“I don’t like the prior bankruptcy on this prospective tenant, but they make great income. The other tenant has a 430 credit score, but has perfect landlord history. Should I accept either into the property?” (Charlotte Property Manager)
“If you can’t be with the one you love, love the one you’re with.” (Crosby Stills Nash & Young)
One of the main things I learned during my MBA classes was that business, like life, is all about tradeoffs. Examples of this are rife everywhere:
-- If you want increased national security, you have to give up some individual freedoms
-- If you want a guy with a great personality, you probably have to give something up on looks (and vice-versa)
-- In Season 7 of 24, Jack Bauer must make the decision to rescue now-fugitive Tony Almeida from FBI custody or let the bad guys kill his daughter at the airport
-- If education is going to be our national priority than we must give less resources towards health care and building roads
-- Another piece of chocolate cake or look good with your shirt off?
How does this look with property management? Well there are perfect tenants out there, but most are like us, blemished in some way or another. With the poor and worsening economy, using old standards of tenant selection (600+ credit scores, no criminal background, rent less than 25% of gross monthly income, good landlord history, gainfully employed) are sure to keep most of your houses vacant (not good!). However, the last thing you want to do is put in a tenant who is not going to pay and then rip up your house (not good either!). So this is where tradeoffs come in. What should they be?
The first thing is setting priorities. What are the most indicative signs that someone will be a good or a bad renter? What should we care about the most? In my experience, the order should look like this:
1. Employment: It’s tough to pay rent with no money coming in (duh!) and finding a job quickly is proving to be difficult in this economy. Hint: If unemployed, ask the tenant for 4-6 months of rent upfront.
2. Landlord history: Some people always pay their rent before anything else. However, it’s important to make sure you are actually talking to the past landlords and not the tenant’s friends. Hint: Ask the “past landlords” how much rent they charged. Friends usually don’t know this and their guesses are way off.
3. Rent they paid at their last house: I like this one. If all things are equal (same job, family, etc.) and what they paid their last landlord is near what they are supposed to pay you, it’s a good sign. Be wary of big jumps ($700/month rent to $1,200, for example).
4. Credit: Everyone always has this at the top of their list, but I don’t see this as that important. If they have 700+ scores, approve them. If their scores are bad (sub 550), find out why and have an open mind. You can get some great tenants this way; if you’re still too scared to move forward, ask for an additional month of security deposit.
5. Income: The numbers need to make sense. If the make $3K/month, have a car payment of $1K, and are supposed to pay you $2K/month for rent, they can only go hungry for so long.
6. Criminal background: This is usually much ado about nothing. Just watch out for violent felons who could potentially ruin your week.
Now is the time for tradeoffs. If #1, #3 and #6 are good, #2 and #4 are awful, and #5 is marginal, what do you do? Panic? How would your profile look on these 6 criteria? Look at the entire picture of the prospective tenant and make an educated decision with the data provided. Do you need to wait until you find Mr. and Mrs. Right who score “superlative” on all six criteria?
Of course not! Stop worrying and eat a little chocolate cake. You can still have a great beach body without the well-defined abdominals. Or a great tenant without the perfect qualifications!
Brett Furniss is the President & Owner of BDF Realty, “Charlotte’s Most Innovative Property Management & Investment Company” (www.BDFRealty.com and www.RentToSell.com). You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://twitter.com/bdfrealty. He is the author of the FREE E-Manual entitled “How to Rent-To-Sell Your Own Home” (http://www.renttosell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.
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