Background Checks on Prospective Tenants

Tuesday, January 5, 2010 , Posted by Johnny Fuery at 4:21 PM

Originally Published 2007-08-15 13:55:39


A friend of mine emailed me last night asking about the things to look for when evaluating a housemate. I have done this a couple of hundred times, of course, both for housemates, where you share a kitchen, dishes, mailbox, but are not in a romantic relationship, and for the typical landlord-tenant arrangement, where the relationship is usually at arms-length and transactional.

Now, as a landlord, there are really two things I care about. These are summed up nicely in the following excerpt that I regularly use in my rental advertisements:

I care about two things. Every landlord does, despite the fact that some of them can be old, cranky, and get hung up on details.

Will you pay your rent on time?
and
Will you take care of the place?

Demonstrate these two things and we're in good shape. Usually that means a paycheck stub and a glowing reference from your last landlord. A high credit score never hurts, either, but a lower one is not necessarily a deal breaker.

In terms of weight, I usually place the highest value on the previous landlord's recommendation, merely glance at the paycheck stub ("is it enough" is a pretty quick arithmetic computation), and spend 5-10 minutes scanning the credit report.

With regard to credit, it can simplify things in your head if you simply pick a number, e.g., 630, and stick to it as your mid-score baseline, but remember that people are human. I've had phenomenal tenants that never called, always paid their rent, and left the place in good condition after years of tenancy with a sub-600 FICO. It's important to take a look at why the score is low. Ask them. A bankruptcy two years ago because of a failed business is probably fine if they've spent the last 18 months cleaning up their act. Late payments over the last year might be ok if they are forthcoming about a need to downsize and renting from you will represent a substantial cost savings in their monthly budget.  And I shudder to think about the FICO score repercussions for anyone who endures a life-altering injury (think bad car accident) without good medical insurance. Use your schmoozing techniques to get the low-down and follow your gut. People are more than their credit scores.

That being said, credit scores, generally speaking, are a good barometer of responsibility. Higher scores do usually indicate someone who minds the details, and that usually includes not only the validity of their personal checks, but the cleanliness of their home and the orderliness of their closet, too. Now if I could work a credit check into the evaluation process when I ask a pretty girl out on a date... ;-)

That being said, a slightly lower credit score is not necessarily a bad thing. Aside from the examples I've noted above -- all of which represent actual tenants I've worked with for years, incidentally -- there's another, slightly evil reason for considering your sub-excellent applicants.

It's no secret that good credit is an incredibly valuable tool for building wealth, is it? Borrow at 5%, lend at 10%, repeat a million times, get rich. That's called leverage, and it's the principle that makes real estate investing a strategic vehicle for moving up the socioeconomic ladder.

So what can one do to sabotage their own wealth-building abilities? Not pay their bills on time. Blow off creditors. Live beyond their means. Basically, cultivate poor financial habits that tend to manifest themselves in poor credit scores.

But guess what? Folks who sabotage their wealth building abilities actually make pretty good tenants. Sure, the frugal fellow with a 730 credit score that makes $100K a year is a great tenant, but he'll leave you when he buys his own place. The family of four who is barely making it and submits a 600 will stick with you for years, until something substantial (and usually non-financial) occurs that changes their situation, like a pet that dies, a child that goes off to college, or a divorce.

It is, perhaps, a bit unfortunate, but these folks do have to live somewhere, and it may as well be in your house, which is a nice place to live and has a very responsive, friendly, and helpful landlord. (Right?) You're providing a needed service. It's just business. More than that, it's good business.

One last point about credit scores. I always tell applicants to bring in their own copy. "If someone wants to spend the time forging 25 pages of credit history, I'm sure their diligent enough to pay their rent on time." For what it's worth, I'm pretty sure I've never seen a forgery in any of the 400-500 credit reports I've seen.

While we're talking about applicant evaluation, there is one red flag I insist on: they must have a checking account. If your tenant has no checking account, forget it. This is a huge sign of irresponsibility, and if you move forward, you will spend the entire lease duration visiting your property twice a month. You will get payments in cash, it's true, but they will always be late, never be complete, and, in general, be an enormous pain in the arse. Even if you don't lose money in the from of cash flow, you will spend so much time retrieving it that you'll consider getting out of the landlord game altogether. The only exception I've ever seen to this rule is if you happen to live on property grounds (e.g., duplex or in-law unit). But this isn't really an exception -- it's just that the legwork required is much cheaper in terms of time and energy.

With housemates, there's an additional, culture-based factor to consider. Ideally, I would suggest having a drink together before deciding to live together, because pet-peeve compatibility is a must. If you can't stand dishes in the sink, but your housemate-to-be likes to do dishes in the morning, that needs to be considered. You have much more discretion here than in a landlord-tenant situation, although the rules do vary by state-to-state. I haven't discussed this with an attorney in the last several years (it's been a long time since I've had a housemate that wasn't a friend I knew previously), but I'm pretty sure that, even in California, the tenancy laws pretty much get thrown out the window. I'm not an attorney, however, so please check with your legal counsel.

So, for my aforementioned friend, have your roommate-to-be bring in her own credit report, call her last landlord or roommate (both is even better), and take her out for a drink (go dutch). Do not flirt with her, aside from the necessary schmoozing. Or, if you do, tell her in the same breath that she's going to dinner with you and is not going to be your housemate. :-)

Ask questions about house guests and current boyfriends, because a 5-night-a-week guest is a whole different ball game. Ask about if she's a home body or always out on the town. Ask about alarm clocks and when they go off. Find out about eating habits and if she stresses over sharing condiments or milk. Check out her shoes and her car, because both are usually a reflection of her attention to detail.

Then compare against your own habits and make the call.

To anyone going through this process, remember that it is better to make a good decision at the beginning of the tenancy, because you'll live with that decision for some time to come. Good luck!

Comments

On 2007-09-09 19:42:11 Albuquerque real estate said:
I like your suggestions, short and sweet.

On 2008-01-11 19:35:30 Portland Real Estate said:
Thats always a good idea. You just never know.

On 2008-03-07 07:55:30 Employer Background Checks said:
Honestly employers need to do the same thing, especially smaller employers. Hiring people who can't pass a simple background check, or who can't manage their own financial affairs, is an exercise in futility.

On 2008-10-24 06:18:58 hidayah@Usa People Search said:
Hello the is sweet idea on prospective on tenant to know more about the person who will rent our place.Am strong recomended we need to be choosy on this thing.We don't now who is he/she.And background check will be suitable answer for this situation.

On 2009-02-26 10:54:58 GoodCredit said:
I believe that checking credit history is better than the checking the credit score. By taking a look at prospective tenant's credit report you can say whether he/she has a clean history. Because he/she can have a high score due to a non-activity.

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