Colorado Real Estate Journal - January 2016
Just about every property manager has dealt with the Jekyl-and-Hyde tenant. To fill a vacant property, you do a quick search and find someone you think will be a great tenant. And, at first, the tenant is the good Dr. Jekyl; he follows the rules, keeps up on the maintenance and pays his rent on time. However, after a few months, Mr. Hyde appears; he falls behind on maintenance and rent, and the property appears to be damaged. You ultimately are forced to evict him, which costs a significant amount of time and money. While there is no crystal ball or magical totem that allows you to see into the future and sort the prospective good tenants from the bad, there are steps you can take during the screening process to help prevent renting a property to Mr. Hyde. However, while it’s important to gather as much relevant information as possible before choosing between prospective tenants, it’s equally important to take precautions in the screening process to avoid violating state and federal laws regarding credit checks and discrimination. Serious missteps can result in paying thousands of dollars in tenant damages, court costs and attorneys’ fees. Ask for verification consent. Make sure your rental application includes a section where the prospective tenant authorizes you to conduct rental and employment verification, as well as background and credit checks. A good rental application will ask for a substantial amount of personal information. Request rental references. Make sure your rental application form includes a section regarding the applicant’s rental history, and then verify that information. The section should include (at a minimum): • The names and contact information of former landlords, • Rental dates, • Monthly rent and number of late payments, and • Any complaints or legal action taken by the landlord to collect overdue payments. Run a background report. When screening a tenant, checking into an applicant’s background can save you from unnecessary future drama. There are numerous companies that will run background checks for property managers, but even a quick check of public records and court databases for recent criminal convictions and evictions can be helpful. Verify employment and income. No property manager wants to deal with a tenant who inflated his employment and income on the application but, in reality, can’t afford the rent. At a minimum, you should require pay stubs and call the employer to verify the application information. Alternatively, it might be beneficial to get an income verification letter from the employer. Run a credit check. Running a credit check will provide insight into the applicant’s history of paying his obligations. In addition to getting the prospective tenant’s overall credit score and history, a credit report’s public records section shows court judgments for past-due rent. Pay attention to FCRA. If you take adverse action against a prospective tenant based on his credit report, such as denying the application or requesting a co-signer, the Fair Credit Reporting Act requires that the applicant be informed that the action was based on the negative report. Also, you must give the applicant the name, address and phone number of the agency that furnished the report. Furthermore, the FCRA extends this protection beyond simple credit reports to all consumer reports, which can include rental history. Don’t discriminate. This may seem like simple common sense. There are numerous and well-known federal and state laws (like the Fair Housing Act) that protect individuals of a protected class, based on race, religion and national origin, for instance, from the negative impacts of housing discrimination. However, in practice, it can be hard to determine what are discriminatory actions and policies. For example, if a prospective tenant – who also is a member of a protected class – is asked to undergo numerous background checks, submit multiple references and obtain a co-signer, and this rigorous scrutiny can be shown to be based on her protected-class status and was above and beyond the typical application process, your screening process could be found to violate the Fair Housing Act. Establish defensible criteria. To establish a comprehensive screening process and protect yourself against discrimination liability, establish delineated criteria for approving and rejecting rental applications. For example, your company policy could require that to qualify, prospective tenants have: • A credit score of at least 720 from one of the three major credit reporting agencies, • Verified monthly income of at least three times the rental payments, and • No evictions within the last three years. You don’t have to share your approval criteria with potential tenants, although doing so may help weed out the Mr. Hyde early, but having and following established criteria can go a long way in the event you are accused of housing discrimination. Tenant screening is a vital step in avoiding the Mr. Hyde tenants that cause you grief, stress and financial strain down the road. However, it is important to ensure that you are taking the necessary precautions to avert violating potential tenants’ rights during the process.