How to screen tenants: a best practice in both low and high vacancy markets

Tenant screening is a bizarre proposition.  All too often property managers in low vacancy markets view it as a best practice for high vacancy markets and those property managers in high vacancy markets see it as the opposite.   It’s not until property managers evict their first bad tenant that they understand the costs and time that go into the process and their risk tolerance drops off the map.  Suddenly, best practices around tenant screening becomes a requirement instead of a nice to have in all markets.

One recent example from a property manager identified the following costs from a landlord tenancy relationship gone bad:

Given the circumstances, the property manager in the above example viewed the costs as a best-case scenario by following the rules of the law.  Some property managers elect to circumvent the rule of law by forcefully removing tenants.  However, professional tenants understand that courts do not view these brut force evictions kindly and often default into rewarding the tenant.  These forced evictions result in fees of almost twice as much to the property manager as following the legal process.

Assuming the above costs of $6,500 are customary and a bad tenant rate of 5%, the result is an average additional cost of $325 per tenant.  What if all this can be avoided through proper screening techniques often under $25 per tenant?

Tenant Screening in Low Vacancy:

• The same bad tenants tend to float around the market applying from place to place until such time an unsuspecting property manager doesn’t do their due diligence. Don’t be the property manager left standing when the music stops.
• The number of tenant applicants is numerous and without a proper system for vetting the tenants the process is overwhelming and often left to a first come basis.
• Due to the limited vacancy, it is often easy for the landlord to charge the tenant for the cost of screening making it a zero-cost proposition. Tenants refusing the screening are often those with something they’re unwilling to disclose and filter themselves out of the process.

Tenant Screening in High Vacancy:

• When done properly, tenant screening assesses a tenant on more than their credit history. Thus, great tenants lacking established credit are now available for consideration.  This opens the market to additional tenants with whom your competitors are blindly tossing aside.
• Although it can be tempting to take what you can get, the above example is a great illustration of its associated pitfalls. Because it can cost upwards of $6,500 to evict a problem tenant it will take many months of collecting rent to negate this cost.  Sadly, problem tenants prove to be disastrous early in the process and cost more than they will ever pay in rent.
• The financial qualification is only half the burden. Tenants will become a part of your monthly and sometimes daily lives. It is difficult evicting a paying tenant when they are regularly uprooting your life with complaints.  These encounters will lead to nothing but headaches and higher property management staff turnover.

Tenant screening that considers more than a credit history is becoming the industry gold standard.  Property managers embracing technology around social media scanning and psycho analytical behavioural profiles will take the cream of the crop while others will be left with what remains.  Don’t fall behind the competition, knowledge is the key and the more you have upfront the more time, money & headaches you’ll save.