What Actually Matters When Screening Tenants? Nobody Knows.
In the world of residential rental property, there’s an endless amount of boring, repetitive articles written about “tenant screening”— how best to filter out “bad” tenants (those who will damage your property, fail to pay the rent, or be evicted, among other things) from “good” tenants.
Each author is more confident than the last regarding the best strategy for who to accept and who to reject. Yet, none of them actually know.
Traditionally, rental property managers will look at the following big 5:
Credit Score
Income
Residential History
Criminal History
Eviction History
I have yet to see or hear a single property manager back up their screening methodology with data. Instead, each individual property manager or landlord selects their own criteria (minimum credit score, minimum income, what to consider with regard to criminal history, how far back can an eviction be, etc) based on nothing but their own intuition and “experience”.
What’s interesting is that mortgage lenders (who presumably have studied the data) completely ignore items 3–5, relying generally on income and credit score alone. Why do landlords think they know better?
TransUnion is doing some interesting things with their ResidentScore (essentially a credit score developed for landlords). They claim to have developed a credit model that accurately predicts the likelihood of a bad tenant. However, they give no guidance when it comes to what minimum score you should use. And what about items 2 through 5?
Nobody knows. Perhaps some of the Wall Street landlords like American Homes 4 Rent are tracking various data points for tenants who move in, and then using sophisticated statistical modeling to examine how those items affect the likelihood of a bad tenant. I doubt it, and if they are they’re not talking about it.
I did a cursory analysis of our own tenant base for calendar year 2017 (we manage over 300 residential units in Columbus, Ohio). Our policy will decline anyone with a ResidentScore below 559, and charge a double deposit to anyone with a score between 560 and 620. I found that residents for whom we charged a double deposit were almost three times more likely to go bad, and not only that, but their average tenancy length was half as long! This was shocking to me, and I’m confident if other property managers did a similar analysis they would feel the same way. Your intuition is just not useful here. Needless to say, we’re increasing our minimum scores as a result of these findings. We’ve selected some higher (yet still arbitrary) numbers. And of course, I have no idea if we should make adjustments to our other criteria (for now we’re using “industry standards” like 3x the monthly rent for minimum gross income).
Getting this right would be a big deal for landlords and tenants alike. As it stands today, people who would actually be great tenants are getting declined, and bad tenants who slip through the system are causing mayhem for property owners, to the tune of many thousands of dollars in lost rent and repairs. It could also make high security deposits a thing of the past, which are only necessary because landlords have no way to really know if a given tenant will go bad.
I’m Peter Lohmann, CEO and founder of RL Property Management, a residential property management company located in Columbus Ohio. If you enjoyed this article, you can connect with me on Twitter, subscribe to my podcast Owner Occupied, or sign up for my mailing list.