You did it! Month after month of research, blood, sweat, tears, and stress, you finally closed on your first investment property. That stress has started to melt away a little bit after your celebratory dinner and drinks as you search the internet for “free tenant screening.”
Not so fast: Now is the time that you need to start getting serious about investing in yourself and your property, so don’t search for “free” anything (unless you want to pay a huge price for those discounted services). Most experienced investors will tell you that skipping thorough and fair housing-compliant tenant screening is one of the most stressful and costly lessons they’ve learned.
I know you’ve seen article after article, post after post, about how important it is to screen your tenants thoroughly, but what does that actually mean? I’ve got good news for you—the process is actually really simple. So simple, in fact, that most investors either think it won’t work or that their judgment (or how clean a potential tenant’s car is) works better than a tried-and-true objective process.
Believe it or not, this is one instance where government regulations actually benefit investors: HUD has tenant screening best practices that are incredibly helpful, and as a bonus, they are structured in such a way that you will be protected from any fair housing complaints.
How to Win at Tenant Screening
The steps are simple, and they create a paper trail for you along the way to keep you from falling victim to those “professional tenants” who make a living taking advantage of inexperienced landlords. It doesn’t matter if you are in a tenant-friendly state or a landlord-friendly state—these steps will simplify the process, and 99.9% of the time, you’ll have a solid tenant.
I’ve referenced this article many times with clients of ours in order to simplify the process. But here are the steps to follow and how to do each one.
1. Decide what your screening criteria will be
In truth, your screening criteria can be anything you want, as long as they do not address any of the federally protected classes, such as income, credit score, convicted felons (in some states, like California, felons are protected to a certain degree, so do some research), previous landlord references, etc.
2. Have a documented process for preliminary acceptance before you advertise the property
Basically, how long does an accepted applicant have to sign the lease and pay you the initial fees that your lease requires? We give them 48 hours to sign the lease and pay us in verified funds, but you can have any process you want as long as you have it documented somewhere.
3. Publish the criteria on every advertisement you put out
Not only will this serve as documentation that you are following best practices, it will also weed out tenants who know they won’t quality, and it will scare away the majority of those scammers looking to take advantage of you. They’ll see that you have a professional process in place and know what you are doing, so they’ll keep browsing for another sucker.
4. Run screening on applications as they come in—do not let them pile up
Once you have several to screen simultaneously, it’s very easy to appear to be “picking” a tenant. So make sure you screen your applications one at a time as they come in.
5. Offer preliminary acceptance to the first time-stamped, screened applicant who meets your minimum criteria, and provide them with the document referenced in step 2
Ask them for written acceptance of your timeline for lease signing and paying the fees. This is the part where most new investors start sweating—there’s another applicant they “like” better, or they had a nicer car or a white-collar job with higher income. If you screen as they come in, you will not have this issue. Trust the process; it works.
If they meet your timeline above, congrats—you have a solid tenant! If they do not, continue on to the next step.
6. Move on to screen the next application that meets your criteria, or get back to showing your property and bring in the next potential applicant using the screening process
I know, I know: “I have two applications, and they both meet my minimum criteria, but the second one makes twice as much as the first, so I like them better.” You won’t even have to worry about this possibility if you screen applicants in order, one at a time.
Why These Tenant Screening Steps Are Important
There are two reasons to ignore that voice in your head about who is the “best” tenant for your property. For one, it doesn’t really matter how much more an applicant makes if they make enough to pay the rent—it’s honestly completely irrelevant.
Second, and more importantly, in order to keep yourself out of a courtroom for fair housing violations, it doesn’t really matter if you violated fair housing regulations—it matters if you can prove that you did not. Without a process and documentation, it’s literally impossible to do that.
At the same time, you have to actually follow the process.
Let’s say you “picked” the second applicant above because their higher income made you feel more comfortable. The first applicant could very easily file a claim against you, stating that you didn’t choose them because they had children. Or they didn’t have children. Or that they attend a church that you don’t agree with. Maybe they didn’t speak English, and you couldn’t communicate well with them.
The possibilities are endless, and while you could argue to a judge that the other applicant simply made more, there is no way you could prove that you didn’t violate fair housing laws because you didn’t follow your documented process.
Before you argue that if you don’t have a documented process to violate, you’d be fine—trust me, that’s even worse.
Fair housing protection is simply a side benefit of following the process. The fact of the matter is that if you follow best practices, you are all but guaranteed to have a great tenant who pays on time and takes reasonable care of your property.
We’ve got plenty of experience and real data to back this up. With over 25 years of landlording experience, including self-management in the beginning, to running a midsized property management company with 250-plus doors in our portfolio today, using our published criteria—no exceptions, no negotiating, and following our strict protocols—we’ve yielded zero evictions to date. Yes, zero.
The limited evictions that our company has experienced are a result of tenants that we inherited from other struggling landlords who didn’t have a process in place or from situations where owners bent the rules to “give folks a second chance.”
Consistent, black-and-white policy and procedures work 99.99% of the time.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.