A good relationship with your renters is a simple thing. It’s all about mutual respect.
For everything to work out for the best, it’s important for a property owner to find solid renters from the outset. Through careful screening, an investor can protect a property’s value and optimize its return, while at the same time forging a fair relationship with future renters.
But what are the potential pitfalls in screening renters? Let’s take a look at the risks and best practices in this very important process.
What Factors Go Into the Screening Process?
A capable renter meets a number of criteria. The essentials? A healthy credit profile. Regular income. Ability to submit a security deposit and make the monthly rent payments.
If a renter has scant credit history, unstable employment history, or other unstable factors, all hope is not lost. Getting a co-signer on the lease could cover the property owner’s risk, and make the rental situation work.
Once the application is turned in and the person becomes a prospective renter, the property owner typically goes through the following checklist:
- Obtain the applicant’s written consent for background checks. Get specific written consent to check personal references, run a credit check, and run a criminal record check.
- Order a credit report. (Note: To reject anyone for bad credit involves sending an adverse action letter.)
- Verify the applicant’s name, ID, birthdate, addresses, and work history.
- Review recent paystubs and IRS W-2.
- Contact the workplace to ensure the person has current income.
- Call the prior landlord and personal references to be sure everything checks out.
- Interview applicants as desired.
This all might sound overwhelming. But dedicated screening companies do the vetting, flag issues, and discern an applicant’s capacity to pay rent and act responsibly. The big credit reporting agencies offer these tools.
And keep in mind that a landlord can work with a local real estate company so that an agent does all of the above, applying local market awareness and professional know-how!
Nobody’s Perfect. What Are the Red Flags and Deal Breakers?
Generally, investor owners are on the lookout for past nonpayment of rent, any past evictions, bankruptcy history, and crimes. None are necessarily deal breakers. Lots of people have faced unexpected challenges since the pandemic began. So, a property owner considers the whole situation when looking at histories of employment, defaults, and evictions.
Property owners also take into account individual circumstances before refusing to rent to someone with a criminal record. Consider these factors as part of an individualized assessment:
- The situation in which the criminal conduct happened.
- The person’s age when the incident occurred, and a showing of good conduct since that time.
- A solid history of paying rent, showing that the record may not be relevant to the rental application.
Although this assessment is called individualized, it must be applied fairly to all prospective renters. The National Apartment Association offers this example: Decide on a certain number of years that must have passed from a conviction for a crime. Then, apply that same yardstick across the board, to any applicant.
I’m a Private Property Owner. Do Fair Housing Laws Apply to Me?
If you are a private property owner, federal fair housing law does apply to you. That said:
- You may limit the number of people in an apartment for clear health and safety reasons.
- And you are allowed to be selective if you live in the building you’re renting out, and it has no more than four units in total.
But there are no exceptions allowed for race-based decisions. The Fair Housing Act bars discrimination against renters, from the application stage on. This means a landlord must avoid taking actions (or inactions) based on the applicant or renter’s race, national or ethnic background, gender, religion, or because the applicant has a disability or has kids.
Here you might be thinking: Will they really go after a property owner for not wanting to rent a home out to someone with kids? They might!
What other actions (or decisions not to act) could matter? The property owner should not say a unit is already taken just to avoid accepting someone on the basis of a legally protected characteristic like race, religion, etc. It’s not OK to modify rental agreements based on those characteristics, or evict someone, or give another renter a better deal, or let contractual breaches slide for some and not all. Property maintenance has to be done in a way that’s consistent across the board, and fair for all.
Just in case legal actions arise:
- The property owner should speak with an insurance agent or broker to ensure appropriate landlord coverage.
- The property owner should document the reasons for each decision to select a specific renter.
State and local laws can be stricter than federal provisions. They may bar discrimination on account of age, sexual orientation, or marital status. Some say owners can’t ask about a rental applicant’s immigration or citizenship status. Some require property owners to accept applicants in recovery from past substance use, or domestic violence victims. Security deposit limits and other key provisions appear in state law.
An example of state law on rentals is this one, for Pennsylvania landlords and renters. Investing in Philly? The guide points to the Philadelphia Code provisions on rentals, enforced by the city’s Commission on Human Relations and its Fair Housing Commission. Investing in Pittsburgh? There’s a Pittsburgh Code for that. An internet search will lead you to the provisions you need to study before renting out your property.
Algorithmic Bias in Screening? Proceed With Caution.
Rentals are a huge market in our housing economy. More tech tools keep emerging. Some are helpful in comprehensive ways. They can generate rental advertisements, and quickly filter applicants on the basis of extensive data related to credit and rental histories and background checks. They supply application forms and automated lease agreements and service requests. They even automate online rent collection.
Online tools are good organizers and time-savers, but owners need to inform themselves before jumping in. Under federal law, background screening tools must be reasonably geared to assure the best level of accuracy possible. Not all online renter screening tools are at that level.
More and more, online business tools rely on AI. As we know, artificial intelligence is far from perfect. In some cases it introduces bias into decisions. So, a word to the wise. Rejecting applicants on the grounds of inaccurate or skewed reports means exposure to the risk of legal action.
Summing It Up: The Takeaways
Investor owners have the right to choose people from pools of applicants. Yet they need to be sure their selections are based on business reasons, and not personal preferences. Business reasons mean the choice focused on favorable credit, a specific minimum income, and so on.
Expectations shouldn’t be eased for some people and not others. Reasons for decisions impacting people’s lives should always be clear and documented. Owners should use caution when screening — and even when selecting a screening tool.
Real estate investors can help create an inclusive and fair society. A society in which housing is accessible to all who need it.
Please note: This discussion is for our readers’ general knowledge. It is not intended as financial or legal advice. Readers who need case-specific advice should consult with licensed professionals in their local areas.
Supporting References
The Federal Fair Housing Acts, 42 U.S. Code § §3601-3619, 3631.
The Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.
Lauren Nowacki for Rocket Mortgage, LLC (Quicken Loans): Learn How To Screen Tenants Fairly For Rental Properties (Jan. 9, 2021).
TechEquity Collaborative: Tech, Bias, and Housing Initiative – Tenant Screening (Feb. 23, 2022).
And as linked.
Photo credits: cottonbro studio and Ketut Subiyanto, via Pexels.