Any real estate investor or property manager has heard a thousand times that the most important thing to do is to screen, screen and then screen some more. And it’s absolutely true. Not screening is a good way to put yourself out of business really fast. Indeed, I have heard from pretty much every landlord and property manager I know that at the beginning of their career, the biggest mistake they made was not to screen enough.
That being said, screening prospective tenants is not just a box you can check off. There are a lot of different factors that need to be taken into account and balanced against each other. And all the while, you need to make sure to be in compliance with Fair Housing. (Thus, it would be a good idea to talk to an attorney before starting.) Therefore, the advice of “screen more” isn’t particularly helpful unless you know how to “screen more.”
What to Look for When Screening
In my judgement, there are six big things to look for when screening a prospective tenant:
- Eviction History
- Criminal History
- Income Verification
- Employment History
- Rental History
- Credit Check
For each of these, we then break it down potential issues into “Red Flags” and “Yellow Flags.” A red flag is an automatic disqualifier. This would include an eviction in the last seven years, a violent felony, a felony (other than one DUI) in the last seven years, insufficient income (we require three times the monthly rent in income), etc.
Then there are yellow flags that are not disqualifiers on their own, but if someone has enough of them, that would add up to a disqualification. Yellow flags would include things like a felony DUI, a misdemeanor, a late payment at their last rental, a credit score under 600, etc.
I should note that this is just our criteria. You can obviously decide to have different qualifications. The important thing is to stick to them.
Generally, I would put the most weight on evictions, income and criminal history. Employment history and rental history are important too, but a tad bit less so. The applicant’s credit score is the least important, but still relevant.
There are also things that are not necessarily bad, but would require a co-signer. For example, if a teenager was just moving out from their parent’s home and had no rental history or if someone had no credit history, the person would qualify (for us) if they could also provide someone to co-sign their lease.
As you can tell, this is not as clear cut as many would like. Partially for that reason, I recommend using a third-party screening company as there is a temptation to try to find evidence to support leasing to a prospect as we all want to get our vacant properties filled. But it’s better to have a vacant unit that a bad tenant. Bad tenants can do a lot of damage (trust me, I know). So getting a no-nonsense report from a third-party screening company makes it easier to judge prospects dispassionately.
What NOT to Look for When Screening
Make sure to write down your qualifications and be as specific as possible. And don’t deviate from them! Remember, you must stay in compliance with Fair Housing. HUD has seven categories you cannot discriminate against:
- National origin
- Familial status
Some states have additional categories as well, such as ancestry or gender identity. But what’s more important is that even if you don’t intend to discriminate, it may look like you are if you accept and reject applicants in an arbitrary manner. Doing so could put you at risk of a significant fee (and it’s bad business as well).
So make your policies and stick by them.
Screening is incredibly important for any landlord and property manager. Indeed, I would refer to it as the foundation of a property management business as you cannot be successful without good screening. But quality screening requires balancing a lot of different things, taking care not to discriminate (even accidentally) and formulating written policies to facilitate all of those things.