5 Essential Elements Of Tennant Due Diligence
By JD Esajian on April 16, 2018
If you own a rental property you need to know everything about your tenants. It is not a stretch to say that the quality of your tenants is directly tied to your success with the property. It is amazing how many landlords fail to fully vet their incoming tenants. While you can never know everything about a tenant from an application, it does give you a pretty good idea. Spending an extra twenty minutes pulling credit or following up with a previous landlord can be tedious and time consuming, but it can also prevent you from taking on a suspect tenant. All it takes is one bad tenant to stop paying their rent to create a snowball of problems with the property. Regardless of what else you have going on or how desperate you are to fill a vacancy you need to know your prospective tenants. Here are five essential elements of tenant due diligence.
- Data gathering. Everything starts with an application. It is important to remember that you are not simply trying to fill a vacancy but make sure you find a good tenant. A good tenant not only takes care of your property but pays the rent on time every month. The most basic thing you can do is supply every interested tenant with an application. Some tenants will not want to spend time completing an application but that will help you weed bad tenants out. Good tenants know that an application is part of the process and should be done with every property. On your application you need to find out employment, previous addresses, income and any references they would like to add. You don’t need to go over the top, but you should get enough information to make you comfortable renting to them.
- Fact checking. Having a tenant complete an application doesn’t do any good unless you take the next step. The next step is using that information to learn about your tenant. Start by pulling the credit and finding out what is on the credit report. You don’t need to go crazy and pull from all three credit bureaus, one will have all the information you need. Review the credit to see if there are any red flag items such as evictions or foreclosures. If there are numbers listed for previous landlords or current employers search them online to make sure they are legit. It is not uncommon for a tenant with past issues to give the number of a friend or family member and hope for a lazy landlord. Plugging the number online should give you a name that matches the application. The last piece of the application is the income and employment. Take a look at the w2 or paystub and make sure the net income matches and there aren’t any red flag withholdings. As obvious as it may be, your tenants ability to repay is directly tied to what is on their paystub.
- Research. With the information right at your fingertips you need to finish the job. You should never take the information provided on an application at face value. Go the extra step and reach out to the last two landlords and ask how they were as a tenant. Did they pay on time? Was there any issue with the condition when they left? Would they rent to them again? If you are satisfied with the answer you should find the number for human resources and ask about their employment. Find out the likelihood of continued employment and how long they have been at their current job. If you still have reservations you can reach out to the references listed. Ask how they know the prospective tenant and the last time they spoke with them. In just a few phone calls you should be able to know whether you are ready to move forward.
- Talk to your tenant. There will be times when a tenant falls in love with your property and will do almost anything to get it. It is an unfortunate part of the business dealing with tenants who just aren’t qualified enough to make you feel secure. When you come across a tenant who wants the property, but has some credit issues you should reach out to them and get to the bottom of the problem. There may be a legitimate reason for the late, such as an illness or unexpected short term financial problem. Tenants will always give you a song and a dance but if there is a legitimate reason you can consider them. Whatever you do you should be fully confident that they are going to pay on time every month. A sweet tenant that stops paying is still a major problem.
- Don’t waiver on your policies. The single worst thing you can do is rent to someone based on pressure to find a tenant or frustration with the process. By renting to the wrong tenant you turn a short-term problem into a long term one. Even if you have a one-year lease you will be forced to worry about the rent for nine months to a year. Whatever guidelines and policies you have in finding tenants you need to stay firm with them. Instead of taking on a bad tenant ramp up your marketing and increase the number of leads. Eventually you will find a tenant you are comfortable with.
Finding the right tenant is like approving someone for a loan. You wouldn’t just give money away to anyone that asked for it, and you can’t rent to any interested tenant. Always spend enough due diligence time on every prospective tenant.