Rental units in the current market are likely to have multiple applicants looking to sign a lease. A background check can be the difference between positive cash flow from an ideal tenant, or spending the next year (along with thousands on legal fees) trying to evict a bad one.
It makes no difference whether you’re a property management company with 10,000 units, or an independent landlord renting your basement out for extra income. Conducting a tenant background check prior to leasing should be standard protocol. After all, you’re entrusting your property, your equity, and your liability, to a stranger.
A diligent tenant background check will cost (on average) between $25.00 and $75.00, depending on how in-depth the conducted background check will be. A basic rule of thumb is to plan on spending at least the equivalent to 5% of one month’s rent on a background for each signor of the contract. For example, if you’re renting an apartment at $1000 per month, you should plan on spending at least $50 screening each signor on the lease. Foregoing a background check to save a few bucks is comparable to buying a home without an inspection, or purchasing a car you’ve never driven. You simply cannot make a reliable decision based on appearances and intuition.
What are the key elements of a Tenant Background Check?
Search: Criminal Record Search
Reason: You certainly don’t want to rent your property to someone with a history of violent behavior. You also don’t want to rent your property to someone with a history of drug trafficking, prostitution, theft, sex offenses or other illegal activities. It’s your property, and it will be your liability at stake if a neighbor is hurt by a tenant that you placed without screening.
Search: Past Evictions
Reason: Everyone deserves a second chance, but an evictions search may reveal if someone has already used up their second, third or fourth chance. A tenant with a history of evictions can become very good at avoiding the boot and extending their stay to a year or more without making a single payment.
Search: Liens and Judgments
Reason: Circumstance is key when looking at Liens and Judgments. A judgment from a car accident or a tax lien of fifty dollars does not mean that a person is a high risk. However, a number of judgments or liens in recent years can indicate a pattern that you don’t want to be a part of. Look at the amounts and case summaries. Judgments or liens based on non- payment of contracts are a solid red flag.
Credit Report: I say optional because, as an independent landlord, getting a credit report on an individual isn’t as simple as it used to be. Beware of websites offering instant credit reports that you can conduct on other people. Many are scams to collect personal data, or sell you something other than an actual credit report.
Warnings aside, credit reports are a great way to assess financial stability. Credit reports reveal history payments on everything from mortgages and credit lines, to general credit cards. Another option is to use the more traditional background check process and request that the applicant provide a copy of their own credit report. The advantage to this method is that the credit report will cost nothing for the applicant or the landlord, and it will not count against the applicants credit score, as it would if a third party pulled a credit report.
The Bottom Line:
When it comes to renting property a landlord is loaning a valuable asset to (for all intensive purposes) a complete stranger. The renter has a pretty good idea of what they are getting, as they can walk the property, try out the appliances and see most potential problems, if any exist.
Without a background check, the landlord is rolling the dice and has only a signed contract that may not be worth the paper it’s printed on if things go south. The renter that doesn’t pay his rent is just as unlikely, or unable to pay a civil judgment. Your best defense from a bad tenant is to learn from their history. As we all know, history is bound to repeat itself.