Weeding Out Prospects.

Resident screening is vital, and not as confusing as you think

The phrase "resident screening can strike terror in the hearts of otherwise perfectly rational property managers. While they know they really should be carefully screening prospective residents before having them sign the lease, they also know that an increasingly litigious society can make doing so risky for their properties and their companies. After all, a discrimination lawsuit, even when struck down in court, can be devastating to a business.

As a result, many communities do little more than a credit check when signing on new residents; many small property owners don't even go that far. Overwhelmed by the regulations and restrictions on what can and cannot come into play when considering signing on a new resident, managers shy away from interviews or questionnaires, instead preferring to go on that credit report or, worse, their guts when deciding whom to sign and whom to reject. What they may not realize is that such a tactic is actually more likely to land them in court than a proper resident screening program.

The good news is that resident screening isn't as complicated as many believe. In fact, establishing and sticking with a fair and consistent screening program can be a real revenue saver, not to mention highly effective stress relief for anxious managers.

So how can a property establish a program that's fair, legal and effective? Listen to the experts.

The Importance of Screening

Nevel DeHart, Senior Vice President of First American Registry, doesn't mince words when it comes to screening prospective residents. "Resident screening is the most important day-to-day decision a property manager can make," he says. "A community's overall integrity and profitability are directly correlated to how well its residents have been screened."

Others in the screening business agree, including Edward F. Byczynski, President of National Tenant Network. "Unknowing acceptance of an applicant who is likely to violate the terms of the lease or rental agreement can have a devastating effect on an apartment community. From the abuse of the good residents and management staff to property destruction and financial loss, the results of poor resident selection practices destroy the financial well being of the community, its reputation and livability," he says.

Failing to adequately screen residents, experts say, can lead to unexpected problems, including nonpayment of rent, fraudulent transactions, and even damaged or destroyed property from irresponsible renters. And all of that means lost revenue for the apartment owner.

"Many times, accepting a bad resident can be more expensive than an empty apartment," says Linda Bush, CEO of SafeRent Inc. "The multifamily housing industry loses $4 billion annually to bad debt. Accurate, predictive resident screening allows properties to increase their bottom lines by reducing risk and finding the most qualified residents."

That bad debt can devastate a property; on the flip side, implementing a screening program may help boost a property's income substantially. "A 1 percent improvement in economic vacancy, or the same percentage increase in rents, can help properties generate tens of thousands in additional net operating income (NOI) or funds from operations (FFO)," says Dave Carner of RealPage Inc. "Combined, these small incremental changes can increase a property's value 5, 10, maybe 15 percent."

Screening Methods

So, fine. Property managers need to screen residents. But what can and can't they ask to stay within Fair Housing laws? And how can they avoid legal pitfalls that can arise from bad screening practices?

It's relatively simple, say experts. The most important factor is consistency--asking the same questions and researching the same information for every single prospective resident regardless of race, religion or outward appearances. Then, having gathered that information, it's vital to apply the same criteria to every single applicant when deciding whom to accept and whom to send packing. As Bush says, "Properties need to make sure they are evaluating everyone on the same criteria and not giving any special treatment to one potential resident over another."

"Whatever your resident selection criteria, the single most important factor in defending a claim of discrimination is consistency," she adds. "For example, if you use a screening service, use the same service every time. If you perform criminal background checks, use the same process to obtain the information for every applicant, every time."

Byczynski agrees, and adds that educating leasing staff on fair housing requirements is essential when launching a screening policy. "Asking questions that seem to focus on circumstances or conditions protected by Fair Housing can easily give rise to complaints of discrimination with unfortunate consequences," he says. "Remember, a discrimination complaint is mostly founded on subjective feelings taken out of the application and screening process by a rejected applicant, not on hard facts pointing to improper treatment."

DeHart recommends that all apartment screening policies be spelled out in writing for prospective residents to review, thus avoiding misunderstandings of what's being asked and who may be rejected for a lease. Additionally, he says that having a knowledgeable staff is vital.

"Property managers should require all leasing personnel to attend accredited training seminars that focus on Fair Housing and the Fair Credit Reporting Act," he says.

Others agree. "I would suggest that all applicants fill out an information sheet giving permission to do a credit search," says Maria Merritt of Choice-DATA. "That way, you are covered if they ever question the data you obtained."

On the other hand, screening may help an owner avoid a different, potentially devastating kind of liability suit. "The biggest probably is the liability associated with a convicted criminal who gets through a property's screening process and commits another crime against a person at the site," says Carner. "Courts all across the country have pointed the finger of blame at apartment managers. Accessing criminal information, in areas where it is relatively inexpensive, reliable and instantaneously available is a good method of mitigating risk and reducing liability."

What to Screen For

Most property managers know that a credit screen is fairly basic when it comes to an applicant. But beyond that, there are several important factors to consider when screening a prospective resident:

* Ability to pay the rent. DeHart asks, "Do his income and credit obligations allow for housing expenses?" Compare income with expenses to see if your rent will fit into the prospect's monthly budget.

If he can pay the rent, will he do so? Checking on a prospective resident's past rental payment history is key, experts say. Even if the money is in his bank account to pay every month, don't assume he will. Check out his history to make sure he doesn't have a history of nonpayment at previous residences. Byczynski also recommends checking to see if a prospect has any pending legal actions against him by a previous property manager.

* History of fraud. Bush says that a complete screening should include comparing the prospective renter's social security number with that on file with the Social Security Administration. It's not unheard of for renters with iffy renting histories to pick up the social security numbers of deceased individuals to pass credit checks.

* Criminal background check. DeHart recommends checking for any criminal past that might indicate a propensity to endanger other residents. And Merritt cautions that not all criminal record checks are created equal: "You have to do a proper search. Not many states have useful statewide information, so you have to do a search at the county level. Then it's hard to know what counties to search," she says.

* Credit check. While this is important, Bzczynski says, "This should not be the sole or primary focus of the screening effort."

Other recommended questions to ask include how long the prospective resident has lived in each previous residence and how long he has been employed at his current job.

Small Owners, Same Concerns

"Small properties are sometimes viewed as a haven for applicants that have difficulties getting approved at large communities," cautions Carner. "Applicants that are denied at a larger property will sometimes assume that the Smaller properties are less willing or unable to check sources, such as criminal or eviction backgrounds. For these reasons, small properties have as much risk if not more than larger apartment managers."

Owners of just a few rental units often skip complete screenings of prospective residents due to lack of time or resources. But these owners have no less of a need for complete resident screening than their large-corporation counterparts.

At the same time, they are subject to the same laws and regulations as large rental companies, and their education of such issues is absolutely essential. "The most important thing for small properties to remember is that they are not exempt from the rules, regulations and problems the larger properties have to deal with," Bush says. "Finding services that will screen smaller properties can have positive effects on their business operations too. It is also important for smaller property owners to realize that they are just as susceptible to Fair Homing and Fair Credit issues as the larger properties. They too have to find a way to fairly and objectively approve their residents."

The experts agree that one of the best ways a small property owner can ensure a fair, complete screening of prospective residents is to find and use a screening company that can meet their needs. Since owners of 100 units or fewer rarely have the time or manpower to conduct extensive screenings on their own, finding a vendor to accomplish .the task can be a real lifesaver.

"With the increased use of personal computers, most small, family-owned communities have access to the Internet," said Rich Schreiber, COO and Executive Vice President of Sales at Rent-Port. "This means they now have the opportunity to we the same proven technology to screen applicants that the top 10 management companies rely upon to meet their fair homing requirements."

"Many real estate associations provide insight for their members as to available resources for resident screening," DeHart says. "Additionally, apartment association trade shows are excellent opportunities to speak with screening vendors and learn state-of-the-art processes. Most large national screening companies don't solicit small property owners, so the property owners need to pursue them."

Information on Fair Housing presented in this article is not intended as legal advice. Property owners should consult with legal counsel he, re implementing or using any resident or employee screening program.

Kim Fernandez is a Freelance Writer and has written about the multifamily housing industry since 1994.

Kim Fernandez is a freelance writer for trade and consumer publications who lives in Bethesda, Md. A former Managing Editor of Units, she has written about the multifamily housing industry since 1994.