Editor’s Note: Hal Cranmer has had a wild past. Born in India, he’s lived all over the world and started his working life as an Air Force Special Operations and Commercial airline pilot. After 9/11 brought him down from the clouds, he entered the corporate world and rose to the level of running a $36M machining plant. Yet from 2006 on, he caught the passion for real estate investing. He flipped a bunch of houses in Minneapolis and still owns several multifamily rentals there. Lately, he is into assisted living, and owns 5 assisted living homes in the Phoenix area. He loves to follow real estate trends, both locally and nationally.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Cranmer provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out our other super-helpful Market News Updates. For now, enjoy...
From Hal Cranmer…
With the market ripe for rentals, I thought we’d share some super helpful info about that.
So, it’s standard protocol that when you hire a new tenant, they have to undergo a standard tenant screening process.
It’s different for everybody, but the screening criteria generally looks at these factors:
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Credit history
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Criminal history
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Employment history
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Rental history
There are different ways to determine whether the candidate is a good fit or not, such as high income and a good credit history. There are also the not-so-good signs that make you want to bolt for the door…
Not everyone gets approved for a lease. For applicants who don’t make the cut, it’s better that you inform them immediately in writing. Keep a record that you did inform them as well. In most states it’s required to let tenants know why they were turned down. You can find a state-by-state list of the landlord and tenant laws here.
Before we go into some of the ways you can legally turn down applicants, let’s summarize the reasons you can’t turn down applicants as of 2018:
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Race
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Color
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Religion
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National origin
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Gender
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Age
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Familial status (having children)
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Physical or mental disability
The physical or mental disability protection includes alcoholism or drug addictions, so be careful about denying a tenant for that reason. Criminal drug convictions are still a legal reason for denying an applicant.
5 Reasons to Deny Tenants
It’s easy to identify if an applicant is qualified. However, it may be a little tricky to know whether you should deny them. Here are the top 5 legal reasons why you may opt to deny an applicant:
1. Criminal History
You might notice that many landlords have the notion that criminal records say more about the applicant than credit history – for obvious reasons.
If your tenant has a relevant criminal history, it puts your property and the neighborhood at risk and it makes others feel uncomfortable.
To help you with this decision, the U.S. Department of Housing and Urban Development (HUD) set detailed guidelines on how to handle applicants with criminal records. In 2016 HUD changed the rules. They are now saying that when you evaluate criminal history, landlords must consider the:
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Nature
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Severity
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Age of any conviction
You must also consider some other factors, such as the applicant’s age at the time of conviction, whether the applicant has a positive post-conviction rental history and whether the applicant has rehabilitated.
Although HUD is not disallowing you from rejecting an applicant based on criminal history, they are saying minorities are convicted a disproportionate amount of time. Their thinking is that minorities may be discriminated against because they are arrested more.
HUD also states that an arrest is not an indication of criminal history.
The bottom line is that if you are denying someone based on their criminal history, especially if they are a minority, you need to have a solid documented case of why you denied them, to show no discrimination.
It would be good to have a written set of policies and procedures for rental applicants to show you apply the same criteria to every applicant.
2. Screening Criteria Has Not Been Met
If your tenant screening process complies with the relevant fair housing laws and landlord-tenant laws, then it’s acceptable to deny an applicant if they don’t fit your standards. Here are some of the most common reasons:
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The tenant doesn’t make enough money to afford the rent (typically the tenant’s income needs to be 3x the monthly rent)
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The tenant smokes and you don’t allow smoking
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If a tenant owns a pet and you don’t allow pets in the building
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If the tenant tries to have too many people in a small unit
These are just some of the many reasons on why it’s okay to deny an applicant. To save time and effort, it’s better if you mention all your criteria in the rental advertisement so you don’t have to screen applicants who clearly cannot follow your rules.
Be careful with the ‘too many people’ criteria...
Many cities will set a total number of occupants allowed when they give you a rental license for a building. However, you can also be in trouble if you turn down someone because you only want 2 people in an apartment. A family may apply that has a kid or two. It might be seen as discrimination if you say you only want two people in the place.
One criteria that varies throughout the country is Section 8 (Government Housing Vouchers).
It used to be that any landlord nationwide could turn down Section 8. Now more and more cities are having trouble finding homes for their Section 8 tenants. So, they are starting to pass ordinances requiring landlords to take a Section 8 tenant if the tenant meets all the other criteria in the application.
You can find a guide to the regulations for each municipality here. You can also contact your local Fair Housing Agency.
3. Eviction Record
I’m pretty sure you’re not willing to bear the burden of having to evict a tenant. Evictions can cost the landlord an average of $3,500 once you add up all the expenses. And many independent landlords find this hard to swallow.
Which is why you want to take a closer look at prior evictions. Although prior performances are no guarantee, they are most likely predictive of future evictions. You may want to ask for an eviction report to go along with the criminal history and credit record.
4. Poor Credit Check
When it comes to credit history, every landlord has a different say…
Low credit scores do not mean you’ll get disqualified immediately, however, it can be an advantage. You should also look for warning signs, such as tenant judgment, past bankruptcies, and most importantly, collections for unpaid rent since these can indicate future problems.
Remember that many people are renting because they don’t have the credit to buy a house. Automatically rejecting someone for bad credit may severely limit your potential rental pool.
When you do come across someone with bad credit, you may want to dig deeper to find out why. If it’s something you can live with, you can waive this requirement.
Just make sure you dig deep and waive every applicant the same way, if you do it. That way you avoid discrimination charges.
Here are some ways to ‘dig deep’ on a credit score:
Have someone cosign
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Figure out why they have a bad score – maybe a one-time medical emergency
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Charge more for the security deposit or rent
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Ask for several month’s rent up front
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Have them prove to you they can pay (show funds in the bank for instance)
5. Poor Reference Checks
It also helps if you contact their previous landlord to see how they were (or are) as a renter.
One way to make sure they don’t have you call their buddy is to ask the landlord questions such as when did they buy the property. A renter’s buddy won’t know the answer. You can easily verify what they say on a local property tax website.
Many property management companies won’t provide a rental reference without a signed release from the tenant, so make sure you have one. Also don’t ask opinion questions such as: ‘What did you think of John?’ Opinions can get people in trouble legally.
Ask objective questions such as:
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How long did they rent from you? (Indicates how long they will stay in your place)
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Did they pay their rent late?
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Did they cause any damage?
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Did you return their full security deposit?
Landlords generally want to help each other out. Answers to questions like those above are clear indications that can help you decide whether the applicant should be accepted or not.
Notifying the Applicant
Make sure to follow all relevant laws concerning denying an applicant or notifying them of any other activities relevant to their application. If you’re not sure on how to deal with an applicant, it’s best to consult a reputable attorney.
Finding the right tenant for your property requires more than just a quick glance at their appearance or a scan through their Facebook page.
It’s very important to conduct a thorough tenant screening process so you can sift through all the applicants.
But know that it may cost you a lot of time and money.
So, there are multiple ways you can prescreen your applicants to avoid wasting time, such as:
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Publish a rental advertisement that highlights your rules and regulations regarding smoking, number of people in the property, late fees, pets, payment due dates and other relevant details. This gives the applicants a hint of whether they can qualify or not.
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Also, add these policies to the lease agreement to prevent miscommunication.
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If the applicant is still interested, you can meet them personally and show them to property. Talking to them in person gives you a glimpse on who they really are.
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It’s not enough to judge a person based on your first impression of them. So, you really need to check into their criminal, credit and eviction history. With that info, along with your first impression, you’ll know who they are, their ability to pay rent or when they pay rent.
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Also check their most recent pay stub to ensure that their salary is more than enough to cover their needs plus rent.
Whether you approve or deny an applicant, it really helps to communicate with them thoroughly. If you think that an applicant is qualified, notify them immediately and rent the property out to them.
Until you’re sure that your first-choice applicant is still interested in the property, don’t reject your second choice just yet. You can inform other applicants that the company has taken other applicants.
Disclaimer: We are real estate investors not lawyers. This lesson is for informational purposes only. Obtain competent certified advice for any legal matter affecting your rental business.
Thoughts?
Have you ever denied an applicant before? How did you deal with it? Let us know in the comments below.