Property Management – Woodland Hills

 HOW TO THOROUGHLY EVALUATE THE PROSPECTIVE 

TENANT’S CREDIT AND REFERENCES

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Evaluation of the prospective tenant’s credit, including references from present and past landlords, is the most important step in the screening process. In its larger sense, credit means the degree of confidence the landlord feels that the applicant will fulfill his obligations under the rental agreement. This means all obligations, from the promise to pay rent promptly, to the agreements to keep the property clean, respect the rights of neighboring tenants and to use the property for legal purposes.

Insofar as it is relevant to the landlord, the applicant’s financial condition comprehends his ability to pay the rent as it comes due and, to a lesser degree, to be financially responsible for any damage the applicant may do to the rental unit over and above normal wear and tear. His overall credit, however, also his ability to perform non-monetary obligations. With a properly completed Application to Rent in hand, an adequate evaluation of the applicant’s overall credit should be composed of at least the following elements:

1. Employment and income level verification

2. References from previous and present landlords

3. Eviction records

4. Credit Report

We list these in their order of importance. While we have suggested this hierarchy, all are essential. Some landlords have started to do criminal background checks. The only national and state databases which exist for this kind of evaluation are available to law enforcement only and not the general public. Public records of criminal convictions are maintained on a county by county basis. For this reason, the only way to do a thorough criminal records check is to check every county in the United States in which the applicant may have committed a crime, clearly not a practical proposition. Furthermore, it takes as much as two weeks to complete the check, because the lack of a well maintained central database such as is available to credit reporting agencies. For this reason we believe a question on the rental application “Have you ever been convicted of a felony?,” should suffice to satisfy any moral responsibility a landlord may have to screen out dangerous persons.

All of the four elements we list are available from screening services, and some screening services will even interpret them and assign weighted values to the various pieces of information. While this may be quite useful, it is to be remembered that this weighting is based on the screening service’s opinion. In some instances, the landlord will wish to procure this information separately, perhaps speaking to the current employer and previous landlords himself, but relying on a credit reporting agency or screening service to supply the eviction report and credit history. In either case, the landlord must remember that he must comply with the Federal Fair Credit Reporting Act, and such state and local laws which bear on this subject. See our articles on these topics.

EMPLOYMENT AND INCOME VERIFICATION

The employment and income verification is designed to establish two things: first, that the applicant currently has the income to pay the rent regularly and timely, second, that the applicant’s employment and income are stable.

Employment and income should be verified in two ways. The wage earner should be asked for sufficient pay stubs to verify monthly income. The landlord should remember that the average month contains not four but 4.3 weeks. If the wage earner is paid bi-weekly, his monthly income does not equal one bi-weekly paycheck times two.

If the pay stubs do not show an obvious failure to qualify, the next step is to contact the employer to confirm the information. This is becoming increasingly frustrating as more and more employers are refusing to give out any information about their employees, for fear of being sued. Nevertheless, both the pay stubs and direct contact are important as they cross check each other. Most employers will still verify the fact of employment, even if they will not give out information on pay scales or expected longevity on the job. Many will give out nothing except in writing, or unless requested in writing and accompanied by a release from the applicant. The last pay stub which the landlord sees may be literally that, the applicant’s last pay stub. Furthermore, a talkative employer may still provide good information about the prospect. As a pointer, it is a mistake simply to call the telephone number which the applicant gives as his “employer’s number.” It may be a friend ready to lie, or might be a person in the company who has been briefed to give a glowing reference. Call information and get the number that way, then call and make a generic request to speak to the personnel department, or someone who can verify employment.

Income verification for self employed persons, those who work largely for tips, and independent contractors is more difficult, but still possible. A request for the past two years of tax returns will usually have to suffice. Few persons inflate their income to impress the IRS. Of course, an applicant in November might have tax returns filed for the previous two years showing outstanding income, with a sharp drop for the current year for which a return has not yet been prepared. It is impossible to eliminate all risk, but if this is the case, symptoms should appear in some of the other information the landlord will review. This is the point of not being satisfied with one source or type of information, several sources and types of information can be cross checked to ensure they relate rationally to one another. For example, a self employed person showing excellent income on his last two tax returns, but several late pays on his credit history in the last three months might be viewed with some skepticism.

LANDLORD REFERENCE VERIFICATION

One of the objectives of the screening process is to make a reasonable guess at how the prospect may pay his rent in the future, a thing which obviously cannot be known. However, a relevant inquiry is certainly how he has paid his rent in the past. The rental obligation is unique. Thoroughly investigating and verifying the prospective tenant’s previous landlord references can yield more information about your future landlord tenant relationship than anything else.

 Eviction from one’s residence is very different from something even as catastrophic as repossession of a car. If the prospect has demonstrated an inability to fulfill the obligations upon which his place of abode depend, then it is likely that the prospect is either so economically unstable that he cannot do it, or so irresponsible that he is willing to play with fire. Still, many landlords do not speak to references or if they do will only ask general questions, e.g., “Did he pay the rent?” instead of “Did he pay the rent promptly and in full?”

A good rule of thumb is to insist that the applicant disclose the name and address of at least the last two landlords, and go back at least three years. This may yield three or four landlords, or, it may yield only two, one of which goes back five or six years. Either way, the landlord needs at least two former landlords to speak to, and to examine the history back far enough to establish a pattern of behavior.

The landlord wants to know the following about the applicant:

1. Did he habitually pay the rent on time?

2. Did he abide by the house rules and non-monetary agreements made with the landlord?

3. Did he get along with his neighbors?

4. When did he move in and when did he move out and why?

5. Did he give the reference advance notice he was moving?

6. When he moved, did he leave the unit in good condition?

7. If he applied today, would the landlord accept him?

It is not a bad idea to script these questions so as to avoid forgetting to ask any of them, as they are all important, and the answers can be written on the sheet of paper next to the questions, the document dated and initialed, and maintained with the application. Naturally, some responses may suggest extemporaneous further inquiry, and if the previous landlord is cooperative, the landlord should definitely follow up.]

The current landlord may not be a reliable source of information on the applicant. If the applicant is an excellent tenant, the current landlord may be offended that he wants to move and offer a lukewarm reference in the hope that the resident will remain. If the applicant is a disaster, then the current landlord may give a neutral or even a spectacular reference to get rid of him. Yes, Virginia, landlords occasionally lie. This is the reason it is necessary to follow the two for three rule, at least two landlords going back at least three years. On the other hand, attempting to develop a history going back decades is probably not going to be productive, as most businesses do not keep records that far back and most people will simply not remember your applicant.

EVICTION RECORDS

Most eviction actions do not result in a judgment at all, or, in many states, may result in a judgment for possession of the property, but not for money, which is often a separate step in the process the landlord may not be willing to take or pay for. These probably will not show up on a credit report, as credit reporting agencies are interested in reporting money judgments primarily. On the other hand, there are agencies which are set up to report eviction actions. Depending on the quality of the reporting service, possession only judgments, and even filings which never go to judgment or are dismissed may be reported. This type of a report must be carefully interpreted and evaluated, but is well worth the extra expense.

The report will say that an eviction was initiated, and maybe even the stated reason, but there is much information which must be known before the existence of this proceeding can be properly evaluated. The existence of an eviction on the report of an otherwise qualified applicant should be considered an invitation to further inquiry, and not a reason for automatic rejection. Here are a couple of examples.

In evaluating an applicant from San Francisco, the landlord in New Hampsire finds that three years ago an eviction action was filed against the applicant, and that the basis for the eviction was that the landlord’s relative intended to occupy the rental unit. Eviction proceedings are never initiated lightly, and it may well be that the applicant simply dug in his heels, ignoring his obligations under the San Francisco rent control ordinance, and refused to move. Could there be a reasonable explanation for the situation which does not reflect adversely on the applicant? The answer is “yes.” In San Francisco, only agreements to vacate (stipulations for entry of judgment) which are made under the supervision of a court in an unlawful detainer (eviction) proceeding, are enforceable. Agreements to vacate outside of a court proceeding are unenforceable. Suppose the landlord’s attorney gave a notice to vacate in 30 days on the stated grounds to the applicant. The applicant calls the attorney for the landlord and pleads that he needs three months to move so he can find a suitable place in the same school district. The attorney for the landlord states that this is perfectly acceptable, as long as the rent is paid. The attorney files the eviction proceeding, placing the action under the supervision of the court, and the landlord and tenant sign a settlement stipulation stating the tenant will move out in three months and pay all the rent, otherwise, the applicant will be evicted immediately. The applicant performs precisely as agreed and leaves the premises in perfect condition. The landlord is happy, the applicant is happy, everybody is happy, except that there is now the possibility of this proceeding appearing on an eviction record. Inquiry would reveal the true nature of the proceeding, whereas the report alone might give a very negatively distorted view of it.

This does not mean that each report of eviction must be laboriously documented, however. Recall that the previous paragraph presumed an otherwise qualified applicant. The large majority of evictions are for failure to pay rent and are without any mitigating factors. The report of prior evictions is an extremely powerful tool, but must be used with some discretion. As with all information obtained in the screening process, the landlord should compare it to the rest of the information to see if it fits, and if not, find out why.

CREDIT REPORT

Although we list a credit history, what most people think of as a credit report, last, this does not mean that it is of no value or can prudently be omitted. On the contrary, the complete picture can rarely be obtained without one.

Because of the broad scope of opportunities for fraud on the application to rent, an objective source of data to which the stated information on the application can be compared is of great value. The credit history provides this. An applicant may set up a phony employer and a phony landlord, just waiting on the other end of the telephone line to verify his residence in the landlord’s city. This scheme might even be brought off. But if the credit history shows an address in another state a thousand miles away, many red flags should come up.

The credit history will also show a pattern of responsibility or irresponsibility. This does not mean that a derogatory item is automatically a disqualifier, or the lack of such shows the applicant will pay his rent in the future indefinitely. For example, an applicant with twelve revolving charge accounts and a car loan all paid as agreed so far, may be so overloaded with credit that bankruptcy is imminent. On the other hand, an applicant showing only a Visa card and a car loan, though credit deficient according to some opinion, may simply be demonstrating a healthy respect for the 18% or so per year interest that most consumer credit costs. An applicant may, due to divorce, major illness, or unemployment show a number of late payments, or even charge offs, but if due to a unique disaster they will be close to each other in time. Inquiry of the applicant may show that, although late, he stuck it out and paid everyone off in full. This may reflect a responsible, honest attitude, and not a poor credit risk. On the other hand, most prospective tenants who have established good or excellent credit histories (which will be reflected in a good credit report) have no tardiness whatsoever and pay their bills promptly.

 Note that all four of the essential elements of the credit profile which we have discussed fit together. The key is the pattern. The landlord must read all the information, as he would read a book. For each piece of information, the question is whether it fits a pattern or not. A decision based on a single piece of information is usually not a sound one, although it may be, if that piece of information is that the applicant was evicted from his previous residence for owing six months rent. On the other hand, careful inquiry after discovery of information which does not fit, such as a strange address, an undisclosed period of unemployment, or an undisclosed period of unemployment, can avert a serious mistake.

Carnahan Property Management services Woodland Hills,West Hills, Calabasas, Canoga Park, Tarzana, Reseda, Topanga, Encino, Northridge, Van Nuys,North Hills,Chatsworth, Sherman Oaks, Studio City, North Hollywood, West Hollywood, San Fernando Valley, Granada Hills, Mission Hills, Simi Valley, West Lake Village, Agoura,Toluca Lake, Valley Village, Burbank. Call us at (818) 884-1500 and check if we can service your area.