Qualifying Applicants

By Jeffrey Steele, Contributing Editor

A number of leading indicators point to an improving economy. But if you think that translates directly to improved renter applicant quality, think again.

“I went back to 2008 in our records. I thought I would see a decline in credit scores then, and an uptick now,” says Michelle Sinclair, president of Tempe’s Trillium Residential. “I didn’t. It’s been very flat and very consistent.”

“We’re finding that, using the SafeRent ScorePLUS score, the quality of applicants has held up during the downturn,” says Jay Harris, vice president of business services at Rockville, Md.-based CoreLogic SafeRent.

Patrick Hennessey, director of Waltham, Mass.-based RentGrow, adds that “applicant quality has remained fairly flat over the last few months, and it has even declined in some markets.”

As these findings show, the current resident screening environment holds surprises, as well as some critical lessons, for property owners and operators.

Qualifying more applicants

That applicant quality has held steady during the downturn is probably attributable to multiple factors, says Harris, whose company is a risk management provider to the multifamily industry. One is a rise in applicants 51 and older and a slight decrease in applicants 18 to 34 since 2008, he says.

Management companies are able to qualify an increasing percentage of applicants because operators are using new screening technologies that include, in the case of SafeRent, new data sources and advanced lease risk modeling, Harris says. As a result, they are able to qualify even applicants without conventional credit histories, better known as “thin file” applicants.

“New data sources are able to qualify these applicants, while the old screening methods using only a credit file couldn’t,” Harris says. This holds important implications for the industry. “Immigrants or students with little or no credit history in the U.S. are a growing proportion of the rental population.”

Applicant income levels are another variable being closely eyed by CoreLogic SafeRent. “We have seen a leveling off of applicant income from 2009 through 2011, which raises some concerns about renters’ ability to pay going forward,” Harris points out. “We think these are good risks, but we’re watching the income trends closely as we enter the spring season to see if there’s a return to the normal annual increases in applicant income.”

And applicants with derogatory experiences in the mortgage market can often be good bets as renters. In fact, their lease risk profiles can be as good as or better than those of more typical renters, Harris says. “We’ve seen an increasing proportion of well-qualified renter traffic among those with derogatory mortgage histories,” he reports.

“We find the mortgage experience is just one part of the overall credit and landlord-tenant history. We’re able to differentiate between those with one negative experience in their mortgage history amid an otherwise clean record and those with multiple derogatory indicators, such as evictions.”

The conclusions are different at RentGrow, another leading resident screening firm. Hennessey says his company has found applicant quality actually slipping. “Many of those entering or re-entering the rental market have negative credit histories created during the down years from 2008 through 2011,” he says. “Many of them have strong recent credit histories over the past six to 12 months, but the earlier issues linger on their credit reports.”

Moreover, he doesn’t believe things will get better for them soon. Most apartment operators evaluate a minimum of two to three years of credit history on their applicants. Until we reach 2013 and beyond, with the depths of the recession well behind us, Hennessey says “a significant number of would-be renters will continue to have weak credit histories when compared with the screening standards many management companies now utilize.”

At Trillium Residential, which owns a half dozen high-end luxury communities in the Phoenix, Ariz. area, Sinclair finds an increasing number of applicants are very careful about their money, and many are renters by choice.

“Not a lot of people are going to shop for something beyond their income,” she says. “They know which price range they should stay within, and that helps them qualify. We captured a lot of renters who have gone through foreclosure. We find a lot of people want to be renters by choice. They’re kind of afraid to purchase, based on their own experiences and what they’ve seen others go through. They also want flexibility to be able to move if they have job relocations.”

Additional considerations

One insight referenced earlier is worth reinforcing. With so many residing in their parents’ basements, and with the 2008-09 credit freeze having made it difficult for teens and those in their early 20s to start establishing credit histories, the number of apartment applicants with very thin or no credit histories continues to grow, Hennessey says.

This is in concurrence with the earlier assessment of Harris regarding “thin file” applicants. RentGrow data show nearly 35 percent of rental applicants so far in 2012 fall into this category.

“Developing strategies to attract, retain and evaluate that group will be paramount to a management company’s success in coming years,” he says.

For his part, Harris reports an additional key is that at any rent level, and with any credit profile, maintaining an effective deposit policy, and making sure the deposit is sufficiently large to cover the risk, helps leases perform better.

That policy also reduces the likelihood of default. “So operators should look not just at their rent pricing policy,” Harris adds, “but also at their effectiveness in getting sufficient deposits, as we head into the busy renting season.”