Buy & Hold 101: How We Screen Our Tenants
Welcome back to another segment of Buy and Hold 101. In the last session, we talked about where you can go to find your tenants. My advice is always: Never go the easy route of finding people who will live in your properties.
For example, if someone says their cousin’s mother-in-law’s uncle needs a place to rent, refrain from snapping at that bait. It could spell doom for your rental business. Use good business practices at all times – such as those we talked about in the previous post.
Now on to the next step – finding tenants is only half the battle. Once you have a prospective tenant, you must walk them through a predefined screening process. Again, I have to emphasize – don’t try to shortcut this process. You will do so at your peril.
A Simple Process
If screening is so important, why do so many landlords (especially new landlords) skip this step?
Usually, it’s because of a lack of knowledge. Most don’t know how to go about it, and it just seems like too much trouble. The truth is, screening tenants can be a simple process.
There are many online companies that you can use to run a background check and they're not that expensive. Here are a few sites you can check out:
The main goal here is to do a criminal background check and a credit check, on every potential tenant.
Check the Facts
This doesn't mean that you’ll be using the information against them or that you’re not ever going to rent to that person, but you're going to check the facts in order to protect yourself and your business.
My policy is to build the cost of a background check right into the application process, which typically is less than $50. So if they want to rent the property, they have to show up with a check for the cost of the background check.
This is a non-refundable fee because immediately you’ll spend it on the background check. Show them the receipt to let them know that you’re good to your word. If you’re interviewing two or three and choose only one, now you’re not stuck with the fees for all three background checks.
“I’ve got the Money!”
Here’s an added tip that I’ve learned over the years. Be wary of people who call up wanting to look at the property and after they learn the rent amount they say something like:
"Hey, I've got the money, I can pay it today..."
Don’t let the cash divert your attention. Remember what I said – don’t take shortcuts here. If they're talking money before they see the property, there's a reason. Consider it to be at least a yellow flag, if not a red one.
They’re trying to make the money the main focus rather than who they are or what their background looks like.
Here’s what happens – the newer investor, who is managing their own properties and dealing with their own tenants, may think like this:
Hey, I've got this potential tenant who has the cash to pay for the first and last month’s rent; they’ve got the cash for the security deposit; it's been vacant now for 35 days and I’m SO ready to get this thing rented… I’m just gonna skip the background check this time.
Three months later, that over-eager landlord is walking through the long, drawn-out process of eviction. Talk about expensive – an eviction is expensive both in time and money.
The tenant had the cash for the rent and deposit, but that was it. They have no ongoing source of income; they stop paying and it takes another month or two to get them out of that property. Meanwhile, they’ve had just enough time to trash the place.
Don’t Judge the Book by its Cover
Another tip: Don’t judge people by how they look.
It takes all kinds, as the saying goes, right?
I’ve had people who were dressed nicely, drove a nice car and then turned out to be the slowest paying tenants. I’ve often joked that sometimes educated, intelligent people simply have more educated and intelligent excuses for not paying on time.
I’ve learned to be very direct. When a prospective tenant hands me the application, and before I run their criminal or credit background check, I ask this question:
Hey look, I'm going to do a full check on you. I'm going to pull up everything I can about you, anywhere from a criminal background, credit, financial, everything. Is there anything that I'm going to find that's going to scare me? And if there is, if there's something you think I might find, would you go ahead and be honest with me now? That way we can deal with it and get it out of the way.
Some will say, “No problem – I’m good to go,” and lo and behold you discover felony drug arrests. Now you have an issue.
Then you might have the guy who lets you know he’s a recovering drug addict who just moved out of a halfway house. He’s starting a new life with a new job and has his employer’s reference.
Which one’s the greater risk?
I’ve learned to lean on the side of up-front honesty.
Interestingly enough, some of my best tenants have been people who had issues in the past and are now moving forward, but they were completely honest and transparent with me up front. Their honesty speaks volumes to me about the type of tenant they’re going to be.
There’re a number of important decisions you’ll have to make when dealing with tenants. One biggie is pets – will you allow pets or not? And what will be your boundaries regarding those pets?
It’s never a cut-and-dried issue.
Personally, I’ve never had a problem allowing pets, but no matter how large or small, they leave a smell. That's just the way it is. You have to assume you're going to pay for either a thorough carpet cleaning or all new carpets.
You must insist on a non-refundable pet deposit – this means non-refundable no matter how clean the place is when they leave. They know right up front that that money is not coming back to them. That’s part of the rental agreement.
It will be your judgment on the deposit amount. It should at least be enough to cover the cost of cleaning, if not the total replacement, of the carpet.
Having a strict no-pet policy might save money in the short run, but it will greatly limit your tenant base in the long run. Most families love their pets.
Another tip when it comes to pets: You may want to add a clause (depending on your level of comfort) that restricts certain types of pets. A pit bull for instance. You don’t need the added liability of an animal that has a reputation for being considered dangerous.
I’m sure there are well-trained pit bulls that are not dangerous and that’s fine. But they don’t need to be on your property. Again, use wise business policies. (How do you feel about boa constrictors?)
My Amazing Pet Story
Before we close this out and get off the subject of pets, I have to tell this story of one of my rent-to-own tenants.
I had fully remodeled this house when I bought it, and this tenant had paid a hefty deposit to move in. I hadn’t visited the property for almost two years because they paid right on time every single month. All of a sudden, one month – nothing.
I called his cell and it was disconnected. I called his wife and got no answer back. Finally, I decided to stop by the house. The house looked great – probably the best looking house on the street.
I knocked on the door and it sounded like a freight train coming to the door. It was dogs. Like a herd of dogs. The commotion was horrific. But no one answered my knock, so I left a note on the door giving a 5-day notice.
Then I got a call from the tenant. He said his cell had been inadvertently disconnected, and that he’d pay the rent immediately.
Now I had to ask: “Tell me, how many dogs do you have?
He said, "Well, we got a couple."
Can you say understatement?
I said, "But in the lease agreement, it says no dogs. How many dogs do you have?"
"I have 15 dogs."
I nearly panicked. "You have 15 dogs in a house that I'm renting to you? I don't even know if I have insurance that covers if one of your dogs should attack a neighbor kid.”
His reply was, "I'm headed to the bank; I'm going to send you a $2,000 non-refundable deposit. And by the way, the day we got our first dog, I took up all new carpet, rolled it up, slid it into a sleeve and it's in the garage."
Wasn’t that so thoughtful of him?
Fifteen dogs. I was in shock. Needless to say, I demanded they get rid of most of them, but it was a huge uphill battle. They finally got the number down to 4 or 5.
From this I learned 1) to go check on my properties more often, and 2) to make sure it’s crystal clear in the lease agreement whether or not pets are allowed, and if so how many will be allowed.
Every landlord has a list of almost unbelievable stories like my 15-dog story. But by and large, if you follow the tips given in this segment of Buy and Hold 101, you’ll be protected against most of the hazards that could come your way.
Coming Up Next
In our next session, you’ll learn how to protect your assets. What good is it to build up a nice inventory of rental properties if one frivolous lawsuit could send you packing? Don’t miss this crucial information.
Meanwhile, keep it classy!
I’m interested in hearing your experience with screening tenants. What’s worked for you? And what met with disaster? The things you have learned will help others – so don’t hesitate to share.