When you start your quest in real estate investing, you are going to find that no matter how much effort and importance you place on tenant background screening and investigation, you are still going to have an occasional problem with a tenant who does not want to pay their rent. I emphasize does not want to because most of these tenants seem to be able to come up with money for a security deposit, etc. on the next property they will fail to pay rent on. In my experience, I hear it all. I cannot tell you how many tenants’ aunts, grandmas, etc. have died and that’s why they haven’t been able to pay their rent. It so ridiculous you almost have to laugh (or you will just get angry).
So what’s the secret, magic bullet that will save you from getting a bad tenant? Well, to be honest, there isn’t one. In the end it all comes down to experience, discernment, and quite frankly, luck. But don’t let me get you down here, there are things you can do to hedge your risk on a tenant, and I want to give them to you. Things that I have learned in dealing with many tenants over the years. Even if you are paying property management fees to have someone else take care of this for you, you probably still want to know the types of things they will be doing to screen tenants. So consider these three things:
1. Make the potential tenant show you that they are responsible.
You can do this in many ways. But the way I do this is to have the tenant fill out a lease application, and provide you with a copy of their credit report. Now that may seem odd, having them provide you with a copy of their credit. But here’s the thing – you can charge them an application fee to cover the costs of you pulling their credit, but why? If they have to pull their own credit, that means they actually have to get on the phone or a computer, and do a little work to obtain their credit report.
This tactic will help you to eliminate many potential tenants who are not going to be responsible enough to pay their rent. You see, in this world we live in, people don’t want to do any work or have any hassles, and because most landlords don’t require the tenant to bring a copy of their own credit report with the lease application, most of these deadbeats will move on to an easier target. Stand firm, make them fill out both the lease application and bring a copy of the credit report.
2. Do the work to check the background that is presented to you.
My general rule of thumb is this – at least check the current employment to ensure they are in good standing and make about the amount of money they said they are making, and check the last two residences (if possible) and confirm with the landlord(s) that they were timely, paying customers. Why the last two residences? Put yourself in the shoes of a landlord that has a bad tenant. They want the tenant gone, and if the tenant has filled out a lease application and the new landlord is checking up on the tenant, the old landlord might be inclined to say that the tenant was fine, just to rid themselves of their problem. I am not trying to say that everyone out there is dishonest, but it is worth a few extra minutes to call the previous landlord, who should be totally unbiased due to not having the bad tenant on their hands.
3. Take your time.
Tenants that are in a bad spot with their finances, their relationships, and their current landlord tend to be anxious, and wanting to make a move right away. So to ward off the bad tenant, make them wait a few days. Tell them it will be some time before you can finish processing the application. Take several days to do it, and you might be surprised at how many bad tenants will just float away, never to be heard of again. A good tenant will call fairly often, not in a rush, but just checking on you to see where the process was. If you sense a lot of anxiety in their voice, be cautious. You might ask them why they are in such a hurry, and what’s going on with the current living situation. These are good questions to draw the problem tenants.
So I’ve given you some great methods to leverage yourself against problem tenants. But not every tenant is going to have a squeeky clean application and credit history. Not to worry, in the next post I will give you some of my experience on bad credit, legal problems, etc. Remember, business is all about relationships and people, and you have to get into the head and life of the people you are working to understand what kind of a person they are, and if they are out to hurt you.