Where Do You Draw the Line With Tenant Credit?

by Chris on August 20, 2010

“If I didn’t work with applicants who have credit problems, I wouldn’t have any tenants.”
–Mia Melle, Renttoday.us

Renttoday.us, a property management company in Southern California, manages approximately 1,200 single family homes, condos, and multi-families. These properties are located in one of the hardest hit areas for foreclosures and unemployment.  “We deal with applicants with bad credit all the time,” says spokeswoman Mia Melle.  “In fact, if we didn’t work with applicants who had bad credit we probably wouldn’t lease any homes – it’s that bad!” 

With an economy in turmoil, Renttoday.us has adapted its approach to tenant screening.  According to Melle, the company adopted a “5 star point system”,  and uses “compensating factors” to qualify our tenants who may have less than perfect credit ratings. For example, a tenant gets credit for having a FICO score over 600, but if it’s less than that, they get no points. Therefore, they would have to excel in either the income, reserves, employment history, or rental history categories in order to qualify. This system allows tenants who have very low scores to still qualify providing they have other redeeming qualities.

Melle finds that competing management companies which rely on a FICO threshold alone, typically 600+, are disqualifying otherwise suitable applicants. “I would estimate that at least half of all our tenants had recently lost their homes to foreclosure and have a FICO score of 500 or less.  That’s just the nature of the current economy and the area we live in,” Melle says.  She adds that the Renttoday’s default and eviction rates are less than 1% at any given time.

“We do draw the line in certain areas such as recent evictions (less than 24 months) and excessive tradelines in collections which is different than having a low FICO due to an isolated incident such as foreclosure, bankruptcy, or medical bills. But even then, if the tenant is willing to put up a double deposit that will adequately cover an eviction and any potential damage they may still qualify!”

On the other side of the country, Kat Hopkins with The Rental Factor in Central Florida shares a similar experience.  “Here at the The Rental Factor we do encounter on a daily basis prospective tenants with poor credit – in Central Florida it is hard to find anyone with really good credit!” she explains.  The Rental Factor uses a national tenant background check company which enables managers to see both rental history and work history. Hopkins is willing to give applicants with a solid work history the benefit of the doubt.  “They’ve probably just been affected by the economic crisis that affects us all,” she says. If they have a good, solid work history and a clean rental history, she will speak to them and ask what has happened to affect their credit in a negative manner.  She finds most people will gladly explain how they have reached this point – sometimes it has been a health issue in the family that takes a while to financially recover from.  “Of course in the end it is always up to you as an owner whether or not to accept someone as a tenant,” she says.

Tilmon Brown with JTB Group is a property manager in Mobile, Alabama.  There, widespread unemployment has been a game-changer for landlords and property managers. “One minute a tenant has a great job with good disposable income and great credit, the next minute they have lost their job and cannot pay their rent or meet their obligations. It has absolutely nothing to do with how good the credit report was when they signed the lease,” he says.  

“For us, the answer is to really get to know your tenants, and if they get into trouble, work with them. We try to do all sorts of things to keep a good tenant, like forgoing a month’s rent, amortizing it, and then adding it to the monthly rent over the next twelve months. In our situation, you have to get creative – it is not the tenants’ fault the economy is bad. You have to decide if they are a good tenant and if you want to keep them. I can assure you, if you work with them and be firm but fair, they will be loyal forever and recommend you and your properties to others.”

In the city of Maplewood, Missouri, Adam Kruse with The Hermann London Group is willing to take people with lower credit, or with tarnished credit problems. “We will ask for a higher security deposit, potentially a higher rent, and maybe some prepaid rents,” he says.

“I think that someone who pays me a year’s rent in advance has perfect credit, regardless of their credit score,” says Chicago landlord David Kaufman. “So, my approach is to let the amount of their security deposit increase to match just how poor their credit is. A security deposit equal to two months rent should put most owners in the ‘catbird seat’ with less than perfect credit types.”

Greg Morad, a Realtor and Property Expert with GEM1properties.com in Northville, Michigan, which rents properties in fashionable Royal Oak, says the bar is lower than it used to be. “In this market of less than perfect credit, as a landlord and realtor, if a potential tenant has a short sale or foreclosure on their record, we can generally overlook that. Also outstanding medical payments are usually okay.  Red flags which are unacceptable are delinquent utility payments or judgments against them for unpaid rent or car repos,” he says.

 Overall in this market, Morad finds the new bar for credit is 600+, where in the past it was 720+. 

He suggests that obtaining 2 most recent pay stubs, a previous landlord letter and a credit report of 600+ should be your top 3 requests as a landlord. 

“If the potential tenant can provide you with these items in a timely fashion, they are generally going to work out as a tenant.”

Chicago Celebrity Jazzman and Rock Star Anand Bhatt put some of his millions to work in rental properties.  He’s had to put his creative energies to use as well, dealing with tenants who have less-than-perfect credit.  “I was just talking about this,” he explains.  “I just had an applicant refuse to provide a credit report.  When I forced the issue, it turned out he had poor credit and no real assets.” Anand, like many landlords, had to weigh the risks between vacancy vs. future eviction probability and all the hassles that go along with that. He came up with a plan of asking for a few months of rent up front, and accepted the tenant despite the poor credit.

Choice New York Management is a third-party property and asset management company based in Manhattan. President Michael Feldman has the opportunity to work with many landlords. “The biggest distinction I can draw from my experience is between larger and smaller owners. I find that the tendency among larger, more experienced landlords is to be more rigid and less forgiving when it comes to an applicant’s credit history. Smaller owners, on the other hand, tend to be more willing to not just look at the score but understand the entire report. They are more likely to accept a less reliable tenant in exchange, possibly, for a higher price point. For example, is this mediocre credit score driven by a default on their rent or is it driven by something more palatable,  like a delinquency on their cell phone bill while they were studying abroad in college?”  

But irrespective of being a large or small landlord, Feldman finds one way to mitigate against imperfect credit is to collect more security up front. “I often remind our clients that the goal is not to achieve the highest rent at lease signing. Rather, the goal is to achieve the highest rent AND have that tenant perform to the fullest on their obligation,” he adds.

Landlord Beverly Potter in San Francisco has the added burden of rent control laws that make it especially difficult to evict a problem tenant.  She has found that lease guarantees can be a viable work around to poor credit.  “Often if credit is very poor, I may request a guarantor, but the guarantor must own a house and live within the state,” she says.  Another alternative is getting two months security deposit, instead of one. Potter has also learned to embrace the “cash-for-keys” option to end problem tenancies.  “I am very good at getting folks out fast”, she says.  “I pay them.”

Please keep in mind that cities and states can differ when it comes to rules for prepaid rents and security deposit rates, so just to be on the safe side, check with your legal advisor before you implement a plan.  But regardless of where you decide to draw the line with tenant credit, be sure to run a tenant credit report before you turn your property over to a stranger.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only). 

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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Mia Melle August 24, 2010 at 11:40 am

Good article!!

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