CHAPTER
10

More Renter Considerations

In This Chapter

Ideally, you want the perfect tenant. Everyone gets along, they pay their rent on time, and no one causes any conflicts. But no matter what you do and how good you are to your renters, some of them will cause problems. These can range from simple noise complaints, or late-night parties, to far more serious issues. How do you qualify tenants, set up rental rates, and avoid getting stuck with a problem tenant?

You’ve purchased a property, upgraded it, and found a tenant interested in renting your property. What you do now establishes the framework of your relationship with your tenant that could last for years to come.

Start with Good Communication

Every relationship starts the same way—two people getting to know each other. Your relationship with your tenant is no different.

Start building the right relationship with your tenants on day one with good communication and an understanding of expectations. Your tenants should know what’s required on their part when they fill out the application, sign the lease, and move into the property.

Don’t just assume the tenants have read every word in the application or lease. Take the time to verbally review everything, from what references you’ll check, to how the building works, to what you expect from them and what they should expect from you. Communication is the key to any successful relationship.

The Application Process

The rental process starts with a rental application and a tenant reference authorization form. You can use standard forms available online, or you can personalize these documents to better align with your expectations. We also provide some sample documents in Appendix C.

Remind potential renters that by completing a rental application, they’re giving you access to their financial and other personal information. You’d be surprised how many tenants don’t understand what they’re authorizing by signing the application form. This is especially true with employment verification and references. Be sure they understand that you’ll be calling their boss to verify their current employment.

To keep everything legal, do not start checking their information until you have a signed agreement giving you authorization to do so. Your rental agreement should include wording such as this:

I authorize the verification of the information I have included on this form, as well as verification of my credit history, as they relate to my tenancy and to future rent collections.

Before you start the expense of running reports on potential tenants, ask for a photo ID and verify that they are who they say they are by matching them to the photo on their ID.

RENTAL REMINDER

It’s okay to pass on the fees associated with running these checks to the applicant, as long as they’re reasonable costs. You cannot charge for your time, however.

All application forms should include the following information for each adult who plans on living in your property:

Personal identification: Complete name of applicant, date of birth, Social Security number, current address, phone numbers (home, cell, and work), email address, and emergency contact information.

Employment information: Company name, job description/title, contact name, address, phone number, email address, and length of employment. If the applicant has been at the job less than 3 years, ask for previous employment information as well.

Rental questions: Current address and length of residence there. If less than 3 years, ask for previous residence information. Also ask for their current landlord name, if applicable, and his or her contact information.

General questions: How many people will be living in the rental property? How many and what type of pets will be living in the rental property? Have they ever been served an eviction notice? Have they ever refused to pay rent? How did they find this property? Have they ever filed for bankruptcy? Have they ever been found guilty in a court of law of criminal activity?

When you have a completed rental application from the tenants, give them a copy of your property lease or rental agreement for review while you do some checks.

Remember, once they give you a completed rental application, it’s your responsibility to protect their personal information. Store the application in a secure location, or scan the form into your computer for future reference, password-protect the file, and shred the original document.

Reports and Checks

Now the process of qualifying the tenant begins.

Rental History Checks

There are two ways to verify rental history. First, start by running a rental history report utilizing their rental history and their Social Security number. Numerous websites offer specific reports, or your marketing websites should have a resource page from which you can connect with approved vendors.

Second, pick up the phone and call their current and previous landlords. During this process, also verify that the addresses listed on the application matches the addresses in your report.

Ask the previous landlords, “Would you rent to them again?” As you’re having these conversations, remember that these landlords might not give you the entire story. Landlords can be sued for slander or making derogatory comments about the tenant, or the landlord may want to get rid of a bad tenant at your expense.

Finally, verify the potential tenant’s eviction history. This can easily be done through a professional company like TransUnion.

Credit Checks

Another way to verify that your tenants will be able to afford your property and that they don’t have anything of suspect in their background is to run a credit check. A credit check also tells you if other lenders have given your prospective tenant a loan and whether they’ve missed any payments, paid on time, or paid them off. In addition, a credit check shows how much debt a person currently has and whether he or she has been sued or filed for bankruptcy.

The best way to do a credit check is to run a credit report. You can do this online easily; you just need to find a good price and a report format you like to read. Almost all credit reports, no matter which agency runs them, go through one of the three national credit reporting agencies: Equifax, Experian, and TransUnion. You can also get more information on credit reports at usa.gov.

RENTAL REMINDER

If you reject an applicant due to bad credit, you’re required by law to notify the tenant of the bad report. The Fair Credit Reporting Act requires you to provide notice to the person, including the name, address, and phone number of the credit reporting agency; a statement that the agency did not reject them; and a notice of their rights to dispute the report and the right to receive a free report.

Background Checks

Just as you called the previous landlords, you also need to call to verify employment information. Start by researching the company listed on the rental application. This is easy, thanks to a few quick internet searches.

Then pick up the phone and give them a call. Ask the employer to verify the information provided on the application. For example: “Do you currently employ this individual? Could you verify his or her hire date?” If there’s anything that makes you suspicious about either the company or the contact the applicant gave, ask to speak with the human resources department.

This process can also include running criminal history reports. You can do these at the same time you’re running a credit report.

If the applicant claims to be self-employed, you’ll need to do some more research. You might even want to ask for a previous tax return or the company’s financial statements and bank statements. Verify their income to confirm they’ll be able to pay the rent due to you.

If the tenant lists other sources of income, such as alimony payments, child support, or Social Security, ask for the documents to back up this information.

Remember, running these checks now is what will make you residual income in the future.

Reference Checks

Personal references can be tricky. Yes, you want to have them, but who in their right mind would give you a bad personal reference? It can’t hurt to call these reverences; just remember they probably will say only great things about the applicant.

Start by verifying that the people listed as personal references do exist and do know the applicant. Ask about the nature of their relationship and how long they’ve known the applicant. If you’re not able to locate or verify these references, chances are, this is not a tenant you want to rent to.

Approvals and Denials

In a perfect world, everything about your potential tenants check out and you can let them know they can rent the property. All you need to do now is make arrangements for them to complete the lease and other rental documents.

But sometimes tenants don’t check out. You can always say no to a potential renter if they have bad credit. No laws protect people under these circumstances.

However, if everything else checks out, you might still want to rent to them. As a result of the past economic downturn, many people now have bad credit. It’s no longer a black-and-white issue when qualifying a tenant.

If you do decide not to rent to them, you’ll need to let them know you’ve denied their application. If you deny a tenant, you have to give that person a good reason and an explanation of why you denied him or her. It’s important for you to properly communicate the denial and avoid any possibility of discrimination. If you decide to deny tenants because of their credit history, you have a legal obligation to notify them of the reason for the denial. You can always deny a renter if you find a lie on the application.

To protect yourself from any possible litigation, properly complete a written denial letter. We give you a sample letter in Appendix C.

REAL ESTATE ESSENTIAL

A smart landlord has a specific predetermined approval criteria that applies to all tenants. This makes it easy for you to review the application and completed applicant checks.

Most credit agencies supply you with a form to use when you deny someone based on credit score. You must give this information to the denied applicant so he or she can investigate any discrepancies found on the report. If the tenants indicate they think something could be off on the credit report, you can encourage them to order a free copy of their report to review and correct, if needed, before you run their information. You should not give the tenant a copy of the report you receive. They need to get it directly from the credit agency.

Remember to protect their privacy and discuss their credit report only directly with them. Credit information is privileged, confidential information, and it’s illegal to violate that confidentiality. If you have any questions, you can always talk with your credit report agency about the do’s and don’ts of credit reports.

Choosing a Tenant

How do you decide who you want to or do not want to rent to? You get to decide based on the facts, your experience, and your gut instincts.

Let’s start with “No, you cannot rent my property.” Generally, this is because the applicants have refused to provide a required piece of information during the application process, you discover they lied on the application, or you found out they can’t afford to pay your rental rate.

As you’re reviewing the applicant’s reports, look out for some potential warning signs. If the applicant has a credit history that shows late payments, this could mean he or she will also be late with their rent. Look at how frequently they happen and when they happened, and ask the applicant about them.

On the credit report, look at the total amount of debt and minimum amount of payments due, and calculate whether the applicant can afford to pay all those plus rent to you. If you get a bank statement, review the balance and check to see if any cash is available in case of a rainy day. Never assume that just because they want to rent your property, they can actually afford it.

In addition to the finances, check to see if the applicant has moved around a lot. If this bothers you, talk to the applicant about it.

If the criminal check shows past convictions, you’ll want to understand all the factors, including what crime was committed, how many convictions have there been, and when the last conviction was. Remember, a landlord also has a duty to protect other residents from known risks, or risks that the landlord should have been able to recognize.

If the applicant is a registered sex offender, for example, there are more specific laws you’ll need to research before you rent your property. You can always refuse to rent to a sex offender for that reason. They’re not a protected class.

If you’re choosing between two applicants, you need to be careful that you don’t violate any of the state and federal discrimination laws that could apply to a protected group. We review these laws more specifically in Chapter 17, but for now, just remember the key to carefully consider why you’re choosing one applicant over another and be sure you’re making a fair and legal decision. Because there’s a risk of discrimination lawsuits, it’s good practice to keep records of all applications and rejections for at least the past 3 years.

You did it! You chose an applicant! Now you need to communicate with the person and let him or her know the good news. At this time, also review the amount of rent and security deposit due, share any specific rental policies you have, and arrange for the rental documents to be signed. If your new tenants live out of town or state, you can let them digitally sign the lease with a program such as Adobe Acrobat or let them sign the agreement and fax or email it to you.

Inheriting Tenants

It’s not unusual to purchase a rental property that’s currently occupied with a renter. So what happens when you inherit a tenant?

The great news is, you purchased a rental property that’s currently producing income, and right now you have 100 percent occupancy.

The tricky part is, you’re entering this relationship blind and had no control of the rental documents, the tenant approval process, and possibly no knowledge about where and how much the security deposit is. Prior to purchasing a rental that’s currently occupied, you need to obtain a copy of all rental documents, including rental applications from the current owner.

WATCH OUT

Do not buy a rental property with a deadbeat tenant who’s not paying the rent. Have the current landlord evict the tenant prior to purchasing the property.

There are three key elements to inheriting tenants: paperwork, money, and communication. Remember to obtain all rental documents from the current owner prior to purchasing the property. Also have the tenant sign a lease addendum that identifies you as the new landlord with contact and payment information. Believe it or not, it’s not unusual for tenants to continue to pay rent to the old landlord. Take the extra step to be sure you get the rent you’re entitled to.

Next, you need to figure out the details surrounding the tenant’s security deposit and any possible prepaid rent. Money details should all be communicated and processed as part of the purchase contract through the title company processing the sale of the property. The total amount of collected deposits needs to be transferred from the old owner to you, along with any fees, like parking fees, the tenant may have paid for services not yet rendered. You also need to ask if the tenant prepaid the last month’s rent and be sure you’re credited this amount.

Also check if the current property owner was holding the security deposit in an interest-bearing account. If so, the tenant would be entitled to the interest his or her deposit earned. If you don’t get it now, you’ll have to pay it out of pocket when the tenant leaves. Remember, security deposits are regulated on a state-by-state basis, and your tenant may be entitled to his or her deposit interest, even if there were charges to the deposit.

The final step in inheriting tenants is communication. Start by introducing yourself as the new landlord. Good communication from the beginning is essential in developing strong working relationships with your tenants. Odds are pretty good the tenants have already heard the property was being sold, but you never know. It’s also a good idea to get updated contact information from the tenants. This can easily be accomplished with a contact information sheet you ask them to complete. This can even be your rental application form.

Remember, tenants are also interested in learning about you and will appreciate knowing what to expect from their new landlord. Don’t forget to provide all tenants with the new maintenance and contact information.

Negotiating Rent Rates

Before you listed your property for rent, you researched what to charge and set a rate that’s competitive in your rental’s neighborhood but also gives you a profit. Expect potential renters to ask for a lower rate.

It’s possible your potential tenants ask for a rental rate reduction because, regardless of the current rental market, people often simply want to pay less. If you want to get a reasonable market rent because you’ve priced your property strategically to begin with, here are a few tips to help get the price you want without souring the deal:

Anticipate the negotiation: You have researched your market, you know the comps, and you have priced your property accordingly. (And yes, they probably know the comps, too.) However, be ready for them to want to negotiate, and don’t get frustrated and walk away from a possible good deal. Take the time to develop a dialogue.

Give them understanding: Everyone wants to know they’re being listened to and to understand what they’re paying for. If someone is trying to get a lower rent rate from you, be sure they know exactly what’s included in the rent—especially if other items or services like storage or parking are included. Sometimes all potential tenants need is a little understanding of all the great features they get with your property.

Develop a relationship: Explain to them that, as their landlord, you’ll take good care of them and they’re in good hands. Illustrate how your previous or current tenants have enjoyed the property.

RENTAL REMINDER

Making new tenants comfortable with you as a landlord helps them see they’re not getting a run-of-the-mill property to rent, but they’re getting a thoughtful landlord, too.

Offer incentives: Rather than lower your rate, you might want to offer to throw in an extra service, like a membership to the local gym or a monthly metro pass. Think outside the box. If you also own a vacation rental, offer a discount if they choose to rent it for their next vacation. Or if they want to move in next week, offer to give them the first week free if they move in this week.

Leave some wiggle room: You want to price your property as strategically as possible, but go into the process knowing everyone wants a deal. Set your rate and then cushion it with a little wiggle room. This way, you can still price yourself competitively and negotiate to make your tenants feel like they’re getting a deal. A win-win for all!

Avoiding Scams and Frauds

Rental scams are an unfortunate and ugly side of the real estate industry, but scamming is commonplace these days, and tenants and landlords alike have to protect themselves. Here are some smart ways to avoid being scammed.

International: Double-check all the details when dealing with international tenants. In some parts of the world, scams are a full-time business. If it seems too good to be true, it usually is. Always ask for—and check—references.

Credit cards: Accept them. Cashier’s checks and wiring schemes are all the rage these days. If possible, use credit cards for all transactions. Credit cards will more thoroughly protect both you and your tenant from fraud.

Pick up the phone: Don’t just communicate with your tenants via email. Require a phone conversation before meeting a potential tenant for a property tour or talking about where to send money. It’s always wise, especially when doing business through the internet, to speak directly with the person you’re working with. An email exchange isn’t enough. Exchange phone numbers, and be sure the person’s number works and is legitimately his or hers.

Friday night fraud: Be wary of renting your property on a Friday night for a weekend move-in. People who request to move in on a Friday night usually have a very good story, may come from a reputable company, and have a perfectly good reason to move in over the weekend. Then they pay by check, which takes a few days to clear the bank, but it never does … it just bounces all the way back. Did you know even a cashier’s check can bounce these days?

Take your time, and never rush to lease a property to anyone who shows up on Friday and wants to move in over the weekend. It will save you a lot of time, money, and headaches in the long run.

The Least You Need to Know