The “Ifs, Ands or Buts” of Rental Screening

With rental vacancy rates at their highest levels since at least 1996, it is only natural that some property owners may “loosen” their standards during the rental screening process to increase occupancy levels. However, before taking such actions, property managers need to best understand how to assess their prospective residents in today’s new economic environment. To ensure a renter is both reliable and profitable, a property manager must look at several attributes in their profile.

Classifying the target

The first thing to consider with screening is the target applicant—conventional or subsidized. If a property manager is going to use a scoring model to assist with his leasing decision, he needs to make sure that the model can account for different income sources. Related to that point, a property manager needs to ensure compliance with federal and state housing laws, ensuring that a leasing decision is always made in a consistent manner and for legitimate and permissible reasons and that the proper policies are in place when requiring an additional security deposit or declining an applicant outright.

Property managers aren’t always aware that if they require an additional security deposit from a prospective resident based on a larger credit risk, an adverse action notification is required (even if the applicant is allowed to move in).

Additionally, because of the patchwork of state and federal laws related to housing, there are many nuances that a multi-state property owner needs to recognize (as laws in Chicago may differ from those in Fargo, N.D.). For example, certain states prohibit the use of state-published sex offender lists in making a leasing decision, while other states have no limitation on how a property manager can use such lists in evaluating a potential renter.

Location, location, location

Laws and compliance aside, location of the property also has direct impact on risk thresholds and business decisions. When setting up screening policies, the easiest answer is to make everything “the same”—the same risk profile and policies, no matter the particular economics and demographics for that region. This can work well for concentrated portfolios, but for multi-state property owners, there needs to be a tiered strategy to make sure occupancy or income isn’t sacrificed in the name of standard screening requirements.

Besides credit modeling, there also needs to be policies and considerations for other non-traditional data (public records such as criminal, eviction and resident payment history data). For example, declining someone for an arson conviction seems pretty straightforward, but what about a misdemeanor assault, or driving under the influence record? Policies need to be thought through for this data, and then followed consistently to avoid any legal repercussions at a later date. Also, reviews and updates to these policies should be done periodically as community, state and federal laws and regulations constantly change.

In addition, knowing the nuances of the different state reporting practices is very important. For example, in certain states it may suffice to search the state’s Administrator of Courts (AOC) data because it is centralized. However, there are some states that require a property manager to search at a county-level, as either the court system is de-centralized or that particular county does not supply data to the AOC.

In the red

An upcoming industry issue is “Red Flag” rules—and the requirements placed on property managers. A red flag is a pattern of behavior or activity that indicates potential identity theft. New federal legislation was initiated on May 1, 2009 to help spot red flags and protect consumers from identity theft.

Red Flag warnings place extra burdens on the resident screening company to assist a property manager to comply with these requirements—specifically verifying an applicant’s identity. Having a process in place that audits the verification of an applicant’s government-issued identification or verifying a current phone number has been employed by some property managers to demonstrate compliance.

By better understanding these issues, property managers can ensure they continue renting their properties to responsible individuals—even during today’s dynamic economy.

Mike Mauseth is vice president of TransUnion’s rental screening group. He can be reached at [email protected].