You have so much to learn Grasshopper...
Doing a background check is one thing. Interpreting it is a totally different matter. I charge $40. I use a full-service company that does credit, County Courthouse checks, past landlord checks, and employer.
Here is a reprint from a presentation I put together.
Tenant Screening Basics
Four Pillars of Tenant screening
• Rental History
All four are equally important, but credit score is a good overall indicator
If one pillar is weak, the others must be stronger
Set your expectations - A Great tenant will not live in a non-Great unit
After you have the information, what do you do with it?
Depends on your risk tolerance
We are all felons; most of us just haven’t been caught
Weigh the odds of default, and damages against the guarantee of a vacant unit.
This is a good, overall indicator
Previous addresses on Credit Report should match application
Credit Score is Probability of default, nothing more, but it does indicate how responsible the person is
Over 700, No brainer approve (assuming other pillars are OK)
Fewer than 600, no brainer, deny or use larger deposit. 50%+ chance of default
Between 600 and 700, it gets tricky
Medical account defaults are sometimes necessary
Judgments indicate payout order. If you are not the first judgment, you probably will not get paid in bankruptcy or garnishment
The applicant should have more good accounts than bad accounts, especially recently.
Look at the derogatory account names for landlord defaults. Apartment names, etc.
Look at other credit inquiries. An applicant that has been recently rejected by other housing agencies will have those inquires listed. If other places are rejecting them, and you are considering them, ask yourself if you are prepared to take on the risk cases other places do not.
Look for small payments defaulting, if they can’t pay Pizza Hut $65, how are they going to pay you rent?
With bad credit and previous judgments, if a renter pays, it is not a problem. As long as you stay on top of them, you will only lose one month's rent before you evict or terminate their lease. That's what a deposit should cover. If they leave without paying rent, you will never get it. If they cause damages, you are stuck with the costs.
If you are wondering what a credit score means to you, here is a chart that shows likely hood of a mortgage default, based on credit score.
Most Criminal convictions are public records
Do not rely on ‘National’ criminal records.
Out of date
No set method of consolidating records between States
New records take time to show up
Better than nothing
Use State Court Cases checks from credit Report addresses instead
Why do we care about Criminal records?
If a person has a felony, or multiple misdemeanors, do you think they worry about an eviction?
Recent activity is more important than past
People that cannot behave in society, can’t behave in a rental
Most criminals do not have good credit scores
Previous addresses should match credit report
Assume the Rental History contact person is a lie, and verify
Google the contact phone number, it should come up to a apartment complex number or similar. A cell phone with no information could be suspect.
Google previous addresses to get apartment complexes phone number. You may also find information to help you make a decision. Maybe they advertised a big blow-out party in their last week at the current place.
Find the actual property owner from County Websites
Search Secretary of State to get LLC and Corp information if you have to
Search for eviction records from the previous landlord to validate the contact information. Most times, a landlord will have at least one eviction.
The previous land lord may give better information than the current one. The current one may want the tenant gone.
More than two addresses in five years could indicate a problem, or short term renter. Maybe in lieu of eviction, the landlord let them out of their lease.
Ask prior landlords these questions, at a minimum:
Did they get deposit back in full?
Did the tenant pay on time?
Did they complete their lease obligations?
Would you re-rent to this tenant?
Look for evictions in Civil Filings
Use wildcard searches, civil litigants are not perfect
Look for all parties in Suit. They may indicate other trouble in other cases
Look at other case types to find ‘other half’
Search for ‘other half’ for Criminal background, evictions, etc.
Looks up their previous landlords in Civil Filings. Most landlords have had at least one previous eviction or Court action.
Look for collection items in the credit report from apartments and landlords. WIRTH COMPANIES is a collection agency for large apartment complexes. Other collection agencies may have a lime with 'APT' or 'Real Estate' in them.
How are they supposed to pay the rent with no income?
No paycheck, do they work for cash, doing illegal activities?
You are looking for stability, 12+ months in a job
Look at paystubs to get income
Look for 2 ½ to 3 times the rent in Gross income.
How long have you had your phone number? Less than a year indicates a potential problem.
Are their children well behaved in a showing? This will be their best behavior. (Don’t discriminate)
Do they drive a beat up car? Is the car clean?
Do they have ‘extra’ people at the showing that will not be living there with them? (until you leave)
Do they look at entire apartment, or accept too quickly?
Did everyone who will live there show up to see it?
Do they need to move in ‘right away’?
Use personality for rejection only, not acceptance. Con artists are able to be 'nice' people.
Call the police/sheriff at the previous addresses to see if there were any complaints.
Google the tenant’s phone number. You may find an ad for something they have for sale, or sold. You may also find an ad for prostitution.
Google their name. You may see where they were a suspect in a crime, or are an activist for Tenants rights.
When you make a mistake
Even with good screening, mistakes will be made. Someone has to the first eviction landlord.
Do not accept partial payments unless you have a stipulation in your lease, or an agreement that eviction is not waived for partial payment.
Ask the tenant for their plan to pay early, If they don’t pay on the first, they should have a plan date they will. If they do not pay anything by the 10th evict or if they don’t have a viable plan, coordinate a move out date with a partial payment – within the SAME month.
Tenant should be able to pay some, if they want to stay. If they don’t pay anything, get ready to evict.
A voluntary move out with no rent received is cheaper than an eviction
Don’t make their misfortune your misfortune
Don’t take it personal, get the tenant out, and re-rent.
After the eviction, if you are going to file a small claims court case, have it served at your rental before the eviction Court date. You know where they live. When they are evicted, you may not know where to serve it. You can always go lower on the amount, but you cannot go higher. Sue for the maximum for unpaid rent, and damages. Note that the tenant is still in possession of the unit.
You are entrusting your tenant with a $100,000 property. What does a bank require before entrusting you with $100,000?
Don’t make their misfortune your misfortune – Screen HARD!
Too many evictions are a sign you do not do a proper job screening, or do not have a unit fit for a suitable tenant
An eviction will cost at least the equivalent of five months’ rent
Two months lost rent while evicting, if you start by the 15th
One month’s rent for mandated Court expenses and attorney fees, potentially more
One month’s rent for the cost of fixing actual damages (paint, carpet, cleaning, etc.)
One month’s rent for vacancy while showing, potentially more
A vacant unit is much easier to manage than a unit that is not paying rent
Stick to Credit scores above 600, with a single family home, you should be higher, 650+
If a tenant has a score below this, you MUST require two months’ rent as a deposit. Also consider prepaid rent.
Remember, Landlording is more about people management, than property management. Knowing your tenant (or opponent) helps you understand the risk and probability of a bad experience.