You found a great tenant. Or at least, you thought you did.
The tenant seemed to be responsible when they rented the house. They would answer questions and appear to be very responsible. Their credit score seemed to be decent and they had a good credit score for rental purposes. However, 3 months later they would stop paying rent and the owner would have to search for how to file an eviction.
Many owners find themselves deep in financial trouble due to the actions of one bad tenant. And typically they find themselves in this hole long before the tenant even moves in.
Tenant Screening for Rental Property Owners. This post will outline for rental property owners what makes up a real screening process to separate a solid tenant placement from a $5,800 mistake. We will cover what to verify, common things to watch for in tenant screening reports, and a few things that most landlord advice gets wrong when it comes to tenant screening.
Why a "Gut Feeling" Is Not a Screening Process
You are a rental property owner. The above scenario is so common with owners we speak to – They found what they thought was a good tenant! They spoke with them. The tenants had good credit. The owners confirmed the tenants' employment. A few months later the tenants have stopped paying rent and the owners are Googling eviction. Often, the above issues began at the time of screening, or rather lack thereof.
In most cases an owner finds themselves in this predicament because they relied on a "gut feeling" instead of performing a true screening process. In Houston we call screening "verifying information supplied by a tenant applicant during the rental application process." As such, we need to verify information supplied regarding employment income. In a previous article we mentioned that income can be verified with a pay stub for renters with a W-2 job, but this does not work for those earning a living as contract workers. This includes oil-and-gas consultants and other energy workers who may move from place to place with their employer. In our market a large portion of rental applicants are involved in the energy sector, with many in the industry as 1099 employees. Thus for those individuals who are not W-2 employees income verification cannot rely on pay stubs. We therefore verify their employment income by reviewing two years of tax returns and verifying their bank statements to confirm average monthly income from which we can confirm average monthly rent based upon a required income-to-rent ratio.
Personality is not a financial document. Treat them separately.
Income Verification Is Where Most Landlords Cut Corners
To screen applicants we take a look at their Gross Income versus the amount of rent for the property being applied for. The City of Houston norm for the required Income Ratio for Tenant Screening is set at 3:1 (Gross Income per month:Rent). Using the numbers for the prior example for a 2,000/month rental unit, an approved applicant would need to have a documented Gross Income of no less than 6,000/month (rent X 3).
We also verify the amount of income that an applicant has. We require a minimum of 3 times the rent in gross income per month for verification from the applicant. In the case of the $2,000 per month rental unit mentioned above, this would be $6,000 per month in gross income from the applicant. The majority of our clients are W-2 employees that provide current paystubs for our review. However, the Energy Corridor is also home to many energy sector employees that are W-2 employees but are also contracted employees, consultants or earn a substantial portion of their income on a 1099 basis. In the cases of these 1099 earning applicants, we require two years of tax returns and two years of bank statements in addition to current paystubs in order to verify their monthly income. Their income can vary dramatically from season to season, and we cannot allow a placement to occur that may result in late or non payment of rent due to fluctuating income.
By not verifying the renters' income, you can end up with a renter who seemed perfect in October but is unable to pay the rent in February.
Why Credit Scores Tell You Less Than You Think
Most owners will try to emphasize a high credit score. However, this can actually hurt your placement of tenants. Why? Because the owner is looking for tenants with high credit scores who have shown that they can manage debt well. However, this does not translate to how they will treat your rental property or whether they will even pay rent on time. Therefore, it is better to look for applicants with a lower credit score but good rental history and steady income.
There is so much to consider here. A tenant with a 700+ credit score will have a very different renting history than someone with a 700+ credit score that has managed to pay off their credit cards. That applicant with great credit will have had to have taken on debt and worked to pay it off, while the other individual with great credit has managed their credit cards well. Either way, neither of these renters would be suitable for a rental property that has great potential for great tenants. A great renter for a property that has great potential would be someone who has been renting great properties for years, earning high income, and has a very clean renting history. For example, an individual with a 640 credit score who is a great renter for a rental property would be an individual who has been renting for years, and has earned high income for years, such as $9,000 a month for example, and has a very clean renting history with no evictions or Collections.
This may vary by location, but for our portfolio we use 620 and above as our general cut off to be approved for a rental property. On occasion we may approve an applicant with a score of 580 – 619 with an additional deposit for the first 12 months of the lease. Below 580 we generally do not approve applicants for our managed properties. It's also worth noting that a score of 700+ does not necessarily mean that the applicant is going to be a good tenant. Many applicants who have scores in this range have worked hard to establish a good credit history by paying off credit card debt. On the other hand, an applicant with a lower score who has rented a property for several years and always paid on time may be a much better candidate for a rental property.
Multi-factor screening outperforms credit-first screening every time.
Eviction History Checks Are Non-Negotiable
In Harris County, eviction filings have historically run 3,000 to 4,000+ per month. That's not a typo. This is one of the busiest eviction markets in the country, which means a prior eviction is not a rare red flag, it's a common one that shows up in real applicant pools regularly.
A full eviction can cost a landlord $3,500 to $7,000 plus in lost rent before the eviction process is complete, in additional to attorney's fees and post eviction turnover costs. As property managers for 1,038 properties we can attest to the long and grueling process of eviction proceedings in Harris County. One poor tenant placement on a $2,000 monthly rental unit can result in 3 to 4 months of no management income before the matter is ever resolved.
If the owner incurs an eviction loss for a management placed tenant, Management shall cover the entire cost of eviction free for the first 12 months of lease for that tenant. The intent here is to ensure Management has skin in the game for placements.
The Pet Screening Problem Most Owners Ignore
An often overlooked tool for protecting your investments is a thorough screening of potential pets. Unauthorized pets in rental properties cause a host of problems for investors. In a competitive market like Houston, these problems can manifest quickly in the high heat and humidity prior to an investor being able to discover the issue and take corrective action. The situation can result in damages to subfloor and other components of the home that allow urine to penetrate. Pet hair can cause extreme wear on filters in HVAC systems. Large breed dogs can cause extreme damage to yard and outdoor components. In many instances, pet damage can cost $1,500 to $5,000 or more to repair prior to a tenant vacating the property. By screening potential pets and requiring all pets to be added to the lease agreement and corresponding rent roll, investors can mitigate this risk of unverified animal damage.
Having a clear set of guidelines for pet screening and having those same guidelines documented in a pet addendum at move-in time are worth their weight in flooring replacement costs.
Fair Housing Compliance Is Easier to Violate Than You'd Expect
Houston landlords are governed by the federal Fair Housing Act as well as the Texas Fair Housing Act. With all of the obvious aspects of the acts it seems that most problems stem from inconsistent application of the owner's screening criteria. This may occur despite the landlord's best intentions. Simply applying the same criteria to every applicant and documenting every decision should prove to prevent most problems with regards to Fair Housing issues. Keeping accurate records of every applicant in an management tool, such as AppFolio, will ensure that owner and property manager are on same page regarding all applicants.
Houston landlords must comply with both the federal Fair Housing Act and the Texas Fair Housing Act when it comes to landlord/tenant relations. One of the most common mistakes that Harris County landlords make involves treating applicants differently even when all of the criteria for screening rental applicants are applied in a seemingly consistent fashion. If a landlord approves a 640-score applicant for one of his rental units and then fails to approve another 640-score applicant for another of his units, and the two applicants are of different protected classes, then the landlord has discriminated against the applicants who are of the class that was denied for the second rental unit, even if the landlord had determined that the second applicant would not have been as good of a tenant for the second rental unit as the first applicant would have been for the first rental unit.
Just make sure you are treating all applicants the same by applying your criteria uniformly. Keeping track of all of the applications in AppFolio, ensures that you have documented every decision made during the screening process. It doesn't matter how you made your decision, what matters is that you are treating all applicants equally and that you are making your decisions in a fair and non-discriminatory manner.
Benefits to the Property Manager and the Landlord
A neighbor down the street listed his home around the same time as a well-screened placement and started taking applications before thoroughly screening the tenants. He got one placed in the home and a couple of months later he called to report $4200 in damage and said he would be putting the home back on the market for 74 days and estimated the cost to re-rent the home would be $4900. He had paid $2000 per month in rent on the home and this happened in just 2 months. It would have cost almost nothing to thoroughly screen applicants up front.
Calculating gross lost rental funds for a 74 day vacancy on a $2,000/month property would equate to approximately $4,900 in lost revenue. Add to that cost for any necessary repair of any damage caused by the ill-prepared tenant, plus the cost for marketing the property for re-rent, would very likely cost almost as much as a single round of screening out the bad tenant beforehand! You can estimate your own numbers using our Vacancy Loss Calculator.
That's what good systems do for you.
Pricing Your Rentals for Success
A big part of finding great renters is making sure you are pricing your rental property to attract them. Many Houston landlords price their apartments at too high of a rent and then are disappointed when they do not get the quality of tenant that they are looking for. Screening applicants for rentals that are overpriced will yield mostly poor quality applicants that are willing to pay too much for an apartment that they cannot afford. On the other hand, finding the optimal price for your rental property will bring you the highest quality renters willing to sign a lease and pay on time.
Think for a moment about how much you pay for your property to sit idle each day – $67/day for example, on a $2,000/month property. A 30 day 'dispute between you and yourself over what to rent the property for will cost you $2,000. Don't set your rental property up for failure by setting the wrong rent price and screening for tenant's who will only occupy the property until they can find a cheaper place to live.
Effective Property Management = Effective Tenant Screening
Tenant screening isn't paperwork. It's risk management.
We have 30 years of combined experience in property management. We can assist self-managed landlords in Houston with screening. We can also assist owners who have had a bad tenant placement that they wish to avoid in the future.
FAQ
What income standard should I use to screen tenants in Houston?
3x rent. Many property management companies here use this as a rough guideline to evaluate a potential applicant's ability to pay. Using 3x on a $2,000 monthly rental would mean that the potential tenant must verify a gross income of $6,000 monthly. Remember, for self-employed individuals or 1099 contractors this would mean far more than just their last paycheck or two. In fact, we typically look for 2 years of tax returns as well as several months of bank statements to accurately evaluate their credit worthiness.
Can I set my own credit score requirements as a Houston landlord?
Yes. Texas law allows landlords to establish their own criteria and standards for screening potential tenants. As long as the landlord applies the same standards to all applicants, screening is left up to the landlord. It is also important to note that the landlord must apply the same standards to all categories of applicants as well. For example, the landlord cannot establish different criteria for renters with children versus those without children. Often, property management companies will use a minimum credit score of 620 as a criteria for approving applicants. Some properties will approve applicants with lower credit scores with an additional security deposit. It is also very common for landlords to require proof of rental history as well as rental references.
How much does an eviction actually cost in Harris County?
Eviction can be very expensive and may set you back $3,500.00 to $7,000.00 or more, depending on the length of time the eviction is being processed, the amount of back rent due, attorneys' fees, and turnover costs. Thus, finding the right tenant for your property is far more valuable than your time spent processing applications for potential tenants.
Do I have to allow pets in my Houston rental property?
No, but a blanket no-pet policy is rarely effective at excluding all pets from your applicants. Rather, allow individual properties to be screened on a case-by-case basis by a third-party for rental to approved pets. Then clearly outline the approved animal(s) in an addendum to the lease with appropriate rental for the pet.
How can I screen tenants for rentals if I have multiple properties?
Un-intentional discriminatory treatment of applicants is perhaps the greatest source of fair housing complaints with respect to residential property management in the Houston metropolitan area. There is a very simple solution to this matter: treat every applicant the same by consistently applying the same set of qualifications (income, credit report and rental history) and document every approval and every denial.
Where can I report a landlord for housing violations in Houston?
For issues pertaining to housing code violations or complaints against landlords or rental properties regarding possible housing discrimination contact the City of Houston Department of Neighborhoods or Harris County Public Health, for violations of Fair Housing Laws contact HUD or Texas Workforce Commission's Civil Rights Division as appropriate.
