unit. You can set a clause for a dollar amount (ex. $50/person), if more people end up living in the unit than they initially dis- closed.) d) Do you have any pets? What kinds? e) How long are you planning on living here?
  8. 8. 7 f) How much parking do you require? g) Do you smoke? h) Do you have any questions? Always ask this you never want to an applicant to feel like you cut them off or they didn’t get some information that they really wanted.
  9. 9. What You’ll Learn 1. How to prepare your property 2. What to take note of 3. What questions should you ask 4. The best ways to show your property 8 Property Tours Property tours allow you to further evaluate a potential tenant to make sure they’re a good fit for your property. It’s always impor- tant to be friendly and professional no matter who shows up for the viewing. Don’t treat anyone differently. Ask the same questions you would whether you plan on renting to them or not. Keep your eyes open and your mouth shut. Make sure to let them do most of the talking. Ask any questions that you missed during the initial conversation. Follow up with more precise questions. Make a note of whether they showed up on time. Whether their car was clean. Whether they were clean (or smelt nice). If there was more than one of them, how they interacted; were they nice and po- Section 2 Showing Your Property
  10. 10. 9 lite? Little things can make a big difference, it’s your job to notice them. And sell! That’s what you’re there to do. It’s your job to convince them that this is the right place for them. That you take great care of the property. That it’s located in a fantas- tic neighborhood, with the best schools in town and a Starbucks on every corner. Help them fall in love. From their perspective all they can see is an empty apartment, or even worse one filled with another person’s stuff. Home is where the heart is. Help them imagine that this could be theirs. Showing the Property Before you show it, make sure it’s actually ready to be seen. That the yard is clean, the unit doesn’t need any work done, and that the unit doesn’t smell. Make sure that it looks good. Just as you’re judging a potential tenant, don’t for- get they’re also judging you and your property. There are two common situations that arise when you’re renting a unit. It’s either still occupied or vacant.
  11. 11. 10 If the unit is in good shape and only needs a quick clean before renting it’s great to try and rent it back-to-back. That means on the day that your current tenant moves out you get the unit ready and the next day the new tenant moves in. Back-to-back is particularly important for smaller landlords. Large property managers have a large enough portfolio of properties that having a unit stay on the market for a month or two isn’t a big deal. When you’re only managing a property or two and relying on your day job to make up cash flow problems it’s integral to try and minimize the amount of time that your prop- erty is vacant. Showing An Occupied Unit Dealing with a vacant unit is easy. You can show it whenever you need to. No one is ever there. It won’t get dirty. Easy peasy.
  12. 12. 11 An occupied unit is another animal all together. It’s hard to ask current tenants to keep their unit clean for weeks on end. It’ll drive them crazy if you’re bringing prospective tenants through their place every other day. It’s best to get it done with as quickly as possible. Here’s a guide for showing the unit when it’s cur- rently occupied: 1. Contact The Current Tenant(s): Reach out to the current tenant(s) and ask them if there is a 3 – 4 hour window, either during the evening or on the weekends where they could ‘be somewhere else,’ so that you can show the property 2. Advertise: Post your property on the top listing services for your city. Make sure that you have high quality photos, a good description, contact information and the viewing period – Saturday 1pm-3pm, Wednesday 5pm-8pm 3. Schedule Showings: Try and schedule the showings back to back with 20 minutes for each showing. That way there’s hopefully some overlap, which creates a sense of urgency and demand for the property (Make sure to ask the tenant to bring a blank check and pay stub – this will really speed up the process for you).
  13. 13. 12 4. Remind Potential Renters: Either call or text those who booked viewings to double-check that they’re showing up. 5. Sell, Sell, Sell: Do your best to convince them to rent from you. 6. REMEMBER: ALWAYS ask if they would like to apply to rent from you. You wouldn’t believe how many tenants are too scared to ask for an application.
  14. 14. What You’ll Learn 1. How to verify an applicants identity 2. The Pros and Cons of credit checks 3. The power of the Z Score 4. How to perform background checks 5. What questions to ask an applicants previous landlords 6. How to use Social Media to uncover an applicants past 13 Introduction Once you’ve shown a potential tenant a unit you need to get them to fill out an application form. You usually collect their application along with a check for last months rent. So many landlords show tenants a unit and don’t ask if they’d like to apply to rent it. This is such a stupid mistake, always ask it never hurts. If you have rejected their application you should contact them to let them know that they have not been accepted. You also need to de- stroy their personal check to your company or mail it back to them. Never tell them why you have rejected them. Use a standard re- sponse like ‘I’m sorry but we never disclose our reason for not ac- cepting applicants.’ Section 3 Reviewing Applications
  15. 15. 14 What you are allowed to ask and what you aren’t allowed to ask on a rental application varies widely by jurisdiction. Make sure that you’re application form complies with lo- cal laws. It’s important to join your local landlord/ property management association. They usually include a template application that they’ve made sure is legally com- pliant. This is also a good time to check your applicants govern- ment issued I.D. If they’ll let you take a photocopy of their I.D. or a photo for your records. Make sure to delete it if they end up not renting from you. This way you can confirm that they’re actually who they say they are. It also helps for running credit checks, and making sure their names match their pay stubs. Credit Checks The first thing most landlords do is to perform a credit check on a potential tenant (Note: It’s important to get per- mission to perform a credit check on an applicant. The rational is pretty straightforward. A credit check is a summary of a tenants history of making regular payments on products that use credit. These include credit cards, lines of credit, car payments and mortgages.
  16. 16. 15 The premise of a credit score is that making regular payments on these credit products indicates how risky they are. The higher the score the less likely they are to miss a payment. A low score indicates that they’re riskier. Simple as that. And there is a correlation between a person’s credit score and the likelihood of them missing a rental payment but it’s far from perfect. Experian one of Figure -.- three big credit agencies in the U.S. produced a study that showed that pre- viously missing rent payments played a far larger role then a person’s credit score. John Oliver on Last Week Tonight did a great segment on credit reports highlighting just how flawed they can be. It’s definitely worth watching the en- tire video. Zora’s Z Score One of the things that we’re really proud of at Zora is our Z Score. All of Zora’s founders had a background in property management before starting Zora. Like most property managers they relied on a credit score to review tenants. Despite applicants having high credit scores, they were often horrible tenants. They didn’t pay their rent on time and damaged the unit. Because of these personal experiences Milan, Jaime, and Colin new that there had to be a better option. Working with some of North America’s largest property management firms, Zora collected one of the most complete data sets on ten- ants ever compiled. Using this data Zora has created its very own proprietary algorithm for reviewing the riskiness of tenants. Using over 80 different socio-economic and demographic variables Zora ranks a tenants actual riskiness.
  17. 17. 16 We’re so confident that we’re even willing to guarantee qualified tenants rent. Do you think Experian would promise that? Background Checks Now that you’ve collected a bunch of applications it’s time to vet them to see who makes the cut. There are a number of things that you need to do to verify that the information a tenant gave you is accurate. Why? Though most renters are good people there are those out there who aren’t. Serial renters know how to play the sys- tem, they know how to exploit you and it’s your job to catch them. If you don’t it can take six to nine months to get them evicted during which time you won’t collect a cent of rent. Proof of Employment It’s important not to just ask a potential tenant how much they make and who they work for but to verify it. You want to make sure you confirm their: • Income • Any other sources of income • The company they work for and their title • How long they’ve worked for the company • Their employer’s contact information
  18. 18. 17 Never, ever use the contact information for their employer that they have provided you. Always look it up yourself. First, they might have lied and given you the number of their buddy who’ll pretend to be their boss. It catches them in the lie You will also need to ask the applicant to provide you with their last two pay stubs. This can be done when they submit their application or by email. You can either photocopy these or just take a photo. What A Pay Stub Tells You • Applicants Name: You can confirm that this matches both their application and government I.D. • Current Address: You can double-check that this matches what they put down on their application for their current rental unit. • Monthly Income: You can see if they exaggerated at all about their monthly earnings. • Employer’s Name: You can match this to the phone number and contact information they provided. • Earnings Year-to-Date: This tells you whether they’ve been working for the company for at least one year. Landlord References It’s important to understand why a tenant is moving. Does their current unit just not meet their needs any longer? Or, are they a problematic tenant that you should try and avoid. Try and avoid using the contact information provided by the tenant to contact their past landlords. Just like with verify- ing employment, bad tenants will lie and have a friend pretend to be a reference. Ask the landlord the start date and end date of the lease this is a great way to catch them in a lie if they’re not actually the landlord.
  19. 19. 18 Usually with companies it’s easy enough to verify that they exist. Unfortunately, there are a lot of small property man- agers that only manage one or two properties. If you think something is off, you can always verify who owns a property using your local land registry. It’s usually not super expensive and if you’re thinking about allowing someone to rent from you, who you’re not one hundred per- cent sure about it’s definitely worth it. It’s important not just speak to an applicants current landlord but also the one before as well. If they’re problematic tenants their current property manager may sugarcoat his experience with them to try and get them out of his prop- erty. There are a number of questions that you should ask each landlord about your applicant: 1. How often did they call to complain about the unit? Obviously, rentals aren’t perfect they almost always show a bit of wear and tear even when they’re well managed. Tenants that expect perfection can be a headache, they call at all hours of the day about minor things and they’re never satisfied. It’s best to avoid them if possible. 2.Were there any noise complaints? Were the police ever called? These are particularly important issues in multi- unit buildings or neighborhoods where most of the properties are owned. Your phone will ring incessantly with complaints. 3. Did they ever miss paying rent on the first of the month? Tenants history of making rental payments in the past is probably a better indicator of their ability to make future payments. Even compared to their credit score. If they were late once in three years that’s probably ok. If they’re consistently late that’s a serious issue. 4.Did they have any pets? Some jurisdictions don’t allow you to discriminate renting to pet owners. Despite the fact that animals can cause major damage. They might say they have a 20lb poodle. If you talk to their landlord and they currently have three Rottweiler’s, those dogs are probably moving with them.
  20. 20. 19 5.What sort of condition did they leave the unit in? Though you might be able to recoup some of the physical damage caused by rough tenants it’s unlikely you’ll be able to rent the unit back-to-back, which means a month or two of not collecting rent. Try and avoid tenants that cause a lot of damage, are heavy smokers, or have lots of pets. 6.Would you rent to them again? If they hesitate you know something’s up. Move on. Social Media Let’s be honest, in how grateful we are with how open people are nowadays with all the stupid stuff they do on social media. It’s a treasure trove of information about who they are and what they do. Once again, it’s just another way to catch them in a lie from what they told you during their interview to how they’re actually acting. Google: The best way to begin is just a simple Google search of their name(s). Searching ‘James MacDonald’ will proba- bly turn up to many hits for you to find the one you’re looking for on its own. This can be combined with their city, a phone number, or employer to try and narrow the search. Though this will probably just lead to a tenant’s Facebook and Twitter pages, there may also be links to news stories or company websites that are worth reading. Facebook: Because people can post comments on friends’ pages and tag them in photos Facebook is often less curated than other social apps where the owner is in full control. It’s important to verify that the way they represented them- selves over the phone and in person actually matches their real-life behaviour. Did they tell you they didn’t have any pets? But wait, there’s a black lab in every other photo. Are quite and don’t drink or do drugs?
  21. 21. 20 Huh, what’s with all of these photos of them passed out on a couch with a bong in their hand and empty beer cans eve- rywhere. Twitter: It’s often used as an unobstructed stream of verbal diarrhea. People truly do post what they think here. Scroll through to see what their interested in and what their opinionated about. LinkedIn: Obviously this is going to work better for tenants with more white collar jobs. The real question though is, if they do have a LinkedIn page does their job match what they told you? Is it currently blank? This isn’t a deal breaker (I’m horrible at updating my profile), it just requires some follow up. Ask them about the mis- match and definitely see their pay stubs. Instagram: Use it the same way you would use Facebook. Read the comments that friends post though. Because the ac- count holder has full control of what gets posted the photos are curated and only show them in the best light. Pinterest: Ok, so this probably won’t tell you anything. It’s just fun to see how they might decorate their apartment.
  22. 22. What You’ll Learn 1. How to consistently avoid bad tenants 2. What steps to take every time 3. What questions to always ask 4. How to find great tenants every time 21 Introduction Tenant screening can be a repetitive process. Particularly when you have a lot of units vacant or you’ve been looking for a qualified ten- ant for a long time. It’s easy to become lax about the entire process. However, it’s important to not allow this to happen. Tenant screen- ing is one of the most important jobs as a landlord. You’re stuck with whoever you’ve chosen for at least a year. It’s next to impossi- ble to get rid of them - even if they don’t pay their rent. Even if they’ve destroyed your property. Even if they’re using your property to commit illegal acts. The best way to avoid all these things is to make sure you follow the same process every time. This is the same checklist we use here at Zora for our customers. Landlords pay us to verify applicants for them. That’s what we do. Trust us this works. Section 4 Tenant Screening Checklist
  23. 23. 22 Following a checklist is a great way to make sure that you don’t miss any steps in the rental process. Humans are noto- riously bad at this. Make sure to use a checklist to avoid stupid mistakes. Tenants can be disqualified at any point along this checklist. There’s no point in going through all the steps for ten- ants that you’re going to turn down anyways. Just make sure to do it all for tenants that you’re seriously considering. First Contact: Phone/Email Interview 1. Make sure to ask the Big Five Questions and any others you like: o Why are you moving? o When do you plan to move? Have you given notice to your landlord? o What is your monthly income/what do you do for work? Will you be able to pay first months’ rent and the security deposit upfront? o Can I ask for references from your past landlords and current employer? o We require a background check and credit check. Are you willing to let us perform one? o Others: Any pets? How many people? 2. What you need to tell them about the property. It’s your job to sell them on the rental. That it’s the best option out there for them: o Describe the property and the building o List any additional amenities (in suite laundry, pool/hot tub, backyard, gym) o Describe the neighbourhood – if they have kids list the closest schools and parks, if they like nature talk about any nearby hiking trails, ask if they need parking and if they don’t talk about public transportation, etc. o List any other features that you think are worth talking about o Ask if they have any other questions TENANT SCREENING TO DO LIST Part I
  24. 24. 23 Unit Showing 1. The Unit: Make sure the unit is at it’s best. Sell hard but be honest about the unit, the neighbours and the neigh- bourhood. Make sure to do the following before showing: o Clean the yard and porch o Make sure the unit is clean o Repair any minor/superficial damages o Make sure it smells nice and fresh – not stale 2. The Application: Make sure that the application is filled out in full. Paper applications are always hard to read, we’d recommend using an electronic one (like Zora’s), that way all the information is transparent and can be up- loaded and viewed from any location. 3. Government I.D.: If they’re comfortable with you photo copying (take a photo) their I.D at this point it can really speed things up for you down the road. Look at their photo and then at them to make sure the I.D. matches. Tenant Screening 1. Income Verification: The most important question is whether the tenant has the ability to make rent each month. The easiest way to check is to make sure that their rent is a reasonable (>30%) of their income. o Review application form for rent income o Review at least two pay stubs o Contact their employer to verify employment and determine years of employment (never use the number provided) TENANT SCREENING TO DO LIST Part II
  25. 25. 24 2. Background Check: Make sure to talk to their last two landlords. Their current one may not be completely honest and may be trying to get rid of them as tenants. Remember past payment history is a better indicator of their likeli- hood to pay, even over credit scores. o Were there any late payments (full or partial)? o Did they leave your property in arrears (still owing money)? o Were there any complaints about their behaviour from neighbours (noise, drugs etc.)? o How well maintained was the property when they left? o Would you rent to them again? 3. Credit Check: Let’s not lie, it’s better than nothing. Just don’t rely to heavily on it to find great tenants. 4. Social Media: This is just a final review of the applicant to make sure there’s nothing-fishy coming up when you search their name. It’s definitely worth doing, especially with people in their twenties. o Google their name, add either their city or job for more specific results. o Search Facebook. o Review Twitter. o Check Linkedin – make sure their job matches what they wrote down on their application and on their pay stubs. TENANT SCREENING TO DO LIST Part III

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